More on Dow Stocks
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J.P. Morgan Chase & Co.
JPM Pfizer Inc.
PFE Bank of America Corp
BAC 8. Merck(MRK_) sells pharmaceuticals including Nasonex, Pepcid and Crixivan.
Quarter: Merck's third-quarter net income tumbled 90% to $342 million and earnings per share fell 93% to 11 cents, hurt by a higher share count. However, excluding one-time items, earnings decreased a modest 6% to 85 cents. Revenue surged 94%. The gross margin rose from 83% to 91%, but the operating margin stagnated at 30%. Merck held $11 billion of cash and $18 billion of debt at quarter's end, equal to a quick ratio of 1 and a debt-to-equity ratio of 0.3.
Valuation: Merck's stock sells for a forward earnings multiple of 9.2, a book value multiple of 1.9 and a sales multiple of 2.5, 21%, 60% and 22% discounts to pharmaceutical industry averages. Its cash flow multiple of 12 is on par with its pharma peer average. Merck commands a trailing earnings multiple of 13, compared to a five-year average earnings multiple of 15. The stock has underperformed the Dow in 2010, falling 3.9% as the broader index rose 9%.
Dividend: Merck pays a quarterly dividend of 38 cents, equaling a yield of 4.3% with a payout ratio of 54%. It has paid a 38 cent dividend since 2004. Prior to 2004, Merck had a record of distribution increases
7. JPMorgan Chase(JPM_) is a diversified financial company whose commercial bank serves 26,000 clients. It also has an investment banking unit.
Quarter: JPMorgan's third-quarter net income increased 23% to $4.4 billion and earnings per share climbed 26% to $1.01. Revenue dropped 11% to $27 billion. The gross margin widened from 61% to 77% and the operating margin extended from 31% to 44%. JPMorgan held $290 billion of cash and equivalents at the end of the quarter and $660 billion of debt, converting to a debt-to-equity ratio of 3.8. It had a tier-one capital ratio of 9.5% at quarter's end.
Valuation: JPMorgan's stock trades at a forward earnings multiple of 8.1 and a sales multiple of 1.3, 27% and 24% discounts to financial services industry averages. Its book value multiple, though ostensibly cheap at 0.9, is on par with the peer average. And its cash flow multiple of 29 reflects a 50% premium. JPMorgan is selling for a trailing earnings multiple of 11, a 27% peer discount and a 53% discount to its five-year average multiple of nearly 23.
Dividend: JPMorgan pays a paltry quarterly dividend of five cents, translating to a 0.5% annual yield with a 6% payout ratio. It has paid a five cent dividend since 2009. Previously, it paid a distribution of up to 38 cents
6. Travelers(TRV_) is a diversified insurer.
Quarter: Third-quarter net income ascended 7.5% to $1 billion. Earnings per share advanced 28% to $2.11. Revenue inched up 2.4% to $6.5 billion. The gross margin expanded from 35% to 36% and the operating margin stretched from 21% to 23%. Travelers carries $5.3 billion of cash and equivalents and $6.3 billion of debt, equal to a debt-to-equity ratio of 0.3. Its subsidiaries receive top financial strength ratings, with grades of AA- from Standard & Poor's.
Valuation: Travelers' stock sells for a forward earnings multiple of 9.1, a book value multiple of 0.9, a sales multiple of 1 and a cash flow multiple of 7.3, 35%, 76%, 78% and 51% discounts to insurance industry averages. A trailing earnings multiple of 7.8 represents a 66% discount to the peer average and a 16% discount to Travelers' five-year average multiple of 9.3. The stock's PEG ratio, a measure of value relative to growth, of 0.9 signals a 10% discount.
