However, the month of May and the beginning of June have been rather terrible months for the S&P 500. This past Friday has so far been the worst performing market day of 2012.
For a long term investor, however, this can pique some interest. These aren’t bargain level prices by any stretch (like back in 2009), but after erasing 2012′s market gains, we’re at a more comfortable market level. Some of the edge has been taken off. An assortment of the sturdiest, strongest companies around have taken a bit of a dent in their stock prices, so long term investors may be taking notice.
The Coca Cola Company (KO)Coca Cola stock is unfortunately almost never cheap. The company has an unrivaled distribution network, global market penetration, and among the strongest brands in the world. There’s not much innovation and change from year to year; just the company selling their namesake product and a host of other brands with volume that has grown like clockwork lately.
They acquired their North American bottler, and they have set an ambitious target of selling 3 billion servings daily in 2020 compared to their 1.75 billion servings daily at the current time. This actually implies a prediction of acceleration of volume growth compared to what they have been achieving so far, likely because they expect to reach critical points of market penetration. The worldwide annual number of servings consumed, per capita, of Coca Cola products (including all of their brands), is 92. In America this is over 400. Several of the world’s most populated countries such as China, India, Nigeria, Indonesia, and Pakistan, have annual servings consumed per capita of under 40, and the annual number of per capita servings has been growing over the last decade in these countries. Moderate volume growth in these regions of high population growth translates to solid overall volume growth for Coca Cola and their sodas, juices, teas, energy drinks, and water.
So while volume, EPS, and the dividend have been growing at a sturdy pace, their stock price has unfortunately kept pace, hitting its 52 week high in mid-May. But despite no specific setback for the company, the stock price has dropped more than 5% in the last 3-4 weeks as part of this overall market correction. I estimate that the current valuation is reasonable with regards to risk-adjusted returns. The dividend yield is currently 2.77%, and the most recent dividend increase was a solid 8.5%.
Recent Coca Cola Analysis Report
McDonald’s Corporation (MCD)McDonald’s stock has taken quite the nose dive lately. The company has continued to grow revenue, EPS, and the dividend, but at around $86/share, they’re more than 15% off of their 52 week high from the beginning of 2012, where the stock peaked at over $102. The company looked pretty pricey to me at over $100 based on my valuation estimates, but anything under $90 looks solid.
The company runs a tight ship:
-McDonald’s profit margins are significantly higher than, and often twice as high as, their major competition.
-They typically pull in significantly more revenue per location than similar competition.
-The company puts all their free cash flow towards dividends and share repurchases.
-They continue to grow and scale globally.
-The unbroken chain of annual dividend increases stretches back to the 1970′s.
At $86 or so, with a 3.24% dividend yield, I’m a buyer.
International Business Machines (IBM)IBM stock peaked at over $210 in 2012, but is now down to nearly $188. With a low dividend payout ratio, IBM isn’t quite the tech dividend payer as, say, Microsoft or Intel, but with a P/E of 14, a forward P/E estimated at around 12, and steady EPS growth, it does appear to be at a reasonable value. The current dividend yield is 1.80%, and the most recent quarterly dividend growth was over 13%, though personally I’d prefer to see a higher yield in place of less repurchasing of shares.
The company has their 2015 road map, wherein they target EPS of $20 or greater by 2015. The current stock price is a multiple of about 9 over this target 2015 EPS figure. IBM reached their long-term 2010 goal with a comfortable margin, and they appear to be on track to reach their 2015 target as well. The IBM report I published a while back explains in more detail how they plan to reach their target:
There are more specific predictions and explained paths that lead to that number. IBM wants the percentage of its business coming from high-growth countries to be 30% by 2015, up from 21% in 2010 and 11% in 2000. The company expects to continue share repurchases and dividends into 2015, with a summation of $50 billion in share repurchases and $20 billion in dividends for the time period between 2010 and 2015, which comes from the $100 billion in free cash flow they expect to have generated. (Share repurchases were a large component of the 2010 target, and will be a large component of the 2015 target). Another $20 billion is expected to be spent on acquisitions over this period. Revenue from the “cloud” in 2015 is expected to be $7 billion. Revenue from analytics in 2015 is expected to be $16 billion (and global data volume is predicted to multiply in volume by 29 between 2010 and 2020). Revenue from their “Smarter Planet” area is expected to be $10 billion by 2015. Overall, half of earnings are expected to come from software in 2015, with the other half coming from the combination of services, hardware, and financing.Full IBM Analysis
Overall, with the price dip, while I wouldn’t call IBM a huge value, it seems that their risk-adjusted return potential is robust, their operations are strong, and they may make for some solid blue-chip tech exposure for a dividend portfolio that might otherwise be a bit under-weight in the tech sector.
Compass Minerals International (CMP)Compass Minerals controls the largest known underground rock salt mine in the world, the Goderich Mine, and it happens to be located right on the Great Lakes for ease of transport. When it comes to commodity products, pricing is everything (both for the product and for the transport), so having an enormous and ideally located salt mine (as well as other assets), is something that competitors cannot replicate. The fact that they own the largest rock salt mine in the United Kingdom as well tends to follow the same argument.
The company’s salt products are used for both consumer and deicing use, and they also operate a fertilizer business. With their largest segment being their deicing segment, Compass Minerals for the most part trades economic risk for weather risk. Warm winters mean less salt is required for deicing, while cold winters are ideal for the company. Keeping roads safe is not typically a place to cut budget corners on.
Compass is more than 20% off of its 52 week high, and currently has a dividend yield of 2.79%. The P/E is over 17, but this is based on their earnings after an abnormally warm winter, which as previously described, is a bad thing for the business. They’ve built up their mined salt inventory this year, so next year’s free cash flow is poised to be fairly strong.
Full Disclosure: As of this writing, I own shares of KO and MCD.