Sometimes Boring Stocks are Ok Too
Jon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Chicken might just be the most unimaginative and generic dinner idea one could possibly come up with. The only people who jump up and down at the idea of dining on chicken are my children. To everyone else the idea is...well, boring. But there's nothing wrong with chicken. It's good, and meets all my nutritional needs. It's also inexpensive.
This is the mental game people play with stocks sometimes. As it turns out, in many cases the most exciting investments are also the ones that carry the largest price tag. The ones that meet all of our investing needs are often overlooked because they are...well, boring.
For this article I've picked out five of the blandest investing ideas I could think of. They are:
- American Express (NYSE: AXP)
- Cisco Systems (NASDAQ: CSCO)
- General Electric (NYSE: GE)
- Pfizer (NYSE: PFE)
- Verizon Communications (NYSE: VZ)
These stocks are five of the best known companies out there, so I'm not going to provide any commentary on who these companies are and what they do. I'll assume you've already heard that part. Rather, I want to show you how they can meet your investing needs, and I will attempt to find which is the biggest value. For these companies, we'll look at three main areas:
- Price to Earnings
- Long Term Debt
Price To Earnings
When it comes to finding value, the price to earnings ratio is one of my favorite metrics. It's one of the closest ways to determining how much each share is worth. To help out with the price to earnings ratio, I've included the industry average for each company, since every industry is different. I also enjoy looking at forward price to earnings, to give me an idea of where the company is going.
From the chart you can see that both American Express and Cisco Systems trade at a low valuations when compared to other companies in their industry. This could indicate a value buying opportunity. When you look at just P/E and Forward P/E, Cisco looks like the cheaper of the two. But when compared to their respective industries it's American Express that offers a slightly better value buy.
Verizon is currently very high when it comes to valuation. But their forward P/E is a bit more back down to earth. While their P/E is set to drop drastically in the next year, it is still forecast to be higher than their industry's average.
Each of these companies offer dividends to their investors.
Perhaps the reason Verizon is valued a little higher than the other four companies mentioned here is because they currently offer the best dividend.
When looking at dividends, I am interested in who has a history of paying dividends and raising dividends. The past isn't a promise for the future, but it does help identify trends.
With the exception of Cisco Systems, these companies have a long history of paying dividends. This chart also shows us that not only do they pay dividends, but ever since the recession ended they have been in the habit of raising dividends.
Free cash flow can be a good metric to look at to see how much money is sitting around that could be paying dividends back to shareholders.
With the exception of General Electric, these companies have been substantially increasing their free cash flow. Most notably, Cisco Systems' free cash flow is up over 200% since 2003.
Long Term Debt
I always like to at least take a glance at a company's long term debt. Debt is not the end of the world, especially for larger companies who can handle it. But it is relevant all the same.
Since the start of 2010, four of these companies have gotten serious with their debt. Cisco Systems increased their debt levels about 10% a year. But the other four have been making steady progress at reducing debt.
To me, if a company can be reducing debt or, better yet, have no debt, it's always a plus. Debt really limits what a company can and will do. Taking the debt burden away is like opening the door to possibilities.
Basically, what we have seen so far as that these behemoth companies are strong, priced fairly well, faithfully paying dividends, and paying down debt. These are all things that I like to see in companies when thinking about the long haul. I need to know that they will be alive and well in 5-10 years. These metrics make me believe that they will.
So let's say you invested in one of these companies ten years ago. What kind of returns would you have gotten?
Rather lackluster group, don't you think?. General Electric and Pfizer are actually down over ten years. Verizon isn't all that much better off at 15%. American Express and Cisco would make me feel a little better.
But remember, all these stocks pay dividends. If you had reinvested those dividends over the past ten years, the picture changes a little bit.
In this scenario, all the companies would have made you money.
What are we looking for as investors? We are looking for stocks that will make us money. By saying that, we are simultaneously desiring that our stock choices not lose money. Now, of course we all would like gains of 1,000%. But those opportunities are relatively rare in the market.
It seems like a boring investment option. Buy big companies and reinvest dividends for a lot of years. But with this investment strategy, you greatly increase your odds of ending every stock position with a profit. Winning every time, even by a little bit, is enough to make me excited.
As far as the value play of the stocks we've looked at, I'd vote for Cisco Systems. They are priced low when you look at their industry and growing their free cash flow the fastest of the companies we have looked at. They are regularly voted as one of the top innovative companies around. Makes me feel good about future growth at current prices.
thequast has no positions in the stocks mentioned above. The Motley Fool owns shares of General Electric Company. Motley Fool newsletter services recommend American Express Company and Cisco Systems. 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!