In this series, we start with a fairly simple question. If we were to invest in five large-cap, safe, and dividend-paying companies trading at relatively cheap valuations, which companies would make the cut at the given moment?
Note: In our opinion, for a well-diversified portfolio, one should have 15-20 stocks at a minimum.
Goals for the selection process:
Before we get to the selection process to select five companies, we should be clear in our objectives. Our primary goal is income, and the secondary goal is to grow the capital. These goals are by and large in alignment with most income investors as well as DGI investors. A balanced DGI portfolio should keep a mix of high-yield, low-growth stocks along with some high-growth but low-yield stocks. However, how you mix the two will depend upon your personal situation, income needs, and time horizon.
Whatever your final goals may be, we are trying to shortlist and highlight five stocks that may fit most such investors. However, as always, we recommend you do your due diligence before making any decision on them.
Selection Process:
The S&P 500 yields less than 2%. If we are dividend investors, we should logically look for companies which pay yields that are at least higher than the S&P 500. Of course, higher the better, but at the same time, we should not try to chase high yield. If we try to filter for dividend stocks paying 2.0% plus dividend yield, there are more than 1500 such companies trading on US exchanges including OTC networks. If we further limit our choices to companies which have a market cap of at least $30 Billion and daily trading volume in excess of 100,000 shares, the number comes down to just 177 companies.
Furthermore, if we were to choose stocks that are trading at a forward P/E of no more than 20, and had at least 1% dividend growth in the last five years while meeting all other criteria, we will still get a list of 94 companies. We may like to point out that a P/E of 20 is not essentially cheap. However, with the current P/E for the S&P 500 hovering around 24.75, a P/E of 20 is relatively cheap. But that’s not all. In our quest for not paying too high a price, we add one more criterion that the close price is at least 15% below the 52-week high. After applying these additional criteria, we get a set of 38 companies.
Out of a list of 38 companies, the final step to narrow down the list to five stocks is subjective. We will need to do further research on factors like dividend safety, growth prospects and economic-moat of the company. We selected five companies (out of 38), from different sectors/industries ranging from very safe companies like Illinois Tool Works (ITW) to possibly a more controversial choice like Kraft Heinz Co. (KHC), which offered a much higher discount. We think these companies as a group would be appealing to retirees, near-retirees or anyone above 50 years of age. As we get closer to retirement, our focus changes from the growth of capital to income. Though we selected five stocks, however, there are other stocks on this list that may be equally appealing. In fact, there may be quite a few others.
Criteria to Shortlist the Companies:
- Market-cap >= 30 billion
- Dividend yield >= 2.0%
- Dividend growth past 5-years >= 1%
- Forward P/E <= 20
- Distance from 52-week high < -15%.
Below is the complete list of 38 companies that we got by using the above criteria. Out of these, we selected five companies (highlighted) from different sectors/ industry segments.
Company Name | Ticker | Div. Yield % | Last Close | Market Cap (in $Billion) | Avg Volume | P/E (FWD) | 5 Yr Hist. Div. Growth % | 52 Wk High | Perf comp. with the S&P 500 | Distance from 52-WK High |
Intesa Sanpaolo SpA | ISNPY | 6.83 | 15.05 | 39.8 | 281227 | 8.18 | 36.0 | 23.75 | -28.8 | -36.63% |
