A Multinational That Passes All the Tests
09/28/2010 1:00 pm EST
Richard Band, editor of Profitable Investing, finds a dividend-paying blue chip that meets all his criteria for investment success.
Updated September 28, 2010
We’re value investors, proudly so—bargain hunters with an eye on quality. It’s an approach that has worked, even during the Lost Decade, and I’m confident it will keep working for many years to come.
Success depends, of course, on selecting winners that can (and will) prosper in a tough economicclimate. Here are three tests to apply whenever you’re contemplating a new stock purchase these days:
- Pay me up front. I’ve always liked dividends, but especially now. In a world of stop-and-go economic growth and stutter-step markets, capital gains are highly uncertain. Go for the “bird in the hand.” A generous up-front dividend will start you off toward an attractive total return.
- Durable business model. I can’t tell you how many flimsy business schemes I’ve had pitched to me in nearly four decades as an investor. Before you commit your hard-earned cash, weigh the strengths and weaknesses of the company’s business model. Do these folks offer a product or service that can withstand the onslaught of competitors? Is the company properly financed, with a modest amount of debt? Is the business generating cash, here and now? Do any fundamental threats loom, such as litigation or regulation?
- Good stewardship. Nothing frosts me more than managements who waste corporate assets. It’s my money, as an owner, they’re flushing down the drain! Two of the most common offenses in this area: lavish compensation packages for the top dogs, and dilutive takeover deals that merely feed empire-building egos. Steer your funds to companies that avoid these excesses.
You may not recognize Unilever’s (NYSE: UL) name, but you surely know this Anglo-Dutch giant’s products: Breyer’s and Ben & Jerry’s ice cream, Hellmann’s mayonnaise, Knorr soups, Lipton tea, Dove skin- and hair-care products, Pepsodent toothpaste, and Vaseline. UL’s top 13 brands generate $29 billion in annual sales.
As a multinational maker and marketer of consumer staples, UL is the kind of business that grows quietly, almost inevitably, over time. Emerging markets, with their dynamic prospects, now account for 50% sales, up from 35% only six years ago.
Chief executive officer Paul Polman, who came over from Nestle in 2008, has [expanded] both sales volume and profit margins, a notable achievement. The secret: cost savings, which amounted to $1.8 billion in Polman’s first year, allowing the company to trim prices and grab market share.
Operating profits should approach an all-time high in 2010, and will likely set a new record next year. At 13x this year’s estimated net, you’re paying a very modest price for one of the world’s most deeply entrenched megacap franchises. (It closed just below $29 Monday—Editor.)
UL’s dividend will warm your heart, too: At [nearly] 4%, it easily tops the yield on US Treasury paper of any maturity.
Related Articles on STOCKS
Satya Nadella, the CEO of Microsoft (MSFT), gave the stark warning that the world is rapidly “...