Altria (MO) – Perhaps the most well-known of all the tobacco companies, Altria has performed well recently and is up over 28% in the last year. If you add the dividend, which currently yields 5.4%, that makes a total return of over 30%. Not too shabby! The dividend is fairly safe and was recently increased; however, with a payout ratio of 96% the dividend will likely not go higher for a while.
Altria’s gross margin of 53.8% is slightly better than that of its competitor Lorillard (LO), at 53.6%, but Lorillard has a higher profit margin at 25% as compared to about 20% for Altria. The return on equity for Altria over the last 12 months was an impressive 75.9%, although it was aided by the fact that the company is highly levered with over $13.6 billion in debt.
As discussed here, there are some reasons for investors to be cautious as Altria and two other tobacco companies are being sued in Canada for $27.2 billion. Altria trades at a premium to the market with a trailing 12-month price to earnings ratio of 18.4 and an elevated price to book of over 16 and with its recent outperformance I would wait for a pullback of at least 5% before I would pull the trigger on this one.
Kraft Foods (KFT) – It’s been a volatile time for the stock market over the last year and Kraft has weathered the storm nicely as the stock is up almost 10% over that time period. This can partly be attributed to the fact that it has a beta of less than .4 and a dividend currently yielding 3% that should remain fairly constant going forward. In fact the dividend will probably be increased at some point as the payout ratio is only 58% leaving plenty of room for dividend increases down the road. A good analysis detailing the company’s current situation and potential spin-off can be found here.
On the negative side Kraft trades at a premium to the market with a trailing price to earnings ratio in excess of 19 and it carries some serious debt at roughly $27.5 billion which gives the company a debt to equity ratio of almost 78. This would be a problem for most companies, but Kraft should be able to service its large debt load with its steady cash flow. The shares are about 3% from their 52-week highs and might be a little rich at current levels, but Kraft is a very solid company and the shares are worth taking a look at, especially if they come down a little.
Exxon Mobil (XOM) – It’s been tough recently for energy stocks as the sector is down due to lower crude prices, but Exxon bucked the trend and saw its shares go higher. Exxon was in the news recently when Rex Tillerson, the CEO, bashed the federal government for impeding oil and natural gas development as discussed here. Until very recently Exxon was the largest company in the world by market cap, currently $409 billion, but has been surpassed by Apple Inc. (AAPL), which now has a market cap over $500 billion.
Even though it is no longer the largest company in the world, Exxon is still a very profitable company that generates a ton of cash. In fact, it generated over $55 billion in operating cash flow for the trailing 12-month period based on gross revenue of $434 billion. That equates to revenue of over $89 per share and if oil prices continue to go higher, you can expect that number to increase significantly. By contrast, Chevron Corporation (CVX), which is Exxon’s chief competitor, generated roughly $41 billion in operating cash flow over the same period. The stock has a 2.2% dividend yield and trades at 9.4 times next year's consensus earnings estimate and while not a spectacular bargain, Exxon should perform well over time. Patient investors will be rewarded for staying put.
General Electric (GE) – General Electric has performed well over the last few months and the stock is up about 13%. It has a trailing price to earnings ratio of about 15.8 which puts it a little higher than the market multiple so it is not a great bargain, but its 3.6% dividend yield is quite a bit higher than that of the market. Also, with a payout ratio of only 50% investors can sleep well knowing that it is safe.
General Electric is unique but can probably be best compared to Siemens AG ADR (SI), which is a much smaller company with a market cap of only $88 billion compared to GE’s $207 billion. Siemens looks a little cheaper at first glance with a trailing 12 month price to earnings ratio of 11.5 compared to almost 16 for GE as noted above, but GE has significantly higher gross margins and operating margins at 37.9% and 12.1% respectively. A good article detailing GE’s current situation can be found here.
The stock trades at a price that is near its 52 week high of $20.85 and is not cheap as mentioned above. However, it is a great company that will offer yield-starved investors a place to earn a decent yield and I would be a buyer at $19 per share or less.
Merck (MRK) – Merck has been fairly stable for the past few weeks but did give up some earlier gains in the last week, then bounced back in the last few days. At an 18.9 trailing price to earnings ratio, it looks a little pricey compared to its rival Pfizer Inc. (PFE), at 17.3. However, based on its forward price to earnings ratio of about 10, it doesn’t look pricey at all.
Merck has a dividend yield of 4.4% that is higher than that of its rival Pfizer at 4.1%. With almost $15 billion in cash, the dividend is very secure and was increased in Q4 2011 and with a payout ratio of 77% there is still room to raise the dividend in the future. Also, it’s worth noting that Merck has margins that are very strong with an operating margin at 21.99% and a gross margin at 65.86%. The downside is that its pipeline is not as robust as it once was and some of its products are set to go off patent which will lead to slower growth going forward, but it is working on a drug that could potentially cure AIDS someday and that could be a big windfall for the company as discussed here.
Merck is a fairly large company with a market cap over $116 billion and probably doesn’t have a great risk/reward profile, but I would pick up a few shares on a significant pullback.