Income investors are looking for companies that maintain a competitive advantage, and thus profitability, over the long term. In my analysis of the investment landscape I compiled an analysis of companies that can maintain dividend payments over the next decade. Here are four "must-own" stocks that can achieve this based off of an analysis of competitive trends.
Intel (INTC) - Intel is yet another large and established blue chip company facing significant change in its industry. Intel has struggled with generating growth the past few years as computer processing has evolved dramatically. Intel was recently trading in the middle of its long-established sideways trading range of $19 to $26 per share. While always an innovator, Intel's personal computer processing power has continued to improve with technology advancements, but competition from smart phones and, more recently, tablet PCs, has prevented Intel from maintaining stronger pricing power. However, cloud computing is a new and positive trend that holds longer-term promise for increased demand for Intel chips that is likely to help off-set the other personal computer trends.
With a dividend yield of close to 3% and a P/E ratio around 10, Intel is getting noticed by value investors that see an opportunity in the stock. The company continues to be well managed, with the most recent example being its recent bond issuance in this historically low interest rate environment. The prevailing analyst opinion is that Intel is attractive at these levels and it remains a better bet than Advanced Micro (NASDAQ:AMD). I think longer-term investors and income investors should strongly consider accumulating the stock.
AT&T, Inc. (T) - Since dipping below $28 in late November 2011, AT&T has seen an upward trend to a current price of $30 at the time of writing. However, since the failure of AT&T's announced acquisition of T-Mobile, some investors have begun to question the long term outlook of AT&T. At the time, customers had taken the opportunity to play the other carriers such as Sprint (NYSE:S) that would have benefited from the acquisition. While the failed merger news dominates the stock right now, the other important story that investors need to consider long term are AT&T's services that it provides to customers of Apple (NASDAQ:AAPL). While AT&T is no longer its exclusive carrier, Apple continues to roll out popular products at a fast pace. The iPad2 is a recent example of this. The personal computing device has built-in 3G wireless capability that is resulting in increased wireless subscriptions for AT&T.
Additionally, with the release of iPhone 4s back in October, AT&T is again benefiting from another blockbuster product. With a profit margin of 9.32% and operating margin of 16.16% at the time of writing, AT&T looks healthy in its current position. Despite the failed acquisition of T-Mobile, I predict AT&T will stay on track to maintain its dividend payout for many years to come.
General Electric (GE) - General Electric is down just over 5% in the last 12 months compared to the S&P 500 Index that is up just over 3% during the same period. Currently, General Electric is trading near the middle of its 52-week range. One would think that, in a market downturn, investors would turn to a quality company like General Electric rather than sell it. With the stock weakness and the steadily growing dividend the last few years after it was cut in 2009, General Electric's 5 year average dividend yield is 3.9%. This is nearly double the dividend yield of the S&P 500 Index, and it is getting investors' attention.
The reason why the yield is so high, and the stock is under-performing, is the same challenge facing global equity markets - debt. Like the countries such as Greece and Spain that are making headlines, General Electric has a lot of debt due to its financing division. Investors are concerned that dividends can't be sustained by leveraged companies in slow growth environments. General Electric needs to show earnings growth to cover its debts and dividend. As the economy continues to stumble, and shows little growth and disappointing job creation, the nearly 4% dividend comes under increased scrutiny. The company has a dividend payout ratio of 48%, which is normally OK, but it's high for a company with a leveraged balance sheet. General Electric's earnings are growing, thanks to great products and crafty management. However, because of the debt, the economy and economic growth plays a larger role for a leveraged company like General Electric, and the stock reflects it.
The good news is that the leverage effect works both ways, and General Electric should outperform when the economy turns back around. With its nearly 4% 5 year average dividend yield as a confidence booster, General Electric investors can get paid to wait for better economic times that should eventually come. The General Electric of today is more aggressive than its long blue-chip reputation leads one to believe. For these reasons, I predict loyal General Electric investors will be handsomely rewarded with above average yields for many years to come, with even greater rewards when the global economy picks back up.
Merck (MRK) - Merck is up about 13% over the last year and has out-performed the S&P 500 Index. This turn-around reflects a few things that may well continue to the advantage of Merck. First, as uncertainty about economic growth has set in recently and caused market volatility to increase, investors have sought out quality companies in economically defensive industries. Merck, a large, diversified pharmaceutical company in the healthcare sector, has benefited from this trend.
Second, Merck's quality management, research and products continue to showcase the company within the industry. While the product line-up is strong, the pipeline for new drugs is not as attractive as it has been in previous periods, and the patent expiration on its number one selling asthma drug Singular will likely cause some uncertainty and volatility in the stock. The company's management continues to seek ways to grow, and has been cutting costs, seeking research partnerships, and looking for geographic expansion.
Along this line, Merck has been deepening its marketing efforts in China to bring more of its products to that country's huge population. With a five year average dividend yield of 3.90%, combined with a forward P/E ratio of 10.14, I believe longer-term investors will be well compensated while waiting for a resumption of growth from this market leader.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.