The No. 1 Stock In The World - Part 1

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Includes: DIS, GILD, HON, JNJ, KMI, KO, NSRGY, O, RAI
by: Mike Nadel

Summary

15 Seeking Alpha regulars make cases for the single best company to own.

There is no consensus, although three companies were chosen by three panelists each.

The reasons given for the panelists' selections offer great insight and detail.

Although every panelist is not purely a Dividend Growth investor, a reliable and growing income stream is important to most of them.

We have long been obsessed with identifying "No. 1." Hence the popularity of the Super Bowl, the Oscars, Billboard charts, Nielsen ratings, Dancing with the Stars, spelling bees, manned moon launches, elections, rock-paper-scissors and other attempts to determine the winner, the best, the first or the only.

So it is with the stock market, too.

Within comment streams during my three-plus years as a Seeking Alpha contributor, I repeatedly have seen versions of this basic question: What is the single best company for a Dividend Growth Investing practitioner to own?

In an attempt to narrow the field, last year I asked a group of SA authors to suggest their choices for a top 50 -- a collaboration that resulted in a series of articles and, ultimately, the Dividend Growth 50. One offshoot whittled down the list to a Dandy Dozen.

Still, however, there was no attempt to come up with Numero Uno.

If you think about it, the concept of determining the best stock in the world -- or even the best "DGI company" -- is pretty bold and even a little arrogant. There are thousands of publicly traded companies, including hundreds of legitimate blue-chip brands. Who would dare say which is the best of the best?

But hey, we love to ask (and to try to answer), "Who's No. 1?" So I formed another panel of Seeking Alpha contributors, sprinkled in a few frequent commenters, and let them loose on the subject.

Here's what I told them in my instructions:

1. If you could only own one company in your portfolio, which would it be? Why?

2. If you had $25,000 to invest TODAY on one company and you planned to hold it for 10 years or more, which company would you buy? Why?

The two questions allow for some different thought processes.

The first is simply to try to determine the single "best" company as an investment. I will leave the parameters very subjective and open to each panelist's interpretation of what makes it the best. You need not consider current valuation, long-term prospects, dividend growth, etc., but you certainly can.

Answering the second question very well might take current valuations into account but doesn't have to if you don't think that's paramount to your choice. It also adds a buy-and-hold (or at least buy-and-monitor), long-term aspect.

If the answer to both questions turns out to be the same stock, that's each panelist's prerogative. Even though the audience largely will be DG investors, neither choice need be a "typical DGI company."

The only requirement for each question is that you choose an individual common stock (as opposed to an ETF, mutual fund, preferred stock, etc.).

And with that, the 15 panelists went to work.

Meet The Panel

Six are holdovers from the DG50 crew and familiar names to income-seeking readers of this site: Chowder, David Crosetti, Eric Landis, Tim McAleenan Jr., ScottU and Bob Wells. (For the record, the other four DG50 panelists declined to take part this time.)

Joining the returnees are five popular SA contributors -- Adam Aloisi, Eddie Herring, Regarded Solutions, Brad Thomas and Nicholas Ward -- as well as frequent insightful commenters Buyandhold 2012, kolpin, Paul Leibowitz and richjoy403.

The idea was to put together a group representing different age groups, experience levels, investing styles and areas of expertise. Dave, Bob, Eddie, Regarded, Paul and richjoy are retired; Eric, Tim, Scott, Adam, Nicholas and kolpin are in their 20s or 30s. Chowder is one of Seeking Alpha's foremost DGI voices; several panelists do not consider themselves purely DG investors. Brad specializes in REITs. Buyandhold lives by his screen name, saying he never has sold a single share of stock in 45 years of investing.

Once I received their responses, it became evident that the prudent thing to do would be to break this into two parts. Today we will deal with Question 1: If you could only own one company in your portfolio, which would it be? Why? Part 2, to be published later this week, will deal with the hypothetical $25K investment.

First, I will present a fact-filled table with each panelist's selection. Then, I will share their responses to the always-important question "Why?" Finally, I will chime in with a few observations.

