3 Mega Cap Buys
Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Income investors love mega companies, which have long histories of paying uninterrupted dividends over time. However, those large, well-established, and sustainable businesses can be priced quite expensively. In order to find these large companies that pay sustainable dividends, I have set up a screen with four main criteria for income investors: (1) market capitalization is larger than $100 billion, (2) 10 years of uninterrupted dividends, (3) the payout ratio should be less than 50%, and (4) the EV/EBITDA is less than 10x. Here are the top three results:
Exxon Mobil (NYSE: XOM) is one of the world’s largest oil/gas corporation, with its history dated back in the 19th century. As of December 2011, it was reported to have 29.43 billion BOE in proved reserves, including more than 7 million bbls of crude oil and 76.2 billion trillion cubic feet of natural gas. After Exxon Mobil acquired XTO Energy for $26 billion in 2010, it has become the largest natural gas producer in the US. I
n the last 10 years, it has managed to produce consistent positive free cash flow. Trailing twelve months, Exxon Mobil generated nearly $490 billion in revenue, $20.9 billion in free cash flow and delivered $9.48 earnings per share. The business has a fantastic history of paying growing dividends over time. In 2002, it paid out $0.92 dividend per share, and it has increased continuously to $1.85 per share in 2011. Even with the growing dividends, the payout ratio is low, at only 22%.
The good thing is that Exxon Mobil employs little leverage. As of September 2012, it had $162.8 billion in stockholders’ equity, $13 billion in cash, only $3.5 billion in short-term debt and nearly $9 billion in long-term debt. Exxon Mobil is trading at $88.14 per share, with the total market capitalization of nearly $402 billion. The market is currently valuing Exxon Mobil at 6.18x EV/EBITDA.
Wal-Mart (NYSE: WMT) is one of the largest retailers globally, with its core philosophy to save people money so that they can live better. It has three main business segments, including Wal-Mart US, Wal-Mart International, and Sam’s Club. Wal-Mart US contributes the largest amount ofr revenue, accounting for 60% of total revenue in 2011. Wal-Mart is heavy on grocery, as 53% of its global revenue was from the grocery business. The second-rank merchandises belong to Entertainment, Hardlines, and Health and Wellness, with each accounting for 10%-12% of total revenue.
Wal-Mart is the perfect example of growing dividends in the long period of time in the retail industry. In 2002, it paid out $0.30 dividend per share. In 2011, the dividend has been raised to $1.46 per share. The current payout is just around 32%. In the last 10 years, it has kept delivering fantastic double-digit return on invested capital. Trailing twelve months, the ROE and ROIC were 23.5% and 13%, respectively. Currently, Wal-Mart is trading at around $72 per share, with the total market capitalization of $242 billion. It is currently valued at more than 8x EV/EBITDA by the market.
Royal Dutch Shell (NYSE: RDS-A) is another large global oil/gas player working in both upstream and downstream segments. It has reported to have 14.25 billion BOE in proved reserves in the end of 2011. The company has a history of paying uninterrupted but fluctuating dividends. In 2011, it paid out $3.36 dividend per share, and the current payout is around 37.2%.
In terms of the balance sheet, it looked quite strong. As of September 2012, it had $183.7 billion in total stockholders’ equity, $18.8 billion in cash, and only around $36 billion in both short-term and long-term debts combined. Currently, its share is trading at $66.97 per share, with the total market capitalization of $209.58 billion. The market is valuing Royal Dutch Shell at around 4.39x EV/EBITDA.
My Foolish Take
With a long history of uninterrupted dividends, decent payout ratios, and cheap valuations, all three mega-caps mentioned above are worth taking serious looks for long-term income investors. Of course, investors should dig deeper to see if those positions are suitable for their own portfolios before initiating any positions.
hoangquocanh has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. 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!