Dividend: Travelers pays a quarterly dividend of 36 cents, converting to an annual yield of 2.6% with a payout ratio of 20%. Travelers boosted its dividend from 33 cents in February. The company's board has a record of regular distribution increases
5. Microsoft(MSFT_) is a software company.
Quarter: Microsoft's fiscal first-quarter net income soared 51% to $5.4 billion. Earnings per share surged 55% to 62 cents. Revenue grew 25% to $16 billion. The gross margin rose from 83% to 85% and the operating margin climbed from 35% to 44%. Microsoft held $44 billion of cash and $11 billion of debt at the end of the quarter, equal to a net cash position of nearly $34 billion. A quick ratio of 2.1 and a debt-to-equity ratio of 0.2 signal fiscal prudence.
Valuation: Microsoft's stock trades at a forward earnings multiple of 9.7, a sales multiple of 3.4 and a cash flow multiple of 8.5, 59%, 74% and 53% discounts to software industry averages. However, its book value multiple of 4.8 is on par with peers'. A PEG ratio of 0.7 signals a 30% discount to estimated long-run fair value. Microsoft's trailing earnings multiple of 11 represents a 69% discount to its peer average and a 32% discount to the stock's five-year average multiple.
Dividend: Microsoft pays a quarterly dividend of 16 cents, equal to a yield of 2.4% with a payout ratio of 24%. It boosted the dividend from 33 cents in the latest quarter. It has a record of distribution increases
4. Hewlett-Packard(HPQ_) sells computer hardware and servers as well as consulting services.
Quarter: Fiscal fourth-quarter net income ascended 5.2% to $2.5 billion. Earnings per share increased 11% to $1.10, helped by a smaller float. Revenue grew 8.1% to $33 billion. The gross margin extended from 26% to 27%, but the operating margin hovered at 11%. The balance sheet stored $11 billion of cash and $22 billion of debt at quarter's end, converting to quick ratio of 0.7 and a debt-to-equity ratio of 0.6. HP's 12-month sales have grown 10%.
Valuation: HP's stock sells for a forward earnings multiple of 7.4, a book value multiple of 2.4, a sales multiple of 0.8 and a cash flow multiple of 8.2, 52%, 49%, 76% and 38% discounts to computers and peripherals industry averages. Its PEG ratio of 0.3 reflects a 70% discount to estimated fair value. HP's trailing earnings multiple of 12 represents a 46% discount to the industry average and a 23% discount to the five-year average earnings multiple of 15.
Dividend: Hewlett-Packard pays a quarterly dividend of eight cents, converting to a one-year yield of 0.8% with a payout ratio of just 9%. The board has kept the quarterly dividend steady at eight cents since 1998
More on Dow Stocks
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J.P. Morgan Chase & Co.
JPM Pfizer Inc.
PFE Bank of America Corp
BAC 3. Chevron(CVX_) is the world's second-largest energy company. Its rival is Exxon(XOM_).
Quarter: Third-quarter net income declined 1.7% to $3.8 billion. Earnings per share fell 2.6% to $1.87. Revenue increased 7.6% to $46 billion. The gross margin extended from 21% to 23% and the operating margin expanded from 11% to 12%. Chevron held nearly $15 billion of cash and equivalents and $11 billion of debt at the end of the quarter, equaling a quick ratio of 1.2 and a debt-to-equity ratio of 0.1. Crude oil currently costs nearly $89 a barrel.
Valuation: Chevron's stock trades at a forward earnings multiple of 8.5, a book value multiple of 1.6, a sales multiple of 0.9 and a cash flow multiple of 5.5, 58%, 59%, 71% and 34% discounts to oil and gas peer averages. Its PEG ratio of 0.1 reflects a 90% discount to estimated long-term fair value. Chevron's trailing earnings multiple of 9.9 represents a 46% discount to the peer average, but a modest premium to the company's five-year average.
Dividend: Chevron pays a quarterly dividend of 72 cents, translating to a yield of 3.4%, higher than the 10-year Treasury yield, and a payout ratio of 34%. Chevron has a record of distribution increases
Stocks for the long run: take a long-term view when it comes to investments.(Financial Planning): An article from: SaskBusiness
2. Bank of America(BAC_) is a financial-services company. It's the top mortgage lender in the U.S.
Quarter: Bank of America's third-quarter loss widened to $7.3 billion, or 77 cents a share, hurt by a goodwill impairment charge in its credit card business due to a new regulatory rule. The company swung to an adjusted profit of $3.1 billion, or 27 cents, from a year-ago loss. Revenue fell 2%. The gross margin jumped from 43% to 66% and the operating margin climbed from 11% to 31%. Bank of America has $840 billion of debt, equal to a debt-to-equity ratio of 3.6.
