January's Best Stocks for the Long Haul
This article is part of ourRising Star Portfolios series.
I kicked off my multivitamin Rising Star portfolio by buying a stock that I hope will anchor my portfolio for decades to come. Only a "corporate El Dorado" would fit the bill, and in my case, that turned out to be Coca-Cola (NYS: KO) . Each month I'll be running my screen in order to give you a list of more of these world-beating companies to consider.
I'm also tracking and scoring each one of my monthly screens now, so we can see exactly how they're performing.
Wharton professor Jeremy Siegel came up with the term "corporate El Dorado" while studying the common characteristics of the greatest stocks in S&P 500 history. He found that 97% of the total after-inflation accumulation from stocks came from reinvesting dividends.
Dividend-paying stocks act, in Siegel's words, as "bear-market protectors" and "return accelerators." When dividends get reinvested, they purchase more and more shares at lower prices during a bear market. These extra shares act as a bear-market protector. Then, when stock prices head back up, the extra shares act as a return accelerator and rocket total returns higher.
If you need more proof, consider that the 20 best-performing survivor stocks in Siegel's study from the original S&P 500 in 1957 are all dividend payers -- names such as Altria, Abbott Labs (NYS: ABT) , Bristol-Myers Squibb, and Tootsie Roll Industries, as well as Coca-Cola. Altria, as Philip Morris, was the top performer in Siegel's 1957-2003 study period, with an incredible annualized return of 19.75%. That was enough to turn an original $1,000 investment into $4.6 million!
Elements of greatness
Siegel also found some other common characteristics among these 20 corporate El Dorados. The most important is the ability to deliver greater-than-expected earnings growth on a consistent basis. Carrying an average price-to-earnings ratio slightly above the market average, these companies weren't exactly cheap on a traditional basis. But throughout the years, they always seemed to deliver a bit more than the market expected.
Also, most of the top 20 marketed famous consumer brands and pharmaceuticals. Brands like Coke and Wrigley have strong moats because of products that consumers are willing to pay a little bit more for. As Charlie Munger once described, if you walk into a store and see Wrigley chewing gum selling for $0.40 and Glotz's gum selling for $0.30, you're not going to flinch at paying that extra "lousy dime" for a product you know and trust. But those dimes add up significantly for Wrigley over time!
Putting it all together
Enough preamble; it's time for the screen. Remember, we want large caps with a history of dividend increases. We want companies with strong balance sheets, so we don't have to worry about them getting into any trouble during hard times (as so many companies did in our most recent crisis). We also want businesses with a track record of consistent earnings and dividend growth.
I start the screening with all companies on major U.S. exchanges with a dividend yield of at least 1%. Here are the rest of the criteria:
1. Market cap greater than $20 billion.
2. Total debt-to-capital ratio less than 60%.
3. Average annual earnings-per-share growth over the past 10 years greater than 5%.
4. Projected annual earnings-per-share growth over the next five years greater than 5%.
5. Positive dividend growth over the past five years.
The screen produced the type of companies you'd expect, along with a few lesser-known businesses.
Some of today's passing companies fit the classic El Dorado profile, and in fact are the very same big winners of yesteryear: Coca-Cola and Abbott Labs, for example, made the list and are already in my Rising Star portfolio. Coke is one of the top brands in the world, and perhaps the most enduring. Think about it: Management sells billions of dollars of fizzy sugar water (and fizzy diet water) every year. The process is repeatable decade after decade.
Abbott Labs has been innovating for over 120 years, so I've no doubt it will outlast me. It has also appeared on my screens for safe, low P/E stocks and safe high-yielders.
Teva Pharmaceutical (NAS: TEVA) also fits the classic description. Dominating the generic-drug space, the drug giant is extremely similar to Abbott and several other drug stocks on Siegel's all-time list.
Others are harder to figure out. Southern Copper (NAS: SCCO) , for example, is yielding around 9%. However, the miner's major dividend payout has fluctuated significantly in the past, and will probably do so in the future. When high yields get cut down, stock prices usually take a hit. Does this type of uncertainty fit the El Dorado profile? Probably not, though everything else about Southern Copper is solid enough that it might be considered a higher-risk, higher-potential-reward type of El Dorado.
For the more risk-averse, I like 3M (NYS: MMM) . Its track record involves decades of innovation and efficiency, and the business generates high returns off its investments. Its dividend is about as safe as they come, and has increased for 54 consecutive years.
I'll put the complete list of 76 passing companies on my Rising Star discussion board. To follow along with the El Dorado screen's performance, make this CAPS profile one of your favorites.
You can keep up with my buys and sells and all my meandering ruminations on Twitter. You can also add any of these candidates to your free, personalized watchlist by clicking the appropriate link:
- Add Teva Pharmaceutical Industries to My Watchlist.
- Add Southern Copper to My Watchlist.
- Add Altria Group to My Watchlist.
- Add 3M to My Watchlist.
- Add Coca-Cola to My Watchlist.
- Add Bristol-Myers Squibb to My Watchlist.
- Add Abbott Laboratories to My Watchlist.
At the time this article was published Fool analyst Rex Moore is fearfully referred to as "Mr. El Dorado" by his co-workers. He owns no companies mentioned here. The Motley Fool owns shares of Coca-Cola, Teva Pharmaceutical, Altria, and Abbott Labs. Motley Fool newsletter services have recommended buying shares of Pfizer, Coca-Cola, Abbott Labs, 3M, and Teva Pharmaceutical, as well as creating a diagonal call position in 3M. 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.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.