Solid Dividends and Profit Margins
This month, our DRIP Stock Picks include companies that have above average dividend yields (2.75% or more) as well as profit margins that averaged 10% or better over the past 10 years. Given the nature of the past 10 years, we believe that such results augur well for the company to withstand any cyclical downturns that may arise. (For financial firms, we used Return on Equity (ROE), rather than profit margins, since it is a better measure of consistency.)
We are drawing a distinction here between performance of the company and performance of the company stock. Companies with high profit margins tend to be efficient enterprises capable of bringing more of their sales to the bottom line. However, a company can be very profitable and the market can be oblivious to that success. We believe that the companies on this month's list have the capability of becoming the big gainers of the future.
A good example is General Electric, with a 3.4% yield, having raised the payout four times in the past 18 months. Management has expressed a goal of restoring its dividend and earnings to pre-recession levels by reducing the scope of its financial unit and expanding its focus on energy and infrastructure. GE is expected to earn about $1.55 per share this year, up from $1.37 in 2011, and to net $1.76 in 2013. The company is also sitting on over $131 billion in cash, which gives it plenty of fuel to enhance shareholder value through buybacks, acquisitions, and product development.
Fellow Dow Component Johnson & Johnson has suffered some missteps in the recent past including manufacturing defects, which resulted in product recalls. The company has nevertheless managed to achieve record earnings. This is not surprising from a firm that has increased its dividend for 50 consecutive years. Its net profit margins have averaged over 20% for the past decade and analyst estimates call for it to earn about $5.13 per share this year and $5.44 in 2013, compared with $5.00 in 2011. With over $65 billion in annual sales, a new CEO, and a focus on fixing its transitory problems, this giant with an iconic brand should once again gain earnings momentum, making it an excellent "core" buy-and-hold stock.
Recently featured alternatives that could have been included: Clorox, Illinois Tool Works, Intel, Kimberly-Clark, Eli Lilly, Medtronic, and Merck.
As always, we submitted these choices to our long-serving equity analysts, Pat Racaniello, Dave Fish, and Mike Burke, to confirm that they are appropriate for long-term accumulation.
AFLAC Inc. (AFL): The worlds' largest underwriter of supplemental medical insurance, doing business in the United States and Japan, AFLAC earned $3.91 per share in 2009 and $5.13 in 2010, but after the Japanese tsunami in 2011, its earnings dropped to $4.18 per share. But 2012 started well, with earnings of $1.74 per share in the first quarter, up from just 84⊄ a year earlier, so this year could set a new record. The dividend has been increased annually since 1983, and the current rate of $1.32 per share provides a yield of 3%. Return on equity averaged over 17% for the past decade. (No fees)
Air Products & Chemicals (APD): Air Products supplies a variety of gases to the chemical, steel, oil, food, and electronics industries. About 56% of sales are derived from foreign sources. Dividends have been paid since 1954, with increases coming every year since 1983, and the current rate is $2.56 per share annually. Earnings grew from $4.06 per share in 2009 to $5.02 in 2010 and $5.73 last year. Net profit margins have been averaging 10% over the last 10 years. (Low fees)
Altria Group (MO): Altria is America's largest tobacco firm, whose brand names include Marlboro, Benson & Hedges, Merit, and Virginia Slims. It is also North America's largest purveyor of smokeless tobacco. Earnings hit $1.90 per share in 2010 and $2.05 in 2011, with $2.20 expected this year. There are 2.03 billion outstanding shares, down from 2.493 billion in 1995. The quarterly dividend now stands at 41⊄ per share, with another increase likely in the very near future. MO has a 10-year average profit margin of 13.8% and a yield of 5.1%. (High fees)
AT&T Inc. (T): AT&T provides telecommunication services in the United States and abroad. Dividends have been increased annually since 1984 and currently total $1.76 per share, for a yield of about 5.4%. Earnings in 2011 were $2.20 per share and should reach $2.39 this year and $2.57 in 2013. The $39 billion T-Mobile acquisition has been abandoned. The price/earnings ratio under 15 only adds to AT&T's long-term appeal. (High fees)
CenturyLink (CTL): This is America's third largest telecom provider, offering broadband, voice, and wireless services to consumers and businesses across the country, as well as advanced entertainment services under its own and DIRECTV brands. Qwest was recently acquired, adding $10 billion to annual revenues. This is a very high yielding stock paying an annual dividend of $2.90 per share, with a price/earnings ratio of 16.5 and a book value of $33.37 and net profit margins of 13.6%. (No fees)
Exelon Corp. (EXC): Exelon is a utility holding company whose main divisions are PECO Energy and Commonwealth Edison. It distributes electricity and natural gas to 5.4 million electric and 491,000 gas customers, primarily in Illinois and Pennsylvania, and generates 81% of its power from nuclear sources. It recently purchased Constellation Energy in a deal valued at $7.9 billion, or 187 million EXC shares. Exelon has a 10-year average ROE of 21.6%, while yielding 5.4%. (No fees)
