Some gleaned comments on a few of our divi stocks ..
ABT .. USB .. V .. WM .. BAX ..
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I will cover the health care name and will talk about Abbott Labs, symbol is ABT. They operate in four segments in the health care space: pharmaceuticals, diagnostic products, nutritional products - infant formula and adult stuff - and then they have products like stents and things like that. A very diverse mix of businesses. Abbott's a little under $51. At that price, it has a 3.7% yield, substantially above the market's yield of 1.9% - so substantially above the yield on the S&P. At these levels, you are buying Abbott for about 10.4 times next year's earnings, which is below the market.
If you look at the stock performance over one, three and five years, it has significantly underperformed the S&P. You actually could have bought Abbott at this price all the way back in 2002. What we've seen since 2002, the annual dividend has basically doubled from like $0.94 a share to $1.88. Sales have gone from a little bit under $20 billion to almost $35 billion last year, and profits have increased as well. They have really focused on growing sales in international and emerging markets, and those sales and income are growing even faster than the company as a whole. On the quality side of things, the company has had a consistent high-teens to low-20% return on capital. And the debt, we think, is very manageable at about 40% of total capital or about three times annual earnings.
Basically, we have a company that has performed very well from a business standpoint. The dividend has performed very well. It has doubled since 2002, so it has increased much faster than inflation. So this just goes right back to that whole issue about value sensitivity. The market has decided to reprice Abbott from over 20 times forward earnings to around 10 times forward earnings, even though the business performance that we just talked about has been exceptional. Their dividend performance has been exceptional.
Again, we're in a situation where we think we have an incredibly high-quality company that we can buy at a value price. Similarly, while the market might never get it back up to that 20-times-forward-earnings multiple again, at some point the market is not going to handicap it with a below-market multiple. We still have great faith that we're going to see sales and earnings and dividends increase over time, and effectively pull the stock price along with it at some point.
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Minneapolis-based U.S. Bancorp (USB) is a good example. It's big, simple and positioned to win. It's run by CEO Richard Davis, who is very good at managing expenses.
"At its core, it is a traditional community bank that has great scale and is benefiting from a flight to quality," says Hartch, who trained as a lawyer. Customers, he says, are very loyal. And deposits are low-cost, and exceed loans on the balance sheet. The bank is No. 1 or No. 2 in most of its markets, with highly profitable wealth-management and credit-card businesses. U.S. Bancorp, Hartch says, should be able to overcome new regulations on bank overdrafts by eliminating debit-card rewards and raising minimum account balances for services like free checking.
The Street estimates U.S. Bancorp's 2011 cash flow per share at $2.31 on revenue of $18.1 billion, growing to $2.67 on $19 billion in 2012. The consensus forecast puts 2011 earnings per share at $2.20 and $2.61 in 2012. BBH Core Select started buying in late 2009 at 22.61, and continues to buy on dips. The shares were recently trading at 24.41, or about 11 times earnings. Hartch thinks the underlying value is 36.
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Visa (V) is one of the fund's newer acquisitions. "We knew we wanted to own it, but had to wait for the opportunity, which came late last year, when the stock fell on concerns about coming regulation of interchange fees," says Keller. He says that 61% of cards in circulation bear the Visa name, which gives it a "network effect that creates a tremendous moat around the company." The more people there are who use the card, the more retailers who will accept it. "This is a business that can grow [at] mid-to-high single-digit rates for a long time to come," because cash is still the dominant means of exchange worldwide.
Cash flow per share should be $4.99 on revenue of $9.2 billion this year, and $5.94 on $10.1 billion next. The Street puts EPS at $4.92 for fiscal 2011 (September) and $5.69 for 2012. Trading at 76.43, the stock sells at about 15.5 times expected earnings for the current fiscal year. Hartch and Keller started buying at 67.61, and think it's worth well over 100.
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They also like Houston-based Waste Management (WM), because it provides an essential service: garbage collection. "The average American family generates four pounds of garbage per day, or a ton per person per year," says Hartch.Waste Management has high retention rates among residential and industrial customers, and owns about 30% of the nation's landfill capacity—an asset not easily replaced because of zoning laws. "Because of this, they have pricing power even during a recession," says Hartch.
David Steiner, Waste Management's CEO, is not only buying back stock, he's steered the company into new businesses like recycling and waste-to-energy, which have a high return on invested capital. WM has been able to post year-over-year revenue increases because of improved recycling volume, and the higher prices it fetches for the commodities it recovers.
Cash flow in the first quarter jumped 21% over the year-earlier level, and net cash flow from operations posted the highest figure since 2006. The Street puts 2011 cash flow per share at $5.26 on revenue of $13.2 billion, and $5.50 on $13.7 billion in 2012. The consensus earnings per share are $2.26 for 2011 and $2.60 for 2012. Hartch and Keller started accumulating the stock at 27; it's now above 36.
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Another pick, Baxter International (BAX) of Deerfield, Ill., provides essential treatments for those with acute medical conditions, such as hemophilia and kidney disease. "Bob Parkinson [the CEO] has stepped up research and development, so there are new drugs in the pipeline," Hartch says. The stock was recently around 59, but BBH Core Select was able to get in as low as 41.38 because of concern last year about an oversupply of plasma. Last year's stock buyback also was sweet.
Cash flow per share should be $5.20 on $13.6 billion in revenue in 2011, and $5.84 on $14.4 billion in 2012. The Street puts 2011 EPS at $4.25, rising to $4.68 in 2012.
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Triff .. |
