Dont neglect growth sectors

6/9/2008


Investors seeking income tend to gather around the same watering holes. Utility and financial stocks are known for their dividends, and rightly so.

Utilities and financials boast the highest average yield among the 10 sectors of the S&P 1500 Index of small, midcap, and large stocks. On average, financial and utility stocks also earn poor Quadrix® Overall scores relative to the rest of the index and have lower expected growth rates.

Most equity investors should own a variety of stocks, including several from sectors with high expected profit growth like health care, energy, technology, consumer discretionary, and industrials.

While the average yield for stocks in the technology, energy, and health-care sectors is well below 1%, the Forecasts recommends several dividend-paying stocks in these sectors. Investors seeking high total returns — in our view the best strategy — should consider solid companies with modest dividend yields, strong Quadrix scores, and solid growth potential. The table below lists 18 dividend-paying stocks with above-average growth potential. Four are reviewed below:

Exxon Mobil ($86; NYSE: XOM) returned $9.9 billion to shareholders through dividends and share repurchases in the March quarter, an increase of 13% from the year-earlier period. Over the last 25 years, Exxon’s dividend has increased at an annualized rate of more than 5%, with the most recent action a 14% hike in May.

While oil is becoming harder to find, Exxon said it replaced more than 100% of its production last year, marking the 13th consecutive year of at least 100% reserve replacement. To support numerous exploration projects under development, Exxon expects to boost capital spending to at least $25 billion annually over the next five years, up from nearly $21 billion in 2007.

Rising oil prices have hurt refining margins. But Exxon should fare better than many rivals because of its ability to refine lower-quality, lower-cost crude. Exxon is a Long-Term Buy.


Microsoft’s ($27; NASDAQ: MSFT) indicated annual dividend is $0.44 per share, up from just $0.08 when the payout was initiated in 2003. With a yield of 1.6%, Microsoft is already one of the highest-yielding technology stocks, and strong earnings growth should support further dividend hikes. Consensus estimates project per-share-profit growth of 27% in fiscal 2008 ending June and 15% in fiscal 2009.

Microsoft still depends on the Windows operating system and the Office software suite for most of its profits, but the company continues to branch out beyond personal computers with such products as operating systems for servers, the Xbox video-game console, the MSN Internet service, and software for portable devices. Microsoft is in negotiations with Yahoo ($26; NASDAQ: YHOO) to buy or partner with the Internet veteran’s search business in hopes of gaining enough scale to better compete with industry leader Google ($567; NASDAQ: GOOG). Microsoft is a Buy and a Long-Term Buy.


United Technologies ($70; NYSE: UTX) operates six manufacturing segments, producing items ranging from aircraft engines to elevators to air conditioners. The company holds leading positions in most of its end markets. International markets should be a primary growth driver for the company, which generates more than half of its revenue abroad. United Technologies targets high-growth emerging markets and has developed strong positions in places such as China and India. Otis controls roughly 70% of the Chinese elevator market.

Strong demand in the aerospace, commercial-construction, and global-infrastructure markets should support continued sales and profit growth.United Technologies has raised its dividend in each of the last 15 years, growing the payout at an annualized rate of 12% during that period. A modest payout ratio of less than 30% leaves plenty of room for future increases. United Technologies, trading at an 11% discount to its three-year average trailing price/earnings ratio, is a Buy and a Long-Term Buy.


Wal-Mart Stores ($58; NYSE: WMT) is cutting back on supercenter openings in the U.S. to reduce cannibalization of sales at nearby stores. In fiscal 2008 ended January, the company opened 281 new supercenters. Plans now call for 170 new stores in fiscal 2009 and 140 in fiscal 2010. With fewer new-store openings, Wal-Mart depends more on remodeling projects that increase volumes at existing stores. Improvements in inventory management and stricter cost controls should mitigate pressure on the bottom line.

International revenue growth has been particularly strong in recent years, driven by both store openings and acquisitions. Over the next few years, the outlook for revenue and profit growth looks bright. Consensus estimates project revenue growth of 8% and per-share-profit growth of 10% in both fiscal 2009 and fiscal 2010.

In April, Wal-Mart raised its quarterly dividend 8% to $0.2375 per share, the 34th consecutive annual increase. The company plans to return more than $3.6 billion to shareholders through dividends in fiscal 2009. Wal-Mart, trading at a 39% discount to the 10-year average trailing P/E ratio, is a Long-Term Buy.

 

FORECASTS DIVIDEND-PAYERS
All 18 of the dividend-paying stocks below hail from sectors not known for their income potential.
Est
P/E
Sector
Company (Price; Ticker)
Div.
($)
Yield
(%)
Current
Year
(%)
Next
5 Yrs.
(Annual.)
(%)
Trailing
Trailing
Over
3-Year
Avg.
Trailing
Over
10-Year
Avg.
Quadrix
Overall
Score *
Industry
Advice
Consumer Discretionary
Disney ($33; DIS)
0.35
1.1
21
13
15
0.79
0.46
90
Movies & Entertain.
LT Buy
Consumer Staples
PepsiCo ($67; PEP)
1.70
2.5
10
11
20
0.91
0.78
75
Beverages
Buy †
Wal-Mart Stores ($58; WMT)
0.95
1.6
10
11
18
1.06
0.61
73
Super Centers
LT Buy
Walgreen ($36; WAG)
0.38
1.0
9
14
17
0.71
0.50
78
Drugstores
LT Buy
Energy
Chevron ($98; CVX)
2.60
2.7
31
8
11
1.12
0.68
99
Integrated Oil & Gas
Buy †
Exxon Mobil ($86; XOM)
1.60
1.9
21
8
11
0.94
0.61
99
Integrated Oil & Gas
LT Buy
Materials
Freeport-McMo. ($114; FCX)
1.75
1.5
15
5
12
1.06
0.53
99
Metals/Mining
Focus Buy †
Information Technology
Accenture ($41; ACN)
0.42
1.0
31
14
18
0.97
0.93
97
IT Consulting
Focus Buy †
IBM ($128; IBM)
2.00
1.6
20
11
17
1.06
0.81
90
Computer Hardware
Focus Buy †
Microsoft ($27; MSFT)
0.44
1.6
27
12
15
0.73
0.42
87
Systems Software
Buy †
Qualcomm ($47; QCOM)
0.64
1.4
5
17
22
0.78
0.60
87
Telecom Equipment
Focus Buy †
Industrials
General Dynamics ($90; GD)
1.40
1.6
16
8
16
0.93
0.96
91
Aerospace & Defense
Buy †
L-3 Comm. ($103; LLL)
1.20
1.2
12
21
17
0.93
0.70
86
Aerospace & Defense
Focus Buy
Lockheed Martin ($108; LMT)
1.68
1.6
5
12
15
0.86
0.71
92
Aerospace & Defense
Focus Buy †
Oshkosh ($39; OSK)
0.40
1.0
22
21
10
0.56
0.61
86
Machinery
Buy
United Tech. ($70; UTX)
1.28
1.8
14
12
16
0.89
0.88
87
Aerospace & Defense
Buy †
Health Care
Astrazeneca ($43; AZN)
1.87
4.4
1
3
9
0.63
0.41
95
Pharmaceuticals
LT Buy
Johnson & Johnson ($67; JNJ)
1.84
2.8
7
8
16
0.91
0.66
85
Pharmaceuticals
Buy †
† Also qualifies as a Long-Term Buy.      * Quadrix scores are percentile ranks, with 100 the best.

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