So, panelists, if you could only own one company in your portfolio, which would it be?

COMPANY

PANELIST

YR

YLD

5DG

PRICE

M*FVE

S&PFV

VL

Johnson & Johnson (NYSE:JNJ)

Regarded, Buyandhold, kolpin

53

2.96

8.89

101.35

99.00

101.60

1

Realty Income (NYSE:O)

Brad, Chowder, ScottU

22

4.84

5.75

46.96

50.00

NA

2

Coca-Cola (NYSE:KO)

Eddie, Eric, Paul

53

3.20

8.45

41.21

43.00

33.90

1

Gilead Sciences (NASDAQ:GILD)

richjoy

0

1.54

NA

111.71

114.00

160.40

3

Honeywell International (NYSE:HON)

Adam

4

1.95

11.34

105.92

105.00

105.80

1

Kinder Morgan (NYSE:KMI)

Bob

5

4.50

NA

42.69

43.00

NA

2

Nestle (OTCPK:NSRGY)

Tim

0

2.98

10.94

77.70

86.00

NA

1

Reynolds American (NYSE:RAI)

David

10

3.57

8.29

75.07

42.00

71.10

2

Walt Disney (NYSE:DIS)

Nicholas

5

1.04

26.86

110.26

106.00

113.90

1

(Key: YR is consecutive years of dividend increases; YLD is current annualized dividend yield; 5DG is 5-year annualized dividend growth rate according to Fidelity; PRICE is at market close 5/22/15; M*FVE is Morningstar Fair Value Estimate; S&PFV is S&P Capital IQ Fair Value Calculation; VL is Value Line "Safety" score.)

Johnson & Johnson, Realty Income and Coca-Cola each were named by three panelists: JNJ and KO mostly due to their overall strength as companies and proven records of dividend growth; O for its solid performance as a REIT over the years and its absolute commitment to growing its dividend.

The Joy Of JNJ

Regarded Solutions: "Human beings are always focused on health or health products to help us live our lives with more quality and length. JNJ will always have a 'consumer,' will always have a massive assortment of products for today and into the future for every and any stage of life. The pipeline will continue to grow. The Dividend Aristocrat status is more than impressive. If there was one company I would want to own forever, for my money it has to be JNJ."

kolpin: "If there is one sector I want exposure to today and in the decades to come, it's healthcare. It's a sector that flourishes both in bear and bull markets, and demand only promises to grow exponentially as Baby Boomers age and as the previously uninsured join the ranks of the insured due to the Affordable Care Act. JNJ is the most diverse company in healthcare and is supremely well-positioned to ride these demographic trends. JNJ can take advantage of growth opportunities with a strong pipeline of drugs, medical devices, and via acquisitions and partnerships. And it also represents the ultimate in stability with a myriad of consumer products. Not many other companies offer the same potential for long-term growth as well as dependable, rising income."

Buyandhold 2012: "It has a AAA credit rating, a large number of products and a long history of rising earnings and dividends. The P/E is 18.60, which is not bad for a stock of this quality. Although I think the ideal number of stocks in a portfolio is in the range of 20-50, if I could only own one stock, Johnson & Johnson would be the one."

Oh, Then There's O

Chowder: "Since it's the safety of the dividend that I am looking to insure -- to provide income during the distribution phase of my life -- I am most confident choosing O. Any company that advertises itself as 'The Monthly Dividend Company' is going to make sure every executive decision they make has that dividend in mind. If you think back to 2008-09 ... real estate prices were falling dramatically, O's share price along with them, and the shorts were trying to drive O into the ground. Yet O kept paying and raising the dividend. If that isn't strength, I don't know what strength is. The triple-net leases O has in place provide guaranteed revenues. With an occupancy rate about 98% and those long-term contracts in place, the revenues received by O are utility-like."

ScottU: "They're extremely shareholder friendly, they have a sustainable business model, and they have extremely consistent cash flow. The compounding of monthly reinvestment doesn't hurt, either."