Bayer Aktiengesellschaft | BAYRY | 2.5 | 22.73 | 75.2 | 894462 | 12.06 | 3.6 | 35.29 | -33.82 | -35.59% |
ING Group, N.V. | ING | 3.32 | 13.35 | 51.9 | 3245169 | 8.53 | 48.1 | 20.57 | -31.78 | -35.10% |
BNP Paribas SA | BNPQY | 5.08 | 29.25 | 73.0 | 176912 | 8.3 | 20.3 | 42.6 | -26.32 | -31.33% |
Societe Generale Group | SCGLY | 5.12 | 8.12 | 32.8 | 147059 | 7.69 | 36.2 | 11.77 | -26.46 | -31.05% |
Credit Agricole SA | CRARY | 3.89 | 6.72 | 38.3 | 118117 | 9.33 | 15.6 | 9.56 | -23.64 | -29.71% |
The Kraft Heinz Company | KHC | 4.1 | 61.02 | 74.4 | 6201207 | 16.39 | 4.8 | 86.5 | -27.34 | -29.46% |
Philip Morris International | PM | 5.36 | 85.05 | 132.2 | 4905014 | 16.82 | 3.3 | 118.92 | -24.56 | -28.48% |
Ford Motor Company | F | 6.28 | 9.55 | 37.9 | 43397432 | 6.91 | 7.3 | 13.23 | -28.34 | -27.82% |
Asa SA | AXAHY | 4.98 | 24.71 | 60.4 | 171428 | 8.11 | 7.4 | 33.84 | -22.02 | -26.98% |
Lloyds Banking Group PLC | LYG | 3.63 | 3.07 | 55.3 | 4602882 | 7.67 | 37.2 | 4.19 | -23.7 | -26.73% |
Broadcom Limited | AVGO | 3.34 | 209.27 | 90.3 | 5008307 | 11.98 | 53.3 | 284.62 | -23.54 | -26.47% |
UBS Group AG | UBS | 4.46 | 15.47 | 59.6 | 2243057 | 10.25 | 29.2 | 20.89 | -20.88 | -25.95% |
Nordea Bank AB | NRBAY | 6.63 | 10.33 | 41.8 | 183930 | 12.15 | 13.9 | 13.8 | -21 | -25.14% |
Southern Copper Corp | SCCO | 3.67 | 43.63 | 33.7 | 1123275 | 17.88 | 10.8 | 57.34 | -14.89 | -23.91% |
Illinois Tool Works Inc. | ITW | 2.24 | 139.43 | 46.8 | 1913140 | 18.25 | 15.9 | 178.88 | -21.62 | -22.05% |
General Motors Company | GM | 4.18 | 36.38 | 51.3 | 12259533 | 6.06 | 6.9 | 46.48 | -16.67 | -21.73% |
Prudential Financial, Inc. | PRU | 3.64 | 98.8 | 41.2 | 2109941 | 8.15 | 13.8 | 126.02 | -19.7 | -21.60% |
Canon, Inc. | CAJ | 4 | 31.83 | 34.8 | 317401 | 14.23 | 2.6 | 40.22 | -20.68 | -20.86% |
3M Company | MMM | 2.66 | 204.77 | 120.1 | 2351326 | 19.74 | 14.1 | 258.63 | -18.77 | -20.83% |
BlackRock, Inc. | BLK | 2.43 | 474.15 | 75.7 | 722672 | 17.13 | 10.3 | 593.26 | -13.05 | -20.08% |
AbbVie Inc. | ABBV | 3.89 | 98.81 | 149.6 | 6926838 | 12.57 | 16.0 | 123.21 | -4.41 | -19.80% |
American International Group, Inc. | AIG | 2.43 | 52.58 | 46.7 | 4952612 | 11.53 | 34.6 | 65.13 | -17.13 | -19.27% |
Las Vegas Sands Corp. | LVS | 4.56 | 65.86 | 51.9 | 4146843 | 18.71 | 15.3 | 81.27 | -11.81 | -18.96% |
Caterpillar Inc. | CAT | 2.47 | 139.34 | 82.8 | 5206870 | 12.08 | 6.1 | 170.89 | -18.62 | -18.46% |
Morgan Stanley | MS | 2.48 | 48.37 | 84.4 | 8144667 | 9.96 | 41.0 | 58.91 | -13.36 | -17.89% |
Gilead Sciences, Inc. | GILD | 3.13 | 72.92 | 94.5 | 6689163 | 11.12 | 33.2 | 88.8 | -0.69 | -17.88% |
MetLife, Inc. | MET | 3.66 | 45.94 | 45.7 | 5410568 | 8.8 | 8.1 | 55.73 | -15.17 | -17.57% |
Intel Corporation | INTC | 2.55 | 47.1 | 220.3 | 26832028 | 11.34 | 6.3 | 57.08 | -3.82 | -17.48% |
Altria Group, Inc. | MO | 4.59 | 61 | 115.0 | 6976181 | 15.25 | 8.7 | 73.9 | -19.83 | -17.46% |
Allianz SE | AZSEY | 3.34 | 21.075 | 92.8 | 198002 | 10.38 | 21.0 | 25.47 | -13.44 | -17.26% |
Comcast Corporation | CMCSA | 2.13 | 35.6 | 165.3 | 18784384 | 13.97 | 11.8 | 42.99 | -16.2 | -17.19% |
AT&T Inc. | T | 6.06 | 33.03 | 202.8 | 36898720 | 9.34 | 2.2 | 39.51 | -19.9 | -16.40% |
Ck Hutchison Holdings Ltd | CKHUY | 4.14 | 11.48 | 44.3 | 210384 | 8.76 | 85.4 | 13.68 | -15.29 | -16.08% |
Carnival Corporation | CCL | 3.3 | 60.58 | 32.1 | 3282670 | 14.29 | 11.2 | 71.94 | -15.16 | -15.79% |
Dominion Energy Inc. | D | 4.66 | 71.75 | 46.9 | 3279980 | 17.38 | 8.4 | 84.91 | -17.41 | -15.50% |
Walgreens Boots Alliance | WBA | 2.29 | 69.99 | 69.5 | 6660557 | 11.72 | 5.8 | 82.74 | -9.77 | -15.41% |
The last step in this selection process (choosing five companies out of 38) is selective and based on our research and opinion. Please note there may be other companies on the list that may be equally compelling, that’s why we provided the complete list for the benefit of readers.
