On Sept. 21, I suggested investors may do better with blue-chip stocks than with small-caps. Since then, the Russell 2000, a barometer for small-company shares, has dropped 9%, while the Dow Jones Industrial Average of the 30 biggest U.S. companies has remained flat.
Investors typically have been willing to pay a premium for growth stocks, those with the fastest earnings increases. But in a new normal economy, marked by banks' unwillingness to lend and consumers' newfound tightwad posture, investors will pay a premium for safety.
These days, the best investments are established companies with international diversification and brand power. Sifting through oodles of large-cap stocks can be draining, so here are three Dow members that offer compelling value and hefty payouts. They receive less attention than the rest of the pack, but are likely to achieve growth even if the economy struggles.
I have remained wary of AT&T over the past six months, not due to fundamentals such as revenue or earnings potential, but because of nagging fears the company will lose its iPhone exclusivity with Apple . Those concerns are, so far, unwarranted.
AT&T's third-quarter profit declined marginally to $3.2-billion (U.S.), or 54 cents a share, as revenue decreased 2 per cent to $31-billion. AT&T's gross margin remained steady at 58 per cent, but its operating margin slipped from 18 per cent to 17 per cent. The company garnered an extra 2 million wireless subscribers, the highest-ever third-quarter gain.
The wireless churn rate, a measure of customer turnover, fell to a low of 1.2 per cent. TheStreet.com Ratings gives AT&T a financial-strength score of 8.3 out of 10, higher than the "buy"-list average of 7.1. The stock offers a dividend yield of 6.4 per cent, more than twice the S&P 500 Index average of 2.8 per cent. A payout ratio of 81 per cent indicates dividend safety.
AT&T sells at a trailing price-to-earnings ratio of 13, a modest discount to integrated telecom peers. The stock is 14 per cent cheaper than its peer group based on projected earnings and 85 per cent cheaper based on book value. AT&T has fallen 10 per cent this year, underperforming major U.S. indices.
Chevron is looking more attractive than rival Exxon Mobil these days. Both companies reported disappointing quarterly results, with revenue and profit falling precipitously. But Chevron is cheap and, like AT&T, rewards investors with a sizable dividend. Chevron's third-quarter profit dropped 50 per cent to $3.8-billion, or $1.92 a share.
By comparison, Exxon Mobil's plummeted 68 per cent to $4.7-billion, or 98 cents a share. Despite Chevron's comparative outperformance, its shares are cheaper than those of Exxon Mobil on the basis of trailing earnings, projected earnings and sales per share. More broadly, Chevron is 32 per cent cheaper than integrated oil and gas peers on the basis of trailing earnings and 55 per cent cheaper on the basis of projected earnings, an alluring value proposition.
The stock pays a 3.6 per cent dividend yield, higher than the 2.8 per cent average of S&P 500 companies and the 2.3 per cent yield offered by Exxon Mobil. Chevron has a payout ratio of 44 per cent, so its dividend has ample room to grow. The stock has advanced just 4 per cent this year, lagging behind major U.S. indices.
Insurance titan Travelers has rebounded from the throes of recession. Third-quarter profit surged more than four-fold to $935-million, or $1.65 a share, as revenue grew 3 per cent to $6.3-billion. The company's gross margin rose from 21 per cent to 35 per cent and its operating margin climbed from 5 per cent to 21 per cent.
Since the year-earlier quarter, Travelers has boosted its cash balance 24 per cent to $6.8 billion while debt grew just 3 per cent to $6.5-billion. The company's balance sheet now has a liquid tilt. And its debt-to-equity ratio of 0.2 is below the insurance-industry average, demonstrating restrained leverage.
Although the company's 2.3 per cent dividend yield is unremarkable, its shares are cheap. Travelers sells at a price-to-earnings ratio of 9, a substantial discount to the market and property-and-casualty insurance peers. The stock is 67 per cent cheaper than peers on the basis of trailing earnings and 23 per cent cheaper on the basis of projected earnings. Travelers has advanced 13 per cent this year, more than the Dow, but less than the S&P 500. The company is boosting profitability by cutting costs, strengthening its durable balance sheet in the process. Those are signs of near-term profit growth and long-term operational discipline.
© The Globe and Mail
