Less dangerous dividends
We all know that financial stocks tend to pay high dividends. And we all know what happened to financial stocks.
Dividend-minded investors have had it rough this year. As the chart below shows, many of the industry groups with the highest yields at the end of 2007 have performed poorly this year. Conversely, most of the best-performing groups are not known for paying dividends.
Portfolios focused on high-yielding stocks tend to be concentrated in a few parts of the market, many with subpar growth potential. As the table below shows, sectors with the highest profit-growth expectations tend to be light on dividends.
So what’s an investor to do? You want income but don’t want to see your portfolio value fall through the floor when financials — or REITs or utilities — get hammered. Most of the stocks on the Forecasts Buy List and Long-Term Buy List pay dividends.
We seek stocks with high total returns, as measured by capital gains plus income. Four of those stocks that offer superior total-return potential are reviewed below.
2007 marked the fourth consecutive year of record net income at Chevron ($83; NYSE: CVX). The company returns lots of cash to shareholders through dividends and stock buybacks. Chevron repurchased $7 billion of stock in 2007 and increased its dividend by about 12% last year and another 12% in April, extending its streak of consecutive annual dividend hikes to 21. In the first half of 2008, Chevron bought back about $2 billion in stock.
This year, Chevron expects capital expenditures of $23 billion, up 15% from 2007 levels, with about 75% earmarked for exploration-and-production projects. The company has about 40 major capital projects under way, mostly off the shores of Africa, Asia, and Northern Europe. Chevron’s large international production portfolio should help drive sales and profit growth over the next several years. Chevron is a Buy and a Long-Term Buy.
Despite a tough economy and weak consumer spending, Disney ($32; NYSE: DIS) has been posting strong results. Media networks and parks and resorts have been reporting gains in revenue and operating income, offsetting weakness at the studio-entertainment division. Higher ratings and subscriber fees at Disney’s cable sports network, ESPN, are compensating for declines in advertising revenue at network stations. Expanded international distribution of the Disney Channel is also boosting sales and profits. Theme parks haven’t been as hurt as much as expected by tight consumer budgets.
Disney shares its strong cash flows with stockholders. In the nine months ended June, operating cash flow increased 10% and free cash flow was up 15%. During that period, Disney paid out $664 million in dividends and spent about $6 billion on share buybacks, reducing the share count by 4%. Disney is a Long-Term Buy.
Lockheed Martin’s ($117; NYSE: LMT) newest program, the F-35 Joint Strike Fighter, has an estimated total production value of more than $300 billion and will likely contribute to sales for at least the next two decades. The U.S. government — Lockheed’s largest customer — plans to buy thousands of F-35 fighter jets for the Air Force, Navy, and Marines. Nearly 20 foreign nations, including Israel and Japan, also plan to buy the jets. The first F-35s are scheduled for delivery in 2010.
The F-35 will replace older jets, such as the ubiquitous F-16, another enormously successful Lockheed product. About 4,600 F-16s have been sold to customers in 25 countries. As was the case with F-16s, service and repair of F-35 jets will likely make a sizable contribution to operating results. In the first half of 2008, Lockheed paid out $340 million in dividends and repurchased about $2 billion in stock. Lockheed is a Focus List Buy and a Long-Term Buy.
PepsiCo ($69; NYSE: PEP) has posted strong results in recent quarters, driven by robust sales gains overseas. PepsiCo operates throughout Europe, Africa, and Asia, and nearly half of sales are generated overseas.
Growth in North America has lagged, mostly because of weakness in beverages — volume and profits fell 1% in the six months ended June. But the Frito-Lay snacks business has performed better in the region, managing 2% volume growth and 6% profit growth in the six-month period.
PepsiCo has been able to offset the rising cost of commodities by increasing its product prices, which as yet has had little effect on sales. Consensus estimates project per-share-profit growth of 10% in 2008 and 11% in 2009. PepsiCo, yielding 2.4%, is a Buy and a Long-Term Buy.