The Kraft Heinz Company (NASDAQ:KHC)
KHC is an American food and beverage company formed in 2015 by the merger of Kraft Foods and Heinz. The merger was backed by 3G Capital and Berkshire Hathaway, and they together invested US$46 billion in the deal. The company boasts of 8 brands with billion-dollar-plus annual sales. The Company’s brands include Kraft, Heinz, ABC, Capri Sun, Classico, Jell-O, Kool-Aid, Lunchables, Maxwell House, Ore-Ida, Oscar Mayer, Philadelphia, Planters, Plasmon, Quero, Weight Watchers Smart Ones and Velveeta.
In our view, KHC may not be the best company among the consumer staples companies, but its shares have taken the most beating. So, it stands out on the valuation front. For example, the prospect of Unilever (UL) is expected to be much better, but then its shares are not cheap and have stood the ground during the consumer staples downturn recently. KHC may be a good example of “buying low” now and “selling high” later (or keep earning high dividends) strategy. But, it should be noted that shares of other companies in the Consumer Staples segment like Proctor & Gamble (PG) and Colgate (CL) are also trading at attractive valuations, but the discounts are not as steep as they are for KHC. Obviously, we would consider KHC safe enough, but not as safe as more stable names like PG, and Unilever.
Shares of KHC are trading at about -29% compared to its 52-week high. The consumer staples segment, in general, is pressured by the stagnant sales and contracting margins. That is one reason that valuation is relatively cheap. However, not all companies are equal. KHC’s forward P/E is only 16.29 compared to 23.0 for Unilever and 19.0 for Proctor & Gamble. The forward dividend yield of 4.10% is also very attractive and much higher than more its 3-year average of 2.72%.
Broadcom Inc. (AVGO)
The company is a leading semiconductor company with annual revenue of $17.5 Billion and the ninth largest holder of patents among the top semiconductor vendors.
In January 2016, the former Broadcom Corporation was acquired by Avago Technologies, and the combined company was renamed Broadcom Inc. However, Avago retained the ticker “AVGO” of Avogo for the combined company. The combined company is a leading semiconductor company with annual revenue of $17.5 Billion and the ninth largest holder of patents among the top semiconductor vendors.
In 2005, the chip division of Agilent Technologies was acquired by two private-equity-funds to form Avago Technologies. Since then, the company has grown bigger and bigger on its strength an acquisition strategy. In 2016, it announced its intention of acquiring Brocade Communications. To avoid the foreign investment review, it re-domesticated from Singapore to Delaware. However, its proposal to acquire Qualcomm in 2017 did not go well and was finally blocked by President Trump on national security concerns. However, it has moved on and announced its intentions in 2018 to acquire CA Technologies for $18.9 billion. Since then its share price has dropped more than 15%.
Shares of AVGO are trading at -26.5% below its 52-week high. The forward P/E is 10.80. The forward dividend yield of 3.34% is very attractive and more than double of its 5-year average of 1.45%.
Illinois Tool Works Inc. (NYSE:ITW)
ITW needs no introduction to DGI investors. It has paid and increased dividends for 54 years, and for this reason is known as a Dividend Aristocrat. ITW was founded in 1912 and is a Fortune-500 company. The company produces engineered fasteners and components, equipment and consumable systems, and specialty products. It employs nearly 50,000 people across 56 countries and generates nearly half of its $14 Billion revenue outside of the US.
The 5-year dividend growth has been excellent at 14.20%. Valuation of ITW is relatively cheap right now. The share price fell considerably after the second quarter results due to lower guidance. Shares are trading at -22% cheaper compared to its 52-week high. Its forward P/E is 18.21 compared to 5-year average of 21.5%. The forward dividend yield of 2.87% is also attractive compared to its 5-year average of 1.97%.
Prudential Financial, Inc. (PRU)
PRU is an American Fortune 500 company and provides insurance, investment management, and other financial products like life insurance and annuities and services to both retail and institutional clients in the US and many other countries. It provides these products and services to both individuals and institutional clients. Prudential has operations in the US and at least 30 other countries. The company primarily operates through hundreds of subsidiaries and organizes its operations in three segments- Financial Services, Businesses, and the Closed Block Business.
Shares of PRU are trading at -21% discount compared to its 52-week high. Its forward P/E is only at 8.13. The forward dividend yield of 3.64% is also very attractive compared to its 5-year average of 2.84%.
