Updated July 12th, 2016
High quality businesses with shareholder friendly managements trading at fair or better prices make for excellent long-term investments.
But finding these investments is not always easy – especially in today’s overvalued market.
This guide makes locating high yielding blue chip stocks convenient. It includes a free excel spreadsheet download of all 32 S&P 500 businesses with 100+ year operating histories and dividend yields greater than 3%.
The long-term performance and current events of these long-term businesses are analyzed in detail.
Some of their performances are pedestrian, while others are exceptional.
What Are Blue Chip Stocks?
Blue chip stocks are established large-cap businesses that pay reliable dividends. They have long corporate histories and provide well-known products and/or services.
This article examines every business in the S&P 500 with a 3% yield and a 100+ year corporate history. Both of these metrics are important in finding examples of blue chip companies.
Blue chip stocks should pay reliable, above average dividends.
- Stocks with 100+ year histories are generally reliable
- Stocks with 3%+ dividend yields by definition pay above average dividends
Finding Top Blue Chip Stocks
Finding the best blue chip stocks does not need to be complicated. Here’s how to find the best of the best:
- Only look at stocks with yields at or above 3%
- Examine how long the company has been in business
- Determine fair value (prefer low P/E ratios)
- Look for a strong competitive advantage
- Invest in high quality blue chips trading at fair or better prices
This article makes identifying high quality blue chip stocks even easier. Click here to download your blue chip excel spreadsheet list of all 32 S&P 500 stocks with 3%+ dividend yields and 100+ year operating histories.
The spreadsheet can be sorted using dividend yield, date the company was founded, forward price-to-earnings ratio, and much more.
Keep reading this article for detailed analysis on all of these businesses.
Table of Contents
You can quickly skip to analysis of any of the blue chip stocks analyzed in this article using the table of contents below. Companies are listed in alphabetical order.
- Altria (MO)
- American Electric Power (AEP)
- BB&T Corporation (BBT)
- Boeing (BA)
- CenterPoint Energy (CNP)
- Chevron (CVX)
- Coca-Cola (KO)
- Consolidated Edison (ED)
- Emerson Electric (EMR)
- Entergy Corporation (ETR)
- ExxonMobil (XOM)
- Ford (F)
- General Motors (GM)
- IBM (IBM)
- International Paper (IP)
- Merck (MRK)
- Nordstrom (JWN)
- ONEOK (OKE)
- Pfizer (PFE)
- Philip Morris (PM)
- Principal Financial Group (PFG)
- Procter & Gamble (PG)
- Prudential Financial (PRU)
- Public Service Enterprise Group (PEG)
- Target (TGT)
- The Dow Chemical Company (DOW)
- Wells Fargo (WFC)
- Western Union (WU)
- Weyerhaeuser (WY)
- Williams Companies (WMB)
- Xcel Energy (XEL)
- Xerox (XRX)
Date Founded: 1847
CAGR Since January of 1970: 20.3%
Altria’s performance since 1970 is nothing short of amazing. The company has realized a CAGR of 20.2% in this time period… Every $1 invested in Altria is now worth $5,506 dollars (yes, you read that correctly). That is the power of compound interest at a high growth rate. For comparison, the S&P 500 generated a CAGR of 10.3% over the same time period.
Altria (formerly Philip Morris prior to 2008) is the single best performing stock over the last 50+ years according to Jeremy Siegel’s book The Future for Investors.
The company’s excellent performance is due in large part to the strength of the Marlboro brand.
Source: Altria 2016 Annual Shareholders Meeting (US market share)
I want to be clear: There is no way Altria can continue compounding investor wealth at 20% a year going forward (for any long period of time). The company simply cannot grow its earnings at that type of pace going forward.
But that doesn’t mean investors should expect poor returns…
Altria uses high dividends, efficiency gains, and share repurchases to reward shareholders with attractive total returns. In short, Altria’s management is (and has been for a very long time) excellent at capital allocation.
Altria also has a potential cash windfall. Altria owns 27% of beer giant SAB Miller. InBev plans to acquire SAB Miller for $108 billion. This means cash proceeds of around $29 billion (over 20% of Altria’s market cap) could come to Altria. The company is very shareholder friendly and allocates capital well, so these funds will likely be put to good use.
On the downside, other investors have taken notice of Altria’s continued strong performance. The company is currently trading for a forward price-to-earnings ratio of 21.0, which is a bit high considering the company’s presence in a lower growth industry.
Altria makes an excellent long-term holding, but now is not the ideal time to start a new position in the stock.
