4 standout stocks for growth and income
With a steady climb in dividends, sales and earnings, these picks should do well in good times or bad.
In good times or bad, dividend increases make a difference. A history of dividend increases suggests a company possesses ﬁnancial fortitude and a commitment to sharing the wealth with stockholders.
We've found four standouts that have shown steady dividend increases, with three-year annualized growth rates of at least 9%: Abbott Laboratories (ABT), Dover (DOV), IBM (IBM) and Microsoft (MSFT).
These four stocks are also expected to grow per-share earnings this year and in each of the next two years. We award all four stocks our long-term "buy" rating.
Abbott Laboratories has increased its quarterly dividend in 39 consecutive years. In the past three years, the dividend has grown at an annualized rate of 10%, topping the other big U.S. drug companies.
The stock, up 12% this year, offers a 3.5% yield, exceeding its ﬁve- year average of 3.0%.
The dividend, however, will undergo a shift from its present form next year when Abbott splits its pharmaceutical unit ($18 billion in sales) from the rest of its businesses ($20 billion).
Both companies will pay a dividend, and taken together, their distributions should equal Abbott’s dividend at the time of the separation.
Backstopped by strong balance sheets, both new companies should also receive investment-grade credit ratings, Abbott says.
Some speculate that the new pharmaceutical company could receive a heftier portion of debt and cash, since the medical-devices business will likely be better equipped to generate free cash ﬂow.
Dover, an industrial conglomerate, makes everything from hydraulic lifts to refrigeration systems to hearing-aid components.
Order activity remained strong in the opening weeks of the December quarter, management says, building on the 20% increase in bookings during the September quarter.
Dover anticipates revenue will climb 20% in 2011, bolstered by at least 8% organic growth in all four segments. Free cash ﬂow is on pace to represent 10% to 11% of revenue for the year.
That implies a record $856 million to $941 million in free cash ﬂow, marking the strongest growth since 2003. That cash will likely fund Dover’s steady stream of dividend hikes and acquisitions.
Dover announced a 15% dividend increase in August, marking its 56th consecutive year of dividend growth. Dover has also purchased at least eight companies so far this year, spending more than $1.37 billion.
In its latest deal, completed in November, Dover acquired Advansor A/S of Denmark to expand its presence in the refrigeration-equipment market.
IBM uses a two-pronged approach for sharing proﬁts with stockholders. The dividend has grown for 16 straight years, including a 15% hike in May.
The tech giant has raised its payout at an annualized rate of 26% over the last ﬁ ve years, well above its growth rate for per-share profits (17%) and operating cash ﬂow (5%).
IBM also has a seemingly insatiable appetite for its own stock, buying back enough to lower the share count 5% over the last year and 21% over the last ﬁve years.
Looking ahead, IBM seems capable of returning even more cash to shareholders. Despite the steady dividend growth, IBM’s payout ratio is a modest 23% of trailing earnings.
Management expects $100 billion in free cash ﬂow over the next ﬁve years, translating to 12% growth from the previous ﬁve years.
Roughly 70% of that cash should return to shareholders through dividends and buybacks.
Microsoft raised its dividend 25% in September, nearly double its ﬁve-year annual growth rate. (Microsoft owns and publishes Top Stocks, an MSN Money site.)
The dividend hike pushed Microsoft’s yield to 2.9%, well above the 2.0% average for dividend- paying technology stocks in the S&P 500 Index.
The company has $11.2 billion remaining from a $40 billion share-repurchase program launched in 2008. That balance is enough to buy back about 5% of outstanding shares at current prices.
In the past year, Microsoft has spent $5.4 billion in dividends and $8.5 billion on repurchases.
Yet Microsoft’s massive cash hoard still gives it plenty of ﬂexibility. The software giant generated $19.66 billion in free cash ﬂow in the 12 months ended September.
It now holds $57.40 billion in cash and short-term investments — though roughly 90% is offshore — versus long-term debt of $11.92 billion. Net cash equals $5.36 per share, roughly 20% of the stock price.
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