Dominion Energy, Inc. (NYSE: D)
Dominion Energy is one of the largest Utility companies and considered best of the breed among utility companies. It serves more than 6 million utility and retail energy customers and has a portfolio of approximately 25,700 megawatts of electric generation, 15,000 miles of natural gas transmission, gathering, storage and distribution pipeline and 6,600 miles of electric transmission and distribution lines. Dominion also operates one of the largest natural gas storage systems in the U.S. with 1 trillion cubic feet of capacity.
Dominion Energy’s proposed stock-for-stock merger of SCANA Corporation (NYSE: SCG) is still pending. The merger is expected to be accretive to Dominion Energy"s earnings upon closing.
Dominion is considered to be one of the safest dividend-paying utilities by the DGI investors. The utility sector, in general, is down by a lot in the recent months, though it has recovered to some extent recently. The current valuation of Dominion is relatively cheap. Shares are trading at -15.5% below its 52-week high (we highlighted it first in our June article when it was trading -26% below its 52-week high). Its forward P/E is 17.73. The forward dividend yield of 4.66% is still very attractive to its 5-year average of 3.66%.
Financial and Valuation Data:
Below is the comparison of valuation and other data for the five companies
(All data as of 08/17/2018):
KHC | AVGO | ITW | PRU | D | |
Share Price | $61.02 | $209.27 | $139.43 | $98.80 | $71.75 |
Percent below the 52-week high | -29.46% | -26.47% | -22.05% | -21.60% | -15.50% |
Market-cap | $74.4 B | $90.3 B | $46.7 B | $41.2 B | $46.90 |
Forward P/E (1 yr) | 16.29 | 10.80 | 18.21 | 8.13 | 17.73 |
Price/Book | 1.13 | 2.82 | 12.35 | 0.85 | 2.60 |
PEG Ratio | 3.91 | 0.21 | 1.74 | 2.71 | 2.66 |
LT Debt | $31 Billion | $17.4 Billion | $6.0 Billion | $2.0 Billion | $32.0 Billion |
Debt/Total-Asset Ratio | 0.28 | 0.32 | 0.48 | 0.02 | 0.48 |
Forward Dividend Yield | 4.10% | 3.34% | 2.87% | 3.64% | 4.66% |
5-Year Dividend Yield Ave. | 2.72%** (3-yr) | 1.45% | 1.97% | 2.84% | 3.66% |
5-Year Dividend growth | 3.64% (3-yr) | 44.60% | 14.20% | 14.40% | 7.60% |
No of years of dividend growth | 4** | 8 | 54 | 9 | 9 |
Dividend Payout Ratio | 67.2% | 40.0% | 52.4% | 29.7% | 80.9% |
Past 3-yr / 5-yr EPS growth | 72 % (3 Yr)## | 51% (3 Yr)## | 4.70% (5-yr) | 77.40% (3-yr) | 11.70% (5-yr) |
5-Year Future EPS growth Estimates | 23.29% | 14.31% | 8.70% | 8.50% | 5.90% |
5-Year Revenue Growth | 7.50% | 49.50% | -0.65% | -0.50% | -3.40% |
S&P Credit Rating | BBB | BBB- | A+ | A | BBB+ |
**KHC as a merged company (merger of Kraft and Heinz) has a history only since 2015.
##For both KHC and AVGO, EPS figures have been very volatile, and due to limited history after respective mergers, the growth data is not reliable.
Conclusion:
As of January 2018, the average dividend yield of these five stocks was 2.82%. Not bad for a mostly conservative lot. However, if you were to buy these five companies today and invest equal amounts, you would get roughly 3.72% dividend, nearly 32% more. Not much has changed with regards to the quality of these companies. Even the S&P 500 is trading at similar levels as in January 2018. What has changed is the market perception. Generally, some of these sectors have been out of favor in recent months. So, we think that we should take advantage of lower prices. These five companies as a group, the average yield is 3.72%, up 32% from 2.82%, and the average price is 18% lower compared to the beginning of the year.
Disclaimer: The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Please always do further research and do your own due diligence before making any investments. Every effort has been made to present the data/information accurately; however, the author does not claim 100% accuracy. Any stock portfolio or strategy presented here is only for demonstration purposes.
We offer "High Income DIY Portfolios" Marketplace service. The primary goal of the service is high income with low risk and preservation of capital. The service provides the DIY investors with vital information and portfolio & asset allocation strategies to help create stable, long-term passive income with sustainable yields. We believe this service is appropriate for income-seeking investors, including retirees or near-retirees. We currently provide five portfolios, including two "High-Income" portfolios, a conservative strategy for 401-K accounts, a "Sector-Rotation" strategy, and a "High-Growth" portfolio. For more details, click here.
Disclosure: I am/we are long CL, KHC, D, ITW, PG, UL.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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