The Safest Income Stocks for 2013 (Part I)

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

Warren Buffett often said this about his two rules of investing:

Rule #1: Don’t lose money.

Rule #2: Never forget Rule #1. 

2013 is coming! Investors might wonder what the safest stocks are in their income portfolios for 2013. Personally, I think the safest income stocks belong to businesses with global footprints, high barriers for others to compete with, and are priced reasonably. Here are several safe stocks throughout 2013 for investors:

Coca-Cola (NYSE: KO) is one of the most admirable companies on the planet. Its business is quite simple: selling concentrates. Basically, Coca-Cola owns the formula of the concentrates to be sold to bottlers. Afterwards, it could be bottled and sold to consumers via wholesales and retail channels. Coke could be considered the product of the democratization of enjoyment. Everybody drinks Coke, from the rich to the poor alike. Coca-Cola shareholders might not experience the sexy volatility in the market, but they could sleep well at night, as more Coke will be consumed day by day.

Over the last 10 years, Coca-Cola has returned to investors more than 118%, including capital gains and dividends. Year-to-date, the total return has been only 7.7%, lower than S&P500’s total return of more than 11.7%. However, Warren Buffett has mentioned that Coca-Cola was one of his forever holdings. As of September, Coca-Cola was the biggest holding in Berkshire Hathaway’s (NYSE: BRK-A) (NYSE: BRK-B) stock portfolio, with 400 million shares. Coca-Cola is trading at $36.73 per share, with a total market capitalization of $164.74 billion. It is valued at 19.2x trailing P/E, and 5x P/B. When Buffett first bought Coca-Cola, it was valued at 14.5x earnings and 4.8x its book value.

Philip Morris International (NYSE: PM) is one of seemingly few growing companies with great consumer loyalty. Its products are sold in around 180 countries, with an international market share of 16% outside the US, and 28.1% market share excluding China and the US. When hearing about Philip Morris, investors usually think of Malboro, the world’s best selling cigarette, which represented around 33% of the total shipment volume for the company in 2011. The two largest operating income sources for the company were the European Union (33.5% of total operating income) and Asia (35.5% of total operating income). Asia is considered to be the fastest growing continent for the company. Its growth essentially offsets lower demand from more mature markets. The company has strong brands with significant global market share. In addition, the addictive nature of its products enable the company to raise prices without much reduction in volume.

Since the spin-off of 2008 from Altria Group (NYSE: MO), Philip Morris has delivered consistent growth in its earnings per share and dividend payments, along with the increase in operating cash flow and free cash flow. Its EPS has grown from $3.32 in 2008 to $4.85 in 2011, an annualized growth of more than 9.9% for the last 4 years. In the same period, the dividend also increased from $1.54 per share to $2.82 per share. In 2011, Philip Morris has generated more than $10.5 billion in operating cash flow and more than $9.6 billion in free cash flow.

Interestingly, Philip Morris had negative equity of nearly -$1.5 billion, as of September 2012. It also had more than $17.5 billion in long-term debt and $4.9 billion in short-term debt. It seems that Philip Morris has financed its substantial share buybacks with debt financing. The negative equity was mainly due to a significantly higher level of treasury stock, of more than $24.3 billion. Currently, Philip Morris is trading at $83.72 per share, with total market capitalization of $139.86 billion. It is valued at 16.7x P/E and the dividend yield is 3.9%. Its former parent company, Altria, is valued similarly but paying a higher dividend yield. Altria is valued at 16.4x trailing P/E and the current dividend yield is 5.4%.

My Foolish Take

Coca-Cola and Philip Morris enjoy the global footprints with market leading positions globally. Both companies have histories of returning cash to shareholders via increasing dividends. With decent dividend yields, those two could be in safe income stock portfolios for long-term investors.


hoangquocanh has no positions in the stocks mentioned above. The Motley Fool owns shares of Berkshire Hathaway. Motley Fool newsletter services recommend Berkshire Hathaway and The Coca-Cola 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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