Valuation: Bank of America's stock sells for a forward earnings multiple of 7.6, a book value multiple of 0.5, a sales multiple of 0.8 and a cash flow multiple of 1, 32%, 42%, 51% and 95% discounts to diversified financial services industry averages. Bank of America is selling at a discount to its five-year average earnings multiple of 15 and its profit spreads consistently exceed peer averages. The company's shares have fallen 22% in 2010 amid mortgage regulatory scrutiny.
Dividend: Bank of America pays a quarterly dividend of one cent, converting to a paltry yield of 0.3%. Its dividend was cut from a high of 68 cents during the recession as the bank accepted federal TARP money
1. Pfizer(PFE_) sells pharmaceuticals including Dimetapp, Dristan and Halcion.
Quarter: Pfizer's third-quarter net income plummeted 70% to $866 million and earnings per share dropped 74% to 11 cents. Revenue advanced 39% to $16 billion. The gross margin declined from 88% to 87% and the operating margin fell from 38% to 31%. Pfizer has $22 billion of cash and $44 billion of debt, translating to a quick ratio of 1.6 and a debt-to-equity ratio of 0.5. Pfizer's 12-month sales have increased 46%, though net profit has fallen 25%.
Valuation: Pfizer's stock trades at a forward earnings multiple of 7.3, a book value multiple of 1.5 and a sales multiple of 2, 38%, 68% and 36% discounts to pharmaceuticals industry averages. But, its cash flow multiple of 13 represents a premium of 18%. A PEG ratio, calculated by dividing the P/E ratio by analysts' long-term growth forecast, of 0.3 demonstrates a 70% discount to estimated fair value. Pfizer is a consensus buy-side value pick, but has fallen 8.5% in 2010.
Dividend: Pfizer pays a quarterly dividend of 18 cents, translating to a one-year yield of 4.3% and an elevated payout ratio of 94%. Pfizer halved its dividend to 16 cents in 2009 amid recession, but has since lifted it.
Retirement 8 Dow Stocks Most Likely to Outperform
By J. DeFeo
10 'Growth' Stocks in Fight for 'Value'2010 Dividend Aristocrats: Dividend Safety Ratings'QE2': How to Invest in Manipulated MarketsStop Listening to Bill Gross -- Today's Outrage10 Dow Dividend Stocks Fail 'Acid Test'10 Dividend Stocks Most Likely to OutperformMarket Activity
3M Company
MMM Johnson & Johnson
JNJ International Business Machines Corp
IBM NEW YORK (TheStreet) -- For long-term investors, navigating the stocks that comprise the Dow Jones Industrial Average has been like walking a minefield.
Had you invested $100 in each of the 10 best performing (active) Dow stocks from September 2000 to September 2010, your principal would have grown to $2,409 -- had you invested in the 10 worst, your principal would have shrunk to $579*. Had you invested across all 30 (active) Dow components, in equal weighting, your annualized return would be a meager 3.15%. But, if you had you avoided the 10 worst performing Dow stocks, your annual return would nearly double to 5.79%.
As the data shows, diversification is a useful tool -- but far more useful for investors that know which stocks to avoid entirely.
In the past we've highlighted the 10 most overpriced Dow stocks (likely to underperform in the long term), and as a corollary, the most attractively valued Dow stocks.
However, just because a stock is attractively valued does not make it a good investment. Five of the 10 Dow stocks in our attractively valued list have delivered negative returns over the last decade -- in many cases, the result of poor management and corporate governance -- not the result of poor performance by the company.
In the immortal words of Benjamin Graham:
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks."
