GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

Investment Analysis of Three Dividend Juggernauts: AT&T, Eli Lilly, and Consolidated Edison

December 10, 2010 | About:
gururk

Street Authority

17 followers
We just endured a recession that was the worst since the GreatDepression. Since the recession ended, the economic recovery has been weak to say the least. Forecasts for economic growth in 2011 and 2012 are hardly awe inspiring.

While anything can happen and the stock market has cyclical bounces and dips at any time along the way, it is only reasonable to seek out investments that have performed well under similar economic circumstances -- times of tepid economic growth. Let's take a look back…

In the economic malaise of 1974 through 1982, GDP growth averaged an anemic +2% per year. During this period, the S&P's price return was an annualized +4.14% -- but total return for this period, which also included dividends, averaged +9.39% per year. That means dividends accounted for most of the market's total return.

History suggests that it might be a good time to take a look at some reliable dividend paying stocks. Special attention should be paid to those companies that pay secure dividends in good times and bad as well as stocks that the market recovery has neglected.

AT&T (T)

This more-than 100-year old company is one of the largest telecommunications providers in the world. The company is the second largest wireless provider in the country, the dominant local phone company in 22 states, and a wireless services provider in more than 220 countries.

Major telecom companies today generally offer steady cash flow but limited growth. A major growth driver in the wireless industry has been data services (Internet access from phones and other mobile devices). AT&T has been far outgrowing rival Verizon (VZ) in this area, primarily because AT&T has had exclusive rights to offer Apple's (AAPL) iPhone. But, it is widely expected that AT&T will lose exclusivity early next year.

Investors in AT&T have largely dismissed solid recent results in anticipation of lower future results next year. But I think this fear has been overemphasized. While results will likely slip somewhat, the company has plenty of room to grow data services, as 43% of its wireless customers still don't use them. As well, AT&T has been adding subscribers at a solid pace apart from the iPhone, and other phones are becoming increasingly competitive.

The stock pays quarterly dividends, which at the current rate of $0.42 per share, translates to $1.68 a year for a stellar yield of nearly 6.0%. The company has raised the dividend every year since 1998. The dividend is also rock solid: In the first nine months of 2010, the telecom giant generated free cash flow of $11.6 billion and paid out $7.4 billion in dividends. In the past six quarters, the company had more than $9 billion in free cash flow left over after dividends.

Eli Lilly and Company (LLY)

Founded in 1876, Eli Lilly is one of the largest pharmaceutical companies in the world. The company makes top drugs in a variety of areas, including antidepressant drug Prozac and neurological drug Zyprexa. Its products are sold in 143 countries and the company generated about $22 billion in revenue for 2009.

Like most big pharma companies, Lilly faces significant patent expirations in the next several years. But the company's patent expirations are particularly steep even for the industry, as drugs representing about 40% of sales will lose patent protection between 2011 and 2013.

However, the looming expirations are factored into the price already and the company has taken significant steps to develop new sources of revenue. The company acquired biotech giant Imclone in 2008 and has been investing heavily in its internal pipeline of new drugs. Meanwhile, the stock currently sells for less than eight timesearnings, compared with an industry average of 13.

Lilly pays quarterly dividends of $0.49, which translates to a generous 5.7% yield based on recent prices. Thedividend has nearly doubled in the past decade and is still well supported with a payout ratio of less than 50% o net income.

Consolidated Edison (ED)

Con Ed is the primary electric utility in southeastern New York (including New York City) and also operates in New Jersey and Pennsylvania. The company provides electricity (more than three quarters of revenue), steam and natural gas. It is one of the nation's oldest utilities, and about 80% of revenue is generated in its regulated segment.

The company has a well-entrenched and difficult-to-duplicate infrastructure in a high demand area and should continue to deliver solid results. Con Ed is in the process of updating and expanding its systems, for which it has been granted a rate increase, and should boost future revenue.

The stock has outperformed both Morningstar's regulated utilities group and the S&P 500 in every measurable period for the past fifteen years, averaging total annual returns of +7% for the past 10 years, compared with less than +1% for the S&P. But the stock still sells for 14 times earnings compared with the industry average of 22.

