2 Picks for a Time to Play it Safe

04/19/2013 10:15 am EST


Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

In this rising and more uncertain market, don't forget about companies that are fundamentally strong and also pay dividends, says J. Royden Ward of Cabot Wealth Advisory.

I screened the Standard & Poor's database of 5,600 stocks to find very low-risk companies paying healthy dividends.

First, I searched for companies with little or no debt. Companies with heavy debt loads generally produce lower earnings when interest rates rise. Second, I looked for companies that pay dividends, yielding at least 1%. Lower dividend yields add less value.

Standard & Poor's lists over 2,000 companies that pay a dividend and have no debt. You can whittle the list down to just a few by requiring your choices to have Value Line financial strength ratings of A++, A+, and A, and by choosing companies with Standard & Poor's earnings and dividends rankings of A+, A, and A-.

Using these two criteria and the two parameters explained above (low debt, dividends), I came up with 20 companies that are solid candidates to buy now. After perusing the list, two companies stand out.

C.H. Robinson (CHRW) is one of the largest transportation and logistics companies in North America. Founded way back in 1905, it provides multimodal transportation services and logistics through a network of 250 offices in North America, South America, Europe, Asia, and Australia.

C.H. Robinson has contracts with 50,000 transportation companies, including motor carriers, railroads, air freight and ocean carriers. The company maintains the largest system of transportation capacity in North America. In addition, C.H. Robinson operates logistics services, such as fresh produce transport, freight consolidation, and cross-docking.

The company has demonstrated steady growth during the past 15 years, with 14 increases in EPS (earnings per share) and dividend increases in every year. Recent acquisitions and rising costs slowed earnings growth in 2012, which caused CHRW's stock price to decline to bargain levels.

I expect cost controls and cost savings from acquisitions to boost EPS by 19% during the next 12 months ending March 31, 2014, after rising 6% in the past 12 months. Sales will likely increase 11%, same as a year ago.

At 17.6 times my forward EPS estimate of $3.40, and with a dividend yield of 2.3%, CHRW's stock is clearly undervalued. CHRW shares will likely rise to my sell price within one to two years.

FactSet Research Systems (FDS) provides global economic and financial data to investment professionals. The company combines data from hundreds of sources into a single online information library, accessible from numerous devices using a private network.

The network provides a direct, high-speed data link between FactSet's mainframe computers and the client's personal computer or network. The system allows users to download, search, and analyze data in a variety of formats, including custom-designed reports.

Sales and earnings growth has continued unabated, because FactSet is taking market share from competitors such as Bloomberg, Dow Jones, Morningstar, and Thomson-Reuters. FactSet's first-class customer service and unique data sets have become a big advantage.

The recent shift from bond mutual funds to stock mutual funds could enable FDS to beat 2013 forecasts. The company derives more than 80% of revenues from the mutual fund industry.

Sales will likely increase 10% and EPS should rise 12% during the next 12-month period ending February 28, 2014. At 18.8 times my forward EPS forecast of 4.83 and with a dividend yield of 1.4%, FDS shares are a little high. The company's superior sales, earnings, and dividend growth warrants the higher valuation.

FactSet has paid dividends since 1999, and increased its dividend more than 10% every year since 1999. I expect another hefty dividend increase before mid-year. Buy FDS now.

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