Nevertheless, we shall attempt to select a small portfolio of Dow stocks intended to outperform the collective future performance of the 20 best-performing Dow components. To screen for candidates, all 30 Dow components were held against the following criteria.
1.) Each stock must have a liability-adjusted cash flow yield** greater than the yield of a 10-year U.S. Treasury note.
The expected rate of return of the equity should exceed the risk-free rate of a Treasury note, preferably, by a ratio of 2-1 (to compensate the owner for business-specific risks).
2.) Each stock must have a return on invested capital greater than 10% (using 10-year historical data).
Return on invested capital measures the success and failures of a company's capital expenditures -- a direct measure of managerial competence. Ten percent is a reasonable minimum figure to ensure that management is spending capital wisely.
3.) Each stock must show a positive total return (including dividends) over the past 10 years.
For an individual investor, 10 years represents a large percentage of his or her "investable lifetime." Ultimately, if the managers of a profitable company are unable to return profits to shareholders in a decade's time, something is wrong. Or, as Benjamin Graham writes in The Intelligent Investor, "poor managements produce poor market prices."
After analyzing the 30 stocks that comprise the Dow Jones Industrial Average, eight issues meet the standards of our established criteria. (It is worth noting that far greater investment opportunities exist outside of the realm of Dow components -- applying the above criteria to a greater universe of stocks will yield many positive surprises.)
-- Written by J. Lynch
More from John DeFeo
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3M Company
MMM Johnson & Johnson
JNJ International Business Machines Corp
IBM 8. Coca-Cola
■Liability-Adjusted Cash Flow Yield: 3.5%
■10-Year Treasury Yield: 2.74%
■Margin of Safety Ratio: 1.28
■Return on Invested Capital: 27%
■10-Year Total Return: 39.02%
Coca-Cola(KO_) is a goodwill giant of American culture and a proud member of the S&P 500 Dividend Aristocrats -- a select group of companies that have increased dividend payouts annually for 25 years or more. Whether or not Coca-Cola can consistently raise its dividend into the future remains to be seen, but the company did pass our dividend acid test (by a hair).
While Coca-Cola is the least attractively valued stock on our list, investors can take comfort in knowing that Warren Buffett and Bill Gates have a vested interest in the company's ongoing success
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3M Company
MMM Johnson & Johnson
JNJ International Business Machines Corp
IBM 7. DuPont
■Liability-Adjusted Cash Flow Yield: 3.6%
■10-Year Treasury Yield: 2.74%
■Margin of Safety Ratio: 1.31
■Return on Invested Capital: 11%
■10-Year Total Return: 50.43%
E. I. du Pont de Nemours & Co.(DD_) is the original "name brand" chemical company -- developing a well-known portfolio of materials including Nylon, Teflon, and Kevlar.
For the last decade, DuPont has delivered positive value to shareholders by offering a sizable dividend, currently yielding 3.88%. However, it should be noted that DuPont falls just short of satisfying our dividend acid test. Investors also should note that from 2005 to 2009, the company's effective tax rate averaged only 21%.
If DuPont is unable to maintain a below-average tax rate, or if the company faces an operational adversity, a dividend cut may occur, likely resulting in depressed share prices.
6. United Technologies
■Liability-Adjusted Cash Flow Yield: 3.9%
■10-Year Treasury Yield: 2.74%
■Margin of Safety Ratio: 1.42
■Return on Invested Capital: 15%
■10-Year Total Return: 161.01%
If you've ever used an escalator, elevator, or central air conditioner -- chances are -- you've used a United Technologies(UTX_) product.
In addition to Otis and Carrier, United Technologies' portfolio of companies includes Sikorsky and Pratt & Whitney -- two prominent suppliers of commercial and military aviation technology. Since 1978, United Technologies stock has appreciated 2.64 times more than the Dow Jones Industrial Average and has offered a stable and growing dividend along the way.
United Technologies' businesses are protected by high barriers to entry, and with a 15% return on invested capital (a notable achievement for a large equipment manufacturer), the company is poised to deliver ongoing shareholder value.
