"Thoughtful investor seeks high quality companies for long-term relationship. Stock must provide a high level of growing income as evidenced by yield and dividend growth rate.
Sustainability of dividend must be assured by a reasonable payout ratio, well managed and reasonable debt as evidenced by strong balance sheet a good credit rating. Large corporations with high market share and economic moats preferred."
The Online Search
Growing numbers of people seek personal relationships online every year. According to a recent study, 17% of marriages were the results of online meetings and over 40 million people have visited dating sites.
In a parallel manner, the way we find and evaluate investments is increasingly online. Gone are the days when silent, cigar-smoking men would haunt brokerages and watch the ticker display. No longer is the local banker a source of sound investment advice, the stockbroker an exclusive source of market knowledge. No longer do investors visit the public library to sit for hours poring over paper copies of Value Line and reading financial newspapers, magazines and journals. We go online to find our stocks, for introductions to them at sites like Seeking Alpha. We extend our knowledge of them by using many online data providers; we also do background checks online as part of our due diligence. The wedding is online as we, with a click of the mouse at our online broker's site, seal the selection with a purchase.
We present 7 excellent candidates for long-term investors; stocks you can hold for years that will provide you with increasing, inflation beating, returns. They are from several different industries and these stocks could be core holdings at the center of a larger portfolio or the beginning of a new dividend growth portfolio. A statistical summary of key measurements will follow a brief introduction to each firm. The choice, as always, is yours. The action you take may be an evaluation of one or more of these, which leads to a purchase of a long-term holding.
ConocoPhillips (COP) is a U.S. based independent oil and gas exploration and production company (E&P). In 2011, it produced 867,000 barrels per day of oil and natural gas liquids, and 4.5 billion cubic feet a day of natural gas, primarily from the U.S., Canada, Norway, and the U.K. Proven reserves at year-end 2011 stood at 8.4 billion barrels of oil equivalent, 41% of which are natural gas.
Emerson Electric (EMR) manages five business segments: process management, industrial automation, network power, climate technologies, and tools and storage. Primary products include motors, drives, valves, switches, test equipment, air-conditioning compressors, electric tools, and home storage solutions.
Johnson & Johnson (JNJ) is the world's largest and most diverse healthcare company. The company comprises three divisions: pharmaceutical, medical devices and diagnostics, and consumer. While the pharmaceutical division currently represents close to 36% of total sales, we expect patent losses and the Synthes acquisition to reduce this proportion to approximately 27% during the next 10 years, with the device segment picking up the majority of the share.
McDonald's (MCD) generates revenue through company-owned restaurants, franchise royalties, and licensing pacts. Restaurants offer a uniform value-priced menu, with some regional variations. As of March 2012, there were 33,500 locations in 119 countries, including 27,100 franchisees/affiliates units and 6,400 company units.
Microsoft Corporation (MSFT) develops the Windows PC operating system, the Office suite of productivity software, and enterprise server products such as Windows Server and SQL Server. The Windows PC and Office franchises collectively account for nearly 60% of the firm's revenue, and the server and tools business contributes 25%. The firm's other businesses include the Xbox 360 video game console, Bing Internet search, business software, and software for mobile devices.
Royal Bank of Canada (RY) is the largest of Canada's big six banks with more than CAD 800 billion in assets. Royal Bank is one of North America's leaders in diversified financial services, providing personal and commercial banking, wealth management services, insurance, corporate and investment banking as well as transaction processing services, serving 15 million clients in 51 countries.
Southern Company (SO) generates and distributes electricity to more than 4.4 million customers in the Southeast. It owns four electric utilities in Alabama, Georgia, Florida, and Mississippi and has more than 43,500 megawatts of generating capacity, the majority of which comes from coal-fired plants. Southern also operates a conservative merchant generation segment, Southern Power. Southern is one of the most widely held stocks in the United States.
All 7 companies have credit ratings of A or better and market capitalizations with an average value of $93 billion. These are some of the soundest, most well established companies in the world. They go back generations and in several cases, well into the 19th century.
In general, the group of stocks is undervalued with an average P/E of 13.3 compared to the usual market average of 15. However, since we cannot buy the group as a unit, it is individual stock valuations which count. The one that is clearly overvalued is Southern Company . This was indicated by the P/E, verified by checking the Morningstar rating and by my interpretation of the F.A.S.T. Graphs chart. McDonald's P/E is also a little high, however, that company has usually sold at a premium and its normal P/E is about 19. ConocoPhillips, like other major oil companies, is currently undervalued and a buy. Emerson Electric is a better buy than it has been since July, and represents an immediate opportunity. JNJ has just had a little dip, which presents a buying opportunity. In my opinion, the rest are selling at around fair value.
Yield and Dividend Growth Rate, DGR
It is important to note that these firms have high yields with an average yield of 3.8%. The dividend growth rate (DGR) is a very respectable 9.5% a year. This means that if you have $10,000 worth of a stock, and the yield is 3.8%, you will receive a dividend of $380 this year. If the company increases the dividend amount by 9.5% next year, you will receive $416, and the year after that, $455.
Payout Ratio and Debt
If a company is paying out 90% of its earnings as dividends, it would certainly have little money left to invest back into the company to make improvements and increase revenue. The average of the above firms is 52%, which is fine. However, a payout ratio near or over 80% bears scrutiny and may be an impediment to future earnings and dividend growth. However, we expect regulated utilities to be slow growing and have high payouts. The same is true of special tax advantaged companies such as Real Estate Investment Trusts (REITs) and Master Limited Partnerships (MLPs). They are required to pay out a high percentage of profit by statute. Excessive debt can also be a crushing force. Any entity, which spends a large portion of its resources paying off debt, becomes limited in its options and stunted in its growth. None of the companies above has high debt and all have excellent credit ratings.
To Have and to Hold
I am confident that the above stocks are excellent offerings to have in your portfolio and hold for many years. I believe I have surveyed all the key measurements in order to put forth great opportunities. However, I ask you to not take my word for it. Do your own due diligence, your own verification of the facts and your own appraisal of the value and the future potential of these companies. Then, move forward with confidence in your decisions.
The data presented is accurate to the best of my knowledge. I believe that the information contained herein is generally available to the public, often from several sources, and is not proprietary in nature. However, I am very grateful to the sources from which I got it. The brief company descriptions were from Morningstar. The data in the summary table was gleaned primarily from the Seeking Alpha Portfolio section. Data concerning the Debt Levels and Market Cap was from F.A.S.T. Graphs. The credit ratings are from S&P. Additional information came from Yahoo Finance and FinViz.
I thank you for reading this article and welcome your comments. Good luck!