“Comfort” Stocks for a Mid-Winter Day

Gail is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

When the weather gets cold, blowy and snowy, my mind turns to comfort foods and comfort stocks!  Companies with high dividend yields are the ones that grab my fancy on a day like today.  A quick screening for companies with large market caps and high yields produces several stocks, including one from my favorite industry – Telecommunications.  The company is CenturyLink (NYSE: CTL) which bought out Qwest a year and a half ago.  (I actually started my telecom career with Mountain Bell, the predecessor to Qwest.)  Other companies on that screen include General Electric (NYSE: GE) and Merck (NYSE: MRK).  (I purposely selected companies in different industries.)

Here Is What I Found:

If I’m simply looking at Dividend Yield then CenturyLink, at 7.4% wins hands down. 

 

CenturyLink

General Electric

Merck

Dividend Yield

7.4%

3.1%

4.0%

Wall Street Analysts have projected a year ahead stock price, and again, on a percentage basis CenturyLink comes out ahead:

 

CenturyLink

General Electric

Merck

Analyst Year Ahead Projected Price

$44.94

$24.71

$48.50

Projected % Gain

14.3%

12.7%

11.2%

But, being Foolish investors, we can’t just look at what other analysts tell us the price will be in a year.  Though we’ll take that into consideration, we need to look at other criteria too.  Here’s a sampling of critical information I look at when comparing stocks:

 

CenturyLink

General Electric

Merck

Market Cap

$24.5 B

$230 B

$132.6 B

Net Insider Purchases (Sales)

(24.8%)

(4.2%)

(11.1%)

Gross Margin

58.8%

48.1%

64.9%

Profit Margin

13.2%

20.1%

48.9%

YOY Revenue Growth Rate

118%

(1.5%)

4.5%

YOY Operating Income Growth Rate

(-1.7%)

16.9%

223.6%

Beta

0.55

1.37

0.29

Insider Transactions:

What is interesting to me is that Insiders at each of these three companies are net sellers.  Insiders are purchasing fewer shares then they are selling.  While this number by itself means nothing (perhaps the Executive is sending her kid to Oxford) what is telling is that for both Merck and CenturyLink, there were zero purchases by Insiders during the past six months.

Margins:

I like looking at the difference between Gross Margins and Profit Margins.  This tells me how efficient a company is in first producing its service or product and secondly in getting it into the hands of consumers.  And Merck is pretty darn efficient.  Only 50% of its revenue goes towards producing and selling its products.

Growth Rates:

These are the numbers that take a bit of digging to get at.  If a company’s Revenue goes up by 5%, presumably its Net Income should also go up by 4-7%, since most expenses are tied to a revenue producing activity.  In all cases, with these three companies, those percentages are out of whack.   As investors it’s our job to figure out why and decide if those explanatory details are reasonable. 

CenturyLink’s revenue went up by 118%, however its operating expenses went up by 187%, and Operating Income down by almost 2%.  It appears that this is primarily due to the acquisition of Qwest.  As CenturyLink folds the Qwest customers and access lines into its operations, the company should see further efficiencies.  In fact, YOY, Operating Expenses reported for the third quarter 2012 are down by almost 10%. 

Looking at General Electric, its Revenue was down slightly from FY2010 to FY2011.  However, COGS was down by nearly 5% and Operating Expenses were down by 8%.  Like many in this economy, it appears that General Electric tightened its metaphorical belt.  Efficiency is good!

At first glance, it appears that Merck has jumped on the efficiency bandwagon as well.  Revenue up by 4.5% and Operating Income up by 223% is good, right?  Well, it depends.  COGS is down by 8% YOY, and that’s good.  Merck is manufacturing more products at a lower cost.  However, a close look at R&D expenses shows that Merck spent 23% less in FY2011 than it did in FY2010.  That might be good in the short term, but long term results depend on new medicines being developed, new trials, new labs, etc.  I see this as a warning trend for the future of Merck.

Beta:

Beta is a measure of volatility when compared to the rest of the market.  I like knowing that a stock will give me a good return and will be less volatile than the market as a whole.   With CenturyLink and Merck, I know that will be true.

Foolish Conclusion:

Given all of this information, if I were to invest in only one stock on this wintery day, it would be CenturyLink.  It has a high dividend yield, its one year projected gain is outstanding and the company has a lower expected volatility than the market as a whole.   


GailPEddy has no positions in the stocks mentioned above. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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