Enhance Your Portfolio With These Stocks
Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If the best offense is having a great defense, then the following companies are at the top of the game. While sports might frown upon chemically enhanced athletes, chemically enhanced portfolios are a different story. Some of the best stocks you can ever own long-term with little risk are the ones that produce products you see and use everyday no matter the economic conditions or where you live.
This one's omnipresent
Water Displacement 40th formula was the creation of Rocket Chemical in 1953. A company, whose product was originally used to protect the outer skin of missiles from rust and corrosion and introduced as an OTC stock in 1973, WD-40 Company (NASDAQ: WDFC) has become one of the best examples of the value of brand name. Twenty years ago, WD-40 was found to be in four out of five American households with sales of 1 million cans a week. WD-40’s refusal to patent their classic formula has only shown that also realize the value of their brand.
The stock is up over 115% the past 10 years, not including its 2.20% dividend. Quarterly profit margins are increasing with the average of the past five years being 10.26%. Second-quarter 2013 earnings showed that net sales and net income increased 6% and 23%, respectively, year-to-date.
The outlook for WD-40 goes well beyond its core product. The growth in the company lies in its other household cleaning brands, stain removers, deodorizers, and its expansion across the world. While there was a 41% decline in operating income in the American segment last quarter, Europe and Asia-Pacific segments increased 26% and 38%, respectively. WD-40 continues to improve the product by improving the way it is dispersed through different cans, nozzles, pens, and triggers.
The true value in the WD-40 brand is that most people don’t know how much a can of WD-40 should cost. While a can lies around in nearly 90% of households in America, it is seldom used, seldom bought more than once a year, and this gives the company huge pricing leverage to increase the price over time. This also explains the decline in income by the American segment. Nearly all Americans own WD-40.
Another one not to miss
As a global manufacturer of consumer and professional products like Pine-Sol wood cleaner, Glad bags, Kingsford charcoal, Hidden Valley and KC Masterpiece dressing, and Brita water filters, Clorox (NYSE: CLX) is much more than bleach. This diverse portfolio of unrelated products owned by Clorox all hold the number one or two market share positions in their categories.
Clorox is up 88% the last decade, not including its 3% and annually rising dividend, while its average quarterly margin in the last five years is also 10.26%. Its strength as a stock, though, is the ability to not crumble during rough market conditions. During the recent Great Recession, the stock fell to just two-thirds of its peak share price before the recession began. What this means is that people will always need bleach – or at least one of Clorox’s products – no matter the economic environment.
While recent trends point to flat volume and mediocre 1% increase in sales according to its third-quarter FY 2013 earnings, the company should not be underestimated. Clorox is one of the best defensive stocks you can own. Its diverse portfolio provides immunity to trends in the marketplace. While analysts like those at Credit Suisse have given Clorox a downgrade recently, claiming it is outpacing the S&P 500 too quickly, history proves otherwise. Clorox has beaten the index both at the five-year mark (59% vs. 16%) and 10-year mark (88% vs. 69%). If you factor in Clorox’s dividend, it isn’t even close.
Solid like a hammer
Like Clorox, Church & Dwight (NYSE: CHD) holds a diverse portfolio of unrelated brands that include Arm & Hammer, Trojan, OxiClean, Spinbrush, First Response, Nair, Orajel, and Xtra. These eight key brands represent 80% of all sales of the company.
The stock is up over 460% the last 10 years and both average quarterly profit margins and dividends have increased just as greatly. First-quarter 2013 earnings show a record operating margin of 21.7% and the second-highest profit margins of 13.82% for the company. Average quarterly profit margin for the past five years has been 10.52%, so this past quarter’s result is over a 3% jump.
Dividends have grown from just $0.17 in 2008 to a projected $1.12 for 2013. This 558%+ dividend increase looks like it can increase more in the near future. Arm & Hammer brands are currently in nine out of 10 households in America. As the company grows around the world, the potential for this $8.5 billion market cap company to reach double digits and beyond in the near future is certainly attainable.
The world needs chemicals
A defensive stock is one that investors want to own during uncertain times and one they should own during rough times. This has been proven by these stocks that declined relatively little during the Great Recession. While you can find dozens of other stocks that had similar declines, it would be harder to find three stocks that have a portfolio of products that are at the top of their categories.
Brand names count and market share is definitely not to be overlooked. With steady growth and dividends, WD-40, Clorox, and Church & Dwight have crushed the S&P 500 in the past five years with total returns of 104%, 88%, and 135% versus the sub-20% return produced by the S&P 500.
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