As for the dividend, the company pays a current rate of $2.38 a year per share, which translates to a well-above industry average yield of nearly 5.0%. The dividend should grow, too, considering the utility has raised it every year for the past 36 years.

Action to Take --> All three of these companies are reasonably valued, operate in defensive industries and have secure dividends with growth potential. The current market may be ideal for stocks with these characteristics and all can be purchased at current prices.

sig-tom(1).gif

-- Tom Hutchinson

Tom has a 15-year history as a financial advisor with UBS constructing investment portfolios. Tom's background includes a NASD Series 7 and 63 certifications. Read more...

Disclosure: Neither Tom Hutchinson nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority

Rating: 3.3/5 (6 votes)

Comments

roke6362
Roke6362 - 3 years ago
The dividend is stable, safe, and grows at a very slow rate. ED's average p/e over the past decade is around 14.50. In the past decade, the stock has gone south in pricing a few times.

If an investor is patient, and can average down on dips, the returns on a very stable stock can be 10%-12% annually.

This stock is at its high end now. Depending on how patient you can be, it is a screaming buy at $40, and a sell at $50.
batbeer2
Batbeer2 premium member - 3 years ago
Depending on how patient you can be, it is a screaming buy at $40, and a sell at $50.

WOW..... I guess I'm going to be more patient and wait till it hits $25.
roke6362
Roke6362 - 3 years ago


WOW..... I guess I'm going to be more patient and wait till it hits $25.


Batbeer: What's your point? If you have one, make it.
batbeer2
Batbeer2 premium member - 3 years ago
Hi Roke6362

Fair enough.

IMO, a stock isn't a screaming buy if it's 20% below the price you would consider selling it at.
roke6362
Roke6362 - 3 years ago
Respectfully, I disagree. Not on all stocks, but on ED. It's a public utility, very low growth and very high dividend yield. It has a moat because they have a monopoly in a specific geographic territory.

Historically, it trades within a range. Therefore, if you're an investor that wants to take positions in utilities, you're not going to get huge ranges of pricing in which to invest.

WEB said, "investing in utilities is not a way to get rich. However, it is a way to stay rich."

That is why I said it is a screaming buy under $40. You can get a very easy stock to understand that has an virtual guaranteed 20% upside, and a dividend yield that is four times greater than cash. I would take that type of bet every time Mr. Market offers it.

Thanks for your comments. I enjoy the debate.
batbeer2
Batbeer2 premium member - 3 years ago
Historically, it trades within a range. Therefore, if you're an investor that wants to take positions in utilities, you're not going to get huge ranges of pricing in which to invest.

OK. I haven't looked into utilities so based on my lack of knowledge in that department, I'll conceed ED trades within a range and is likely to do so going forward.

But if that's the case, why would an investor want to take a position in the first place ?
roke6362
Roke6362 - 3 years ago
I say the exact opposite. If you know the specific range of pricing/volatility, you can reasonably predict when to buy or average down, and when to sell.

Further, if your timeframe is smaller (age 50 & above, for example), it is better to invest in businesses that have less uncertainty, higher dividend yields, and strong franchises. Then again, I think this type of investing is good for any age investor.

However, if your investment of choice is a trading, I have no comment. I am not a trader, and don't know the first thing about.
batbeer2
Batbeer2 premium member - 3 years ago
If you know the specific range of pricing/volatility, you can reasonably predict when to buy or average down, and when to sell.

Agreed, but how do you know ?

I suppose, in the specific case of ED, you could do an analysis of the dividend policy and balance sheet and compare the dividend payout rate to that of treasuries.... but then still, your range depends on the fed no ?
roke6362
Roke6362 - 3 years ago


I guess no one knows for sure about anything. In the ten years, the share price of ED has never gone under 10 X earnings and never gone above 20 X earnings.

The dividend has been paid to shareholders since 1885, and ED has increased its dividend every year for at least the past quarter century.

A moat, a reasonably predictable range of pricing, an understandable business, and a growing dividend that yields four times cash.

You may disagree, but I consider that a good investment.
batbeer2
Batbeer2 premium member - 3 years ago
Yes I disagree, but I see no flaw with your reasoning......

A good investment for you may be not so good for me and vice-versa....... this from someone who sleeps well with a chunk of LVLT in his portfolio :o)

regards,

B

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK
Email Hide