Brad Thomas: "I start with the concept of economic moats; my pick must offer the strongest structural advantages that protect from competition. My pick must have demonstrated a long-term track record for generating profits, making the business model difficult to replicate. My pick must have demonstrated that it can successfully manage risk and withstand the relentless onslaught of competition. My pick must have a pattern of predictability like no other; the best way to measure that in REIT-dom is by rising dividends. My pick must be time-tested, having experienced risk during multiple cycles. In no way am I looking for instant gratification with this stock. Perhaps in 30 or 40 years, my kids will review my statement (when I'm gone) and say, 'Dad knew how to select winners.' Simply said, my pick must be considered a wealth-building machine. That's why I consider Realty Income to be the one pick above all others."

The Real No. 1 Thing?

Eric Landis:

"Coke is the most iconic brand in the world, AA rated, and has a 53-year streak of dividend increases. It has an attractive yield and will likely continue growing that dividend at a high-single-digits rate for years to come. I strongly considered Chevron (NYSE:CVX), Altria (NYSE:MO) and Apple (NASDAQ:AAPL). But with Chevron being in the cyclical energy industry, Altria being heavily regulated and under intense public scrutiny, and Apple being in the ever-changing technology sector, Coke seemed to be the safest of the bunch and one I would be most comfortable holding as a single-stock portfolio."

Eddie Herring: While I consider myself a Dividend Growth investor, total return is still important to me. The return doesn't have to be market-beating, but it does have to be sufficient to grow the value of the position over time. With the primary requirement being income, I will also want a company that has a proven history of not only paying but growing its dividend. But the company has to have more -- it has to have a moat, it has to have products that will continue to be in demand, and it has to have the financial fundamentals to support the continued payment of the growing dividend. I want a decent yield, I want a historical return on equity that averages at least 20%, and I want the company to still be retaining enough earnings for continued growth of the company. With those factors in mind, if I could only own one company, it would be Coca-Cola.

Paul Leibowitz: For the one-stock account, the key requirement is extreme confidence of rising dividend income paid each year over the investor's lifetime, the annual DGR being greater than the rate of inflation. This core holding must have a fortress-like balance sheet, as close to an impenetrably wide and durable moat as the gods will allow, and rising EPS driven more by increases in operational earnings than buybacks. It should be of a size that renders it immune to takeovers or buyouts, and have a high investment-grade credit rating over the past 10 years. My selection is KO. The overriding consideration is confidence in its ability to reinvent itself in ways to capture hefty market shares of expanding global markets with products tailored to the liking of different cultures. KO's annualized DGRs over the past 1, 3, 5 and 10 years are 8.9%, 9.1%, 8.3% and 9.3%.

Sweets, Smokes and Star Wars

Tim McAleenan on Nestle: "It's the best company in the world. It owns food products that will be consumed 20, 50, 100 years from now. It has 30 different brands generating $1 billion each in annual sales, making Nestle the pinnacle of diversification within a company. Every $10,000 invested into Nestle 25 years ago would be paying out $6,500 in annual dividends today. The management culture has a long history of focusing on keeping costs low, executive compensation is reasonable, and market share is strong. I don't know what the world will look like in 2050, but I know people will be buying Nestle products."

David Crosetti on Reynolds American: "Over a 30-year holding period with dividends reinvested, RAI will be a winner for investors who are not opposed to owning tobacco stocks. I bought my first shares of RAI back in 2000 and those shares have had dividends reinvested all along; my annualized return is just shy of 28%. RAI is going to merge with Lorillard (NYSE:LO) -- not a matter of if but when, in my opinion. That gives RAI some nice synergy with brands and market penetration. This company will be the growth company in tobacco. I like the dividend growth rate, the actual dividend and the prospect for DGR moving forward. It's a very profitable business with strong return on equity."