Date Founded: 1906
CAGR Since January 1970: 9.1%
American Electric Power is a regulated utility in the United States. It is very stable and has a long track record of consistent returns through modest earnings growth and a high dividend.
Last year, American Electric generated $16.5 billion of revenue and grew operating earnings by 7.5%. It expects to grow operating earnings by 4%-6% each year over the long term.
The company got off to a slow start this year…
Operating earnings per share declined 20% in the first quarter due to the warm winter and mild temperatures across American Electric Power’s service markets. Still, American Electric expects to generate $3.60-$3.70 per share in operating earnings per share in 2016.
It expects continued success in its transmission business and its focus on the regulated business. In the first quarter, the transmission and distribution business grew profit by 11% year over year, due largely to favorable rate changes.
Operating as a regulated utility provides stability for American Electric, as the company routinely receives rate hike approvals each year, which help the company steadily grow earnings from year to year.
Its solid profitability should allow it to continue raising dividends, as it has done regularly for many years. American Electric increased its dividend by 5% last year, and it has paid a dividend for more than 420 consecutive quarters, dating all the way back to 1910. It maintains a target payout ratio of 60%-70% of its operating earnings each year.
Based on its earnings per share last year and current year forecast, American Electric’s current $2.24 per share dividend represents 61% of its projected 2016 earnings per share. The stock currently yields 3.2%.
Date Founded: 1872
CAGR Since March 1990: 10.0%
BB&T is a large regional bank with a $25+ billion market cap. The company’s locations are spread across Texas and the eastern portion of the United States.
Source: BB&T 2016 Barclay’s Presentation
As a bank, BB&T needs higher interest rates to sufficiently increase profitability.
However, the company has a strategy to grow, even in a low-rate climate. The strategy involves acquisitions.
Acquisitions helped boost BB&T’s revenue by 4% last year, to $9.8 billion, led by record fee income of $4 billion. The over-arching strategy is to invest more in fee-driven businesses like wealth management, which can offset weakness in traditional banking activities which are suffering due to low interest rates.
Despite these acquisitions, BB&T’s earnings per share declined 5.9% last year.
On the plus side, BB&T maintains a strong portfolio. Its non-performing assets declined $32 million in the fourth quarter, and the company’s loans 90 days or more past due were 0.23% of all loans held for investment at the end of the year. This compared to 0.28% in the previous quarter.
Its consistent profitability has allowed BB&T to continue raising its dividend year after year. Total dividends paid in 2015 were 10% higher than the previous year.
BB&T has achieved 10% annualized returns over the past 26 years, due in large part to its regular earnings growth and consistent dividends.
BB&T’s dividend has been a significant driver of its returns; the company has made uninterrupted cash dividend payments to shareholders since 1903. Its current dividend of 3.2% is significantly above the average S&P 500 dividend yield.
Date Founded: 1916
CAGR Since January 1962: 12.6%
Boeing has generated 12.6% returns compounded annually for more than 40 years, and its future looks equally bright. The company is a member of the DOW 30 and an excellent example of a blue chip stock.
Despite being around for 100 years, Boeing has still managed to grow quickly over the last decade.
Boeing is benefiting from the boom in global demand for aircraft, and is making major breakthroughs in new markets. This year, Boeing announced a deal with Iran that could be worth as much as $25 billion.
Boeing has repositioned its business away from defense operations in recent years. Two-thirds of Boeing’s total revenue last year came from the commercial market.
Boeing grew commercial aircraft deliveries by 5% in 2015, which marked a record for the company. Free cash flow was up 4% to $6.9 billion.
With its impressive cash flow, Boeing returns significant amounts of cash to shareholders. Last year, the company increased its dividend by 20% and also approved a new $14 billion share repurchase authorization. These buybacks will be a meaningful tailwind for Boeing’s future earnings growth, since the buyback level represents roughly 18% of the company’s current market capitalization.
And it had a $480 billion backlog to start 2016, not including the agreement with Iran, which is another positive catalyst for Boeing’s earnings growth going forward. Demand for commercial aircraft is increasing at a high rate—Boeing’s revenue from commercial aircraft rose 10% last year, and this year, management maintains a positive forecast. The company expects 5-8% growth in core earnings per share this year. Boeing could once again generate double-digit returns for shareholders this year, based on its earnings growth, 3.3% dividend, as well as potential multiple expansion.
Boeing stock trades for a price-to-earnings ratio of 16, which is below the S&P average price-to-earnings multiple. Boeing’s valuation multiple has come down to start this year, but it could earn at least a market average multiple given its prospects for above-average earnings growth.
