Essential Elements for Successful Long-Term Investing
A properly diversified portfolio would include consumer products, food, oil, healthcare, utilities, telecoms, and hi-tech. But which companies within those categories will provide the best long-term results?
Analysts may disagree on individual stocks, but most agree on the essential elements that determine value. Among the most important criteria, in no particular order, are:
-Low debt, which allows more profits to flow to the bottom line.
-Healthy cash flow.
-Leaders in their industries.
-Histories of increasing earnings and dividends.
-The ability to ride through various economic cycles.
In general, when these criteria are in place, and earnings are trending upward, the enterprises will have a better than average chance to prosper and grow. Of course, you can overpay for even the best company and that's why we focus on DRIP companies, which make it easy to buy in over time (dollar-cost average). (See box)
For this month's DRIP Picks, we paid special attention to those five essentials. At FedEx, we found total debt of $1.7 billion, $2 billion in cash, and operating cash flow of $4.6 billion. It routinely increased its dividend, even during the recessionary 2001 and 2008-2010 periods (moving from 5⊄ per share in 2002 to 52⊄ now). While earnings declined during those periods, the company still managed to be profitable.
Microsoft is another example (even if extreme), with total debt of $12 billion, $58 billion in cash, and operating cash flow of $30 billion. However, our picks also include companies like MTS Systems (MTSC) with cash flows in the millions (not billions). That company makes systems to test the mechanical behavior of diverse items ranging from bridges and dams to landing gear and dental implants.
In addition to the 14 picks in the table below, we profile six more companies at directinvesting.com: AT&T, Badger Meter, Intel, Northrop Grumman, Polaris Industries, and Timken. All 20 companies meet this month's criteria and enrollments in their DRIPs are available to you at the preferred subscriber rate of $25 (regularly $50).
As usual, we sought comments and confirmation from our long-time stock pickers, Mike Burke, Dave Fish, Vita Nelson, and Pat Racaniello, before we settled on the companies to offer this month.
Some companies charge fees to DRIP investors (generally $2.50-$5). In that case, invest larger amounts even if less frequently (quarterly instead of monthly, for example) to keep fees below 1%.
3M Company (MMM) is a diversified company with strong positions in the consumer, office, graphics, electronics, telecom, health-care, security, and transport spaces. Foreign sales account for two-thirds of total revenues. Management expects 2012 earnings of $6.35-6.50 per share, up from $5.96 in 2011. The company has total debt of $5.2 billion, cash of $3.7 billion, and operating cash flow of $5.4 billion.
Chevron (CVX) is the fourth-largest oil company in the world with enormous capacity for natural gas production. Dividends have been paid since 1912 and raised every year since 1988. After its recent dividend increase (81⊄ to 90⊄) its yield is 3.7%. With debt of $9.2 billion, cash assets of $19.8 billion and cash flow of $39 billion, earnings and dividend growth of 10% are anticipated.
C.R. Bard (BCR) is a medical supplies and technology company producing surgical products and devices for cardiology and radiology. Estimates call for earnings of about $6.69 per share this year and $7.15 in 2013, up from $6.40 in 2011. Shareholders have been rewarded with 40 years of consecutive dividend increases. BCR has debt of $1.24 billion, cash assets of $674 million, and operating cash flow of $709 million. Buybacks have reduced the shares outstanding from 104 million in 2005 to 83.9 million today.
Chubb Corp. (CB) sells property, casualty, auto, homeowners, and business insurance. Since 2005, it has bought back 148 million shares, leaving 270 million outstanding. With debt of $3.6 billion, $1.84 billion in cash, and operating cash flow of $1.77 billion, earnings of $5.90 per share are expected this year (up from $5.13 last year). The annual dividend is up 8Â¢ per share, marking the 47th consecutive annual increase.
FedEx Corp. (FDX) operates an array of transport businesses. Founded in 1971, the company has grown into a worldwide transportation and logistics conglomerate with 260,000 employees and contractors in over 200 countries. Long-term debt is $1.67 billion, cash is $2.04 billion, and cash flow is $4.6 billion. FedEx earned $3.76 per share in fiscal 2010, $4.90 in fiscal 2011, and should earn about $6.50 per share this year.