Nicholas Ward on Disney: "Content is king, and Disney is the king of content. From the classic cartoons to fairy tales to superheroes to the Lucasfilm franchises, Disney is in no short supply of alluring content and characters. Disney is capitalizing with new digital merchandise and, probably most importantly, with several international versions of Disney resorts. Shanghai Disney Resort is slated to open in 2016, signifying penetration into the massive Chinese market. Add in ESPN, and this company has no rivals in the entertainment industry. I know this company doesn't meet many DGI stock screens because of its low yield, but it isn't income in the present that I'm interested in when it comes to Disney. DIS has increased its annual dividend for five consecutive years and has a 5-year DGR of 19.7%. I think it's important to acknowledge that DIS is currently priced for near perfection ... but I'm happily sticking with my DIS shares.

Glad For GILD, Keen On KMI, Hot For HON

richjoy403 on Gilead Sciences: "It's very difficult for me to even conceptualize owning only one company, so I'm more comfortable interpreting the question as: 'What one company would you add to your portfolio if you didn't already own it?' With the present market's new highs accompanying many reduced earnings reports, interest-rate concerns and a sluggish world economic environment (and in the U.S., selective consumer spending), I'm more interested in companies having total returns derived from strong earnings growth. I am therefore willing to give up some dividend yield for greater total returns. GILD is in the healthcare sector and the biotech industry, and either/both should do well in the present environment. GILD is trading below fair value and has a forward P/E of only about 10 despite its very strong earnings growth. GILD meets my main criteria for growth of revenues, operating income, net income and EPS, as well as institutional ownership, analyst recommendations, 12-month price target and credit rating."

Bob Wells on Kinder Morgan: "As a retired Dividend Growth investor, my answer is based on my personal situation. KMI, with its 4.5% yield and strong dividend growth projections, is my choice."

Adam Aloisi on Honeywell: "If one is going to put all their eggs in one basket, I think you need to consider owning something that provides reasonable upside potential but isn't likely to crater due to a niche business focus, uncontrollable input cost dependency or sudden customer change of habit. In other words, something well-established yet potentially forward-nimble. Honeywell fits that criteria. HON has a diverse revenue stream from businesses that could produce market-besting upside but are unlikely to fall apart simultaneously. The company has shareholder-focused management, is expanding margins during current currency and sales headwinds, and has raised its dividend substantially over the last decade. While certainly not recessionary resistant or otherwise defensive, it is a company with an attractive risk/reward profile that has societal, and technological, tailwinds on its side.

My Three Cents

  • I couldn't help but feel the passion many panelists showed in explaining their selections. After reading what Tim had to say, I immediately considered buying Nestle. I don't yet own RAI, DIS or HON, either; Dave, Nicholas and Adam sure made those companies sound appealing!
  • Given the panelists' well-articulated arguments for ownership, it's pretty easy to see why JNJ, O and KO are favored by so many Dividend Growth investors.
  • Of the nine companies selected, only Gilead is obviously undervalued. One could make a case for JNJ and HON being fairly priced, and Tim took a stab at defending Nestle's valuation. DIS has sold at a premium for years, so its lofty multiple might not scare investors. And it's not easy to accurately value KMI and RAI, given recent and imminent merger activity.

Conclusion

Did any panelist conclusively "prove" which investment is No. 1? Well, none named my choice (which will be revealed eventually), so obviously they all failed -- ha!

Seriously, I didn't really expect a consensus No. 1 to emerge; that certainly wasn't the goal of this project. Nor was the objective to convince investors that a one-company portfolio is the way to go.

My intent was to present a variety of ideas, to give investors insight into how others judge "the best," and to encourage conversation on what I believe is an extremely interesting topic.

I think the panelists did a wonderful job, and I'm already looking forward to Part 2 -- in which I will present their hypothetical, long-term, $25K, single-stock investments.

Also, Regarded Solutions, Brad Thomas and Nicholas Ward plan to write extended theses about their choices, so keep an eye out for their articles.

Disclosure: The author is long GILD, JNJ, KMI, KO, O.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author also could buy any of the other companies mentioned at any time.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.