3 Income Growth Stocks for Steady Returns

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

Large conglomerates are generally low-beta blue chips that effectively reduce the risk attached to a portfolio. They record steady growth and often carry a modest yield, serving the purpose of income growth investing. But in the process of finding such low beta stocks, investors often lose out on growth prospects and end up buying overcrowded income stocks. So here are a few companies that offer a significant upside despite having a modest dividend yield.

Healthcare

Shares of Johnson & Johnson (NYSE: JNJ) have appreciated by an impressive 38% in the year to date while still offering a hefty dividend yield of 3.08%. Its forward price-to-earnings ratio of 14 times may suggest that its shares have reached a fair value, but I believe that it has plenty of upside.

This is because the healthcare behemoth just announced that it will acquire Aragon Pharmaceuticals for $650 million. The company operates in the research and development of prostate cancer drugs, and its ARN-509 drug directly competes with Medivation’s Xtandi and Dendreon’s Provenge. Even Johnson & Johnson’s Zytiga is targeted towards prostate cancer, and the acquisition will certainly supplement Johnson’s research in the field.

After a series of failed trials in Alzheimer’s therapy, many pharmaceutical companies including Baxter International discontinued their research work in the field. Johnson & Johnson reverted back to treating patients in initial phases of the disease, however, with an aim to restrict its growth. Since Alzheimer’s is a widespread disease with no cure, patients will be kept on a continuous medication regime. This could translate into a steady stream of income for Johnson & Johnson.

The company also recently announced the launch of its Invokana drug to battle diabetes. In my opinion, these positive catalysts should be enough to power up J&J for the rest of the year. It was the fastest-growing pharmaceutical company last year, and I believe that it will top the list once again.

Consumer goods

Shares of Unilever (NYSE: UL) carry a lucrative yield of 3.58%. Its shares have appreciated by 25% over the last year, yet they appear to be borderline undervalued on a forward earnings basis.

The company generates around 57% of its revenues from emerging markets, while Europe accounted for 27%. Since the real growth of personal and healthcare products lies in emerging markets, Unilever has been targeting Asian markets for the same reason.

To do that, Unilever recently announced that it will increase its stake in Indian-based Hindustan Unilever to 75%, at an estimated cost of $5.4 billion. As of now, Unilever owns a 52.8% stake in the joint venture, which altogether posted $3.8 billion in fiscal year 2011 revenues.

On top of that, Unilever also divested its Wish-Bone dressing business in January of this year. In a bid to divest its non-core food assets, the company sold off its frozen foods business to Hormel Foods for $700 million. While this was a positive boost to its cash, analysts feel that Unilever is not done with its restructuring.

Unilever has been shedding its non-core assets since 2011, and its management recently indicated that it can offload another $1 billion worth of its annual turnover. Such moves may shrink the company's overall revenues, but the company can grow more rapidly and efficiently with its non-core segments off the table.

Processed and packaged foods

In the food industry, I think General Mills (NYSE: GIS) tops the list. Its shares have risen by nearly 30% over the last year, and analysts at Deutsche suggest that there could be another 20% upside.

The processed food manufacturer was reporting sluggish sales volumes until it went on an acquisition spree last year. One of its crucial moves was the acquisition of Yoki Alimentos and Parampara Foods, which allowed General Mills to enter the Brazilian and Indian markets respectively.

Although it currently generates 60% of its revenues from US retailers, these geographical expansions will add diversity and stability to its topline over the long run. As a result, its operating cash flows have risen and by nearly 70% over the last year.

For the recent quarter, General Mills posted a 13% increase in its net income, while its revenues grew by 8%. Despite that these increases, however, its shares dipped slightly on slowdown-related fears. It's worth noting that General Mills will also launch 100 new products in 2013, which will eventually allow it to bolster its organic growth and regain its growth momentum.

At the current price, its shares yield 3.15%.

Final words

Needless to say, all of the mentioned companies seem like solid blue chip investments with ample income and growth prospects. In my opinion, investors should always try to create a portfolio of companies, rather than putting all of their eggs in the same basket.


Piyush Arora has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson and Unilever. The Motley Fool owns shares of Johnson & Johnson. 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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