General Electric (GE): A huge multinational conglomerate engaged in medical systems, financial services, appliances, and lighting, GE has been restructuring to make its portfolio of businesses more risk-free. It recently declared its fourth dividend increase in the last 18 months. Suffering from the recent recession, earnings fell to $1.03 per share in 2009, from $1.78 in 2008. GE earned $1.15 in 2010 and $1.31 last year, and should net about $1.55 per share this year and $1.75 in 2013. The company has about $131 billion in cash and a 10-year average profit margin of 10.8%. (High fees)
Healthcare Realty Trust (HR): This is a real estate investment trust (REIT) engaged in the management properties in 28 states, all in the healthcare services sector. It has 210 income producing properties and mortgages. As a REIT, it is not be subject to federal income taxes if it distributes at least 90% of its taxable income to its shareholders. The annual distribution is $1.20 per share, for a yield of 5.6%. FFO (Funds from Operations) are back on track and able to cover the payout. HR has a 10-year average profit margin of 15.4%. (No fees)
Johnson & Johnson (JNJ): J&J is one of the world's largest manufacturers of healthcare products. It has a strong balance sheet, with almost $31 billion in cash and total debt of just $18.4 billion. Net profit margins over the last 10 years have averaged over 20%. The dividend has been increased annually for 50 years, with a current annual payout of $2.28 per share resulting in a 3.5% yield. (No fees)
JPMorgan Chase (JPM): This bank plays a prominent role in both domestic and international credit markets and has a presence in 60 countries. At last count, it had a $700 billion loan portfolio and a book value of $47.64 per share. JPM earned just 84Â¢ per share in 2008, but bounced back to net $2.24 in 2009, $3.96 in 2010, and $4.48 last year. Since the near bank failures in 2009, JPMorgan has upped its quarterly payout from 5⊄ to 30⊄ per share. This turnaround has a 10-year average ROE of 8.4%, while yielding 2.8%. (High fees)
Mack-Cali Realty (CLI): Mack-Cali engages in the management of commercial real estate properties in the U.S., primarily in the northeast. It has 278 properties with a total of 32.4 million square feet. FFO in the first quarter was 70⊄ per share, more than enough to cover the 45⊄ dividend. For 2012, FFO should total about $2.70 per share. The current distribution of $1.80 per share provides a yield of 6.3%. CLI has a 10-year average net profit margin of 13%. (No fees)
PepsiCo Inc. (PEP): PepsiCo is a leader in two highly profitable fields: soft drinks and snack foods. In the soft drink arena, it produces Pepsi-Cola, Mountain Dew, Diet Pepsi, and Tropicana. In the snack food business we find such brand names as Doritos, Ruffles, Lays, Fritos, and Cheetos. Quaker Oats was added in 2001. Dividends have been paid since 1952 and raised annually since 1972, with the current annual payout at $2.15 per share. PEP earned $3.91 per share in 2010, $3.98 in 2011, and analysts expect $4.05 this year. The company has a 10-year average net profit margin of 12.95% and a yield of 3.2%. (No fees)
Philip Morris International (PM): PM is a world leader in the manufacture and sale of cigarettes and other tobacco products in markets outside the United States. Its brand names include Marlboro, L&M, Philip Morris, Chesterfield, Parliament, Lark, and Virginia Slims. Since 2006, it has had an average net profit margin of 11% and now yields 3.4%. The company has also been buying back shares, lowering the total to 1.72 billion from 2.003 billion in 2008. PM is an ideal candidate for income-seeking investors who are also looking for some steady growth. (High fees)
Pitney Bowes (PBI): PBI is the world's largest manufacturer of postage meters and related mailing equipment. It also makes retail labeling devices and sells office supplies through catalogs. Meanwhile, share buybacks continue, as the number of outstanding shares has dropped from 323 million in 1992 to about 199 million today. The current annual dividend of $1.50 per share yields a generous 8.7% and the company has a 10-year average net profit margin of 10%. (No fees)
PPL Corp. (PPL): PPL is the holding company for PPL Electric Utilities, PPL-Global, and PPL- Generation. It serves 1.4 million customers in Pennsylvania and is a well-run energy company, engaging in generation, transmission, and distribution of electricity, primarily in the northeastern and western areas of the U.S. The annual dividend has grown from 53⊄ per share in 2000 to $1.44 today. Recently added were two Kentucky utilities that supply more than 1.2 million customers. (No fees)
Washington REIT (WRE): This REIT invests in and develops income producing properties, including shopping centers, business centers, and apartment complexes and most of its properties are located in the almost recession-proof Washington, D.C. area, where there are a high number of government employees. WRE has a capable management team with a conservative investment philosophy, a strong balance sheet, a distribution yield of 5.9%, and a net profit margin of 20%. FFO in 2011 were $1.95 per share, more than enough to cover the $1.74 dividend. (No fees)