Flowserve (FLS) is a manufacturer of corrosion resistant process equipment, with 39 plants and 76 service centers in 30 states. It markets mainly to companies in the chemical and oil sectors. Total debt is $501 million, cash is $172 million, and cash flow is $339 million. Dividends, started in 2007 at 60⊄ per share annually, are now $1.44. After earning $7.65 per share in 2011, the company is on track to earn about $8.50 this year and $9.75 in 2013.
Foot Locker (FL) operates 3,369 stores in 23 countries in North America, Europe, Australia, and New Zealand, retailing athletic footwear, apparel, and accessories designed for running, basketball, hiking, tennis, aerobics, fitness, baseball, football, and soccer. Total debt of $135 million, cash is $909 million, with $389 million in cash flow. The company earned $1.82 in fiscal 2011 and analysts expect $2.38 this year and $2.62 in fiscal 2013.
McKesson Corp. (MCK) provides services and products to health-care providers, primarily in the United States, Mexico, and Canada. It offers pharmaceuticals, medical supplies, and services to streamline processes, and improve patient safety. McKesson has $3.15 billion in cash. Its total debt is $4 billion and its operating cash flow totals $2.95 billion. It earned $5.83 per share in fiscal 2011 and is expected to net over $7 this year.
Microsoft Corp. (MSFT) is the world's largest software producer! It began paying dividends in 2003 at 8⊄ per share and now pays 80⊄ annually. It earned $2.69 per share in 2011 (up from $1.62 in 2009 and $2.10 in 2010). $2.72 is expected in 2012 and more than $3 next year. The company has $13.2 billion in debt and more than $58 billion in cash.
MTS Systems (MTSC) makes testing and simulation systems and software that determines the mechanical behavior of materials. Its devices test and monitor items like bridges, dams, motorcycles, airplane landing gear, prostheses, and dental implants and it is a leader in factory automation. Total debt is $40.3 million, cash totals $123.2 million, and cash flow is $35 million. Earnings have grown by an average of 13.5% annually over the past 10 years and dividend growth is estimated to be 6.5%. Consensus estimates call for MTSC to earn about $3.68 per share in 2012 (up from $3.24 in 2011) and $4.18 in 2013.
Nike Inc. (NKE) is known for its sports clothing, footwear, and accessories. Total debt of $369 million is only 3% of capitalization as Nike is sitting on $3.2 billion in cash. Dividends, earnings, and sales should all grow at or near double-digit rates going forward. The dividend has risen from 14⊄ per year in 1996 to the current $1.44, while earnings have gone from 94⊄ to $4.39 in fiscal 2011. Analysts expect earnings of about $4.93 per share for the just-ended fiscal year and $5.79 in fiscal 2013.
Parker-Hannifin (PH) is a worldwide leader in manufacturing hydraulic control systems for industrial customers, and pre-engineered metal buildings and metal stampings. Its products are used in everything from jet engines to trucks, autos, and utility turbines. PH debt is $1.8 billion, cash assets $7.7 billion, and operating cash flow of $1.4 billion. It earned $6.37 per share in 2011 (up from $3.40 a year earlier), and is expected to earn about $7.44 in 2012 and $8.14 in 2013. It recently increased its dividend for the 55th consecutive year.
Qualcomm (QCOM) develops and licenses digital wireless telecommunications products and services. It began paying dividends in 2003 at 9⊄ per share and has raised them annually to the current $1.00. The company's total debt is $1.18 billion, with cash of over $15 billion and operating cash flow of $6.8 billion. Consensus estimates call for QCOM to earn about $3.76 per share in fiscal 2012 (up from $3.20 in 2011) and $4.17 in 2013.
Walgreen Company (WAG) was founded in 1901 and is America's second largest drugstore chain, with over 7,800 locations. WAG also owns 83 home care facilities. Annual dividends have risen each year since 1976 and currently total 90⊄ per share, up from 10⊄ in 1995. Earnings have risen from 33⊄ per share in 1995 to $2.64 in 2011. Walgreen has total debt of just $2.4 billion and over $1.05 billion in cash and operating cash flow of $3.4 billion.