5. Boeing
■Liability-Adjusted Cash Flow Yield: 4.3%
■10-Year Treasury Yield: 2.74%
■Margin of Safety Ratio: 1.57
■Return on Invested Capital: 33%
■10-Year Total Return: 31.75%
Since 1978, Boeing(BA_) shares have appreciated over 300% more than the Dow Jones Industrial Average. For a large equipment manufacturer with a $47 billion market capitalization, the company's 33% return on invested capital is a tremendous achievement (this figure is the highest of any non-tech Dow stock).
Unfortunately, Boeing has very weak liquidity (the company's quick ratio is only 0.53) and is heavily indebted -- as a result, the company is more susceptible to macroeconomic risks
4. 3M
■Liability-Adjusted Cash Flow Yield: 4.5%
■10-Year Treasury Yield: 2.74%
■Margin of Safety Ratio: 1.64
■Return on Invested Capital: 22%
■10-Year Total Return: 135.61%
3M(MMM) has delivered stable returns for investors for over 30 years -- outpacing the Dow and S&P 500 since 1978. Trading near $85 per share, 3M is among the most attractively valued Dow stocks, and with a 22% return on invested capital, the third most profitable non-tech stock in the index.
The manufacturer of Post-Its and Scotch Tape is a Dividend Aristocrat, and passes our dividend acid test with a comfortable margin of safety.
3. ExxonMobil
■Liability-Adjusted Cash Flow Yield: 5.3%
■10-Year Treasury Yield: 2.74%
■Margin of Safety Ratio: 1.93
■Return on Invested Capital: 12%
■10-Year Total Return: 79.3%
ExxonMobil(XOM_) stock continues to trade below its March 2009 lows and has underperformed Chevron(CVX_), ConocoPhillips(COP_), and Occidental Petroleum(OXY_) over the last 12 months. Traders may have left Exxon for dead, but investors with a long-term perspective would be wise to use Exxon's prolonged undervaluation to their advantage.
ExxonMobil is the most attractively valued integrated oil major, and is two to three times more profitable than any company in its competitive set. According to Dan Dicker, TheStreet's resident oil expert, "I would put my money on Exxon's ability to see the energy future clearly. They have a history of doing that better than anyone else. In addition, ExxonMobil's return on equity is always the best in the patch and they have the kind of balance sheet that could lead to a significant stock buyback at any moment."
2. IBM
■Liability-Adjusted Cash Flow Yield: 5.4%
■10-Year Treasury Yield: 2.74%
■Margin of Safety Ratio: 1.97
■Return on Invested Capital: 39%
■10-Year Total Return: 14.11%
Oddly considered a defensive stock despite its volatility, IBM(IBM_) has shifted back into growth mode, delivering impressive year-over-year cash flow gains since 2006. IBM's current valuation gives investors a reasonably safe entry point, and the company's growing cash flows should provide investors with the confidence to buy additional shares in the event of a price decline.
IBM has increased its dividend payout by 276% since 2005, and has the wherewithal to substantially increase future payouts. In the opinion of the author, IBM could greatly enhance shareholder value by doubling its current dividend.
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3M Company
MMM International Business Machines Corp
IBM United Technologies
UTX 1. Johnson & Johnson
■Liability-Adjusted Cash Flow Yield: 5.8%
■10-Year Treasury Yield: 2.74%
■Margin of Safety Ratio: 2.12
■Return on Invested Capital: 24%
■10-Year Total Return: 57.38%
Johnson and Johnson(JNJ_) has been plagued by negative short-term catalysts (that should have little impact on the company's long-term prospects):
■A large-scale recall of children's medicine by J&J's McNeil Consumer Healthcare division.
■Extensive recalls of hip replacement devices.
■Disappointing full-year earnings guidance.
With a 3.6% dividend yield, J&J offers one of the highest yields in the Dow (and satisfies the criteria of our dividend acid test) -- but the health care giant's margin of safety may quickly condense if it is unable to maintain below-average tax rates.
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by J. DeFeo
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