3 Companies for the Long Haul
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Bonds are not the only viable option for income investors. Today’s low interest rates being paid on government bonds makes dividend-paying stocks a more savvy choice. Combined with dividends, many sound companies increase the initial investment in the form of price appreciation. It’s true that investing in stocks is usually more risky than investing in bonds, but investors can limit their risk almost completely by choosing the right companies.
In this article, I pick three companies for the long haul. One of them comes from the healthcare sector and the other two from the consumer goods sector. These companies have a long history of paying dividends with steady price appreciation, and all three companies have a strong financial position to support their returns. These are Johnson & Johnson (NYSE: JNJ), Clorox (NYSE: CLX), and Procter & Gamble (NYSE: PG). Let’s review each company’s ability to sustain its returns.
Johnson & Johnson's returns
Johnson & Johnson is engaged in the development, manufacture, and sale of an array of products in the healthcare sector. It has shown a solid track record, and it has been able to increase its dividends consistently over the past 51 years. Along with consistently increasing income, in the past five years its share price has increased by 33.1%.
Are these returns safe?
J&J is a strong company with a great deal of diversification. Its investments to advance its pipelines and enlarge its worldwide presence have enabled it to generate increased earnings over the past 39 years. J&J recently announced Q1 results with the success of recently launched pharmaceutical products, including INVEGA, SUSTENNA, and XEPLION.
Johnson & Johnson's top-line growth is staggering. At the end of Q1, its sales increased by 8.5% over the past year’s quarter. With solid top-line growth, it has hefty margins on sales. As a result, its net earnings for the recent quarter stand at $4.1 billion or $1.44 per share, an increase of 8.0%. Johnson & Johnson is anticipating generating EPS of between $5.35 and $5.45 by the end of 2013.
With a solid pipeline and strong earnings, it has the potential to generate exceptional cash flow. In the trailing-12 months, its free cash flow stands at $12 billion while dividends account for only $7 billion. Its dividend looks safe as its free cash flow provides full coverage to dividends. Along with other financial indicators, its P/CF ratio of 16.1 also suggests its ability to sustain dividends.
Procter & Gamble's returns
Procter & Gamble offers branded consumer packaged goods. Currently, P&G offers a quarterly dividend of $0.60, yielding at 3.0%. In the past five years, it has been able to raise its dividends by 50.4%. With healthy dividends, the stock has also shown a strong surge with a few shortfalls.
Are the returns safe?
P&G is one of the best stocks in the consumer goods sector. The company has shown solid top-line growth over the years. As the global market share trends are improving, the company continues implementing its growth strategy. As a result, its organic sales grew by 3% over the past year’s quarter. Along with improving top-line growth, the company is looking to enhance margins.
Recently, it announced a $10 billion cost-saving plan to enhance margins and reduce operational costs. As a result, at the end of the recent quarter, its core gross margin was enlarged by 20 basis points and its core operating profit margin was enlarged by 10 basis points.
Procter & Gamble’s financial situation looks stable enough to sustain returns for investors as its free cash flow provides adequate cover to pay its dividends. In the trailing-12 months, it had generated $11 billion in free cash flow when dividends accounted for only $6 billion. Additionally, P&G has a low debt-to-equity ratio of 0.3, which also symbolizes its ability to sustain dividend. With the payout ratio of 56%, P&G has a room to increase its dividends.
Clorox manufactures and markets consumer and institutional products worldwide. It has been paying consistently increasing dividends for a consecutive 36 years. Recently, it announced an increase of 10.9% in dividends--this takes its quarterly dividend to $0.71 per share.
Are the dividends safe?
Clorox has a strong brand name, which means it has the capacity to transfer commodity price increases to consumers. Clorox is seeking to grow earnings by innovative new product launches along with international expansion. Based on its centennial strategy, it is anticipating achieving double-digit annual growth in economic profit. To this purpose, its strategy to increase sales includes expanding into adjacent categories, growing existing brands, and entering new sales channels.
Recently, the company announced Q3 results with a 1% growth in sales. Its quarterly results were impacted by charcoal volume and sales due to unfavorable weather conditions. However, Clorox is expecting to generate an EPS of $4.30 in 2013 and $4.63 in 2014. I believe its dividends are safe as Clorox is seeking to sustain its profitability momentum.
Additionally, this company has very solid cash flow, and its free cash flow is providing full coverage to its dividends. In the trailing-12 months, its free cash flow stands at $565 million while dividends accounted for only $328 million. Its payout ratio of 59% is also manageable. Its current and quick ratios of 1.2 and 0.7 also indicate no sign of excessive debt burdens. Clorox have sufficient funds to meet current liabilities.
Johnson & Johnson is a solid pick for investors. The company’s investment to advance pipelines and enlarge its worldwide presence along with good diversification permits it to sustain returns for investors. Clorox is a solid company for defensive investors. Clorox has a strong brand with strong growth opportunities. Clorox is in a strong financial situation to sustain returns for investors. Finally, in the case of Procter & Gamble, it is a buy for the long haul. P&G is in a strong financial situation that will be further enhanced as the company implements its cost-reduction plan.
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siraj sarwar has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson and Procter & Gamble. 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!