Date Founded: 1882
CAGR Since January 1970: 8.1%
CenterPoint Energy is a well diversified energy company with a $10 billion market cap. It has a midstream energy business, but also has a utility business.
The utility segment comprised 65% of CenterPoint’s earnings last year, and is projected to make up 75%-80% of total earnings in 2016.
CenterPoint is mostly a utility. As such, its future returns may be suppressed if interest rates rise going forward.
As a utility, returns generally would be in the high single-digit range, in line with its historical average since 1970, as a result of modest earnings growth and its 4.4% dividend yield. CenterPoint is a one of 274 Dividend Achievers thanks to its 10 year streak of rising dividends.
But in a rising-rate environment, returns may be less than what investors are accustomed to, because higher interest rates raise a utility’s cost of capital. Utilities use lots of debt within their capital structures to finance their long-term assets. Utilities like CenterPoint are likely to see future financing costs rise under higher rates, which could cause lower earnings growth.
CenterPoint’s operating profit was flat last year. Adjusted earnings per share were $1.10 for the year, after excluding the impacts of one-time charges. Management expects $1.16 per share at the midpoint of its 2016 full-year forecast, which would imply 5% earnings growth this year. If the company grows earnings by 5%, along with the 4.3% dividend, the implied future returns could be more than 9%.
Of course, this assumes that the valuation multiple remains unchanged. The stock currently trades for approximately 20 times forward earnings per share estimates, which is fairly aggressive for a utility stock.
Utilities are defensive in nature, and typically do not hold premium valuation multiples when compared to the S&P 500, particularly if interest rates are set to rise from here.
Now is not the time to buy CenterPoint.
Date Founded: 1879
CAGR Since January 1970: 11.7%
As one of the world’s largest oil and gas super majors, Chevron has been hit hard by the huge decline in commodity prices over the past two years. Even though WTI crude has rallied to $50 per barrel from $27 per barrel at the 2016 low, Chevron had a brutal year in 2015. Net profit fell 76% last year.
The good news is that Chevron remained profitable last year, which was no small feat given how many energy companies reported steep losses. Chevron still earned $4.6 billion in 2015, thanks in large part to $7.6 billion in downstream profit.
Chevron grew earnings in the downstream business, which includes refining, by 75% last year. This at least helped offset the $1.9 billion loss in the upstream business.
The fact that Chevron still generated billions of profit last year has allowed it to maintain its dividend through the oil crash. Chevron currently pays a $4.28 per share annual dividend, which amounts to a hefty 4.1% dividend yield.
The company continues to assure shareholders that dividends will continue to rise.
Chevron’s recent past has been difficult, but over the long term, the company has a good chance of generating returns in line with its historical average.
The reason is because Chevron has multiple large upstream projects set to come on line this year, which will meaningfully help shore up the company’s finances. Two in particular that are particularly promising are the Gorgon and Wheatstone liquefied natural gas projects in Australia.
These are massive projects which cumulatively cost the company more than $80 billion to build. These have been significant uses of cash, but once they begin production, they will turn into sources of cash. Collectively, the two projects could produce in excess of 24 million tonnes of gas each year for decades. Chevron has set the goal of becoming free cash flow positive by 2017, and these two projects will help it get there.
Date Founded: 1892
CAGR Since January 1964: 14.4%
Coca-Cola is one of the most legendary dividend stocks of all time. It’s a favoriteof Warren Buffett, Chairman of Berkshire Hathaway BRK-B, which owns 400 million shares and is the company’s largest institutional shareholder. The company is one of Buffett’s 20 highest yielding stocks.
Coca-Cola has generated extremely good returns for shareholders over a very long period of time. At a 14.4% annualized return over the past 52 years, a $10,000 investment in Coca-Cola stock at that time would be worth $10.9 million today.
The reason why Coca-Cola has generated such massive returns is because it has a highly profitable business model, backed by one of the world’s strongest brands and major economies of scale. Coca-Cola’s global distribution network has provided the company with growth in new markets all around the world.
And yet, Coca-Cola is in a difficult position. Soda sales in the U.S. have declined steadily for the past decade. This has weighed on the company’s growth in recent years.
Going forward, Coca-Cola is turning to growth in new product categories such as teas and juices, particularly in emerging markets like Asia and Africa.
Indeed, Coca-Cola is no longer just a soda company. In all, it has 20 brands that each generate at least $1 billion in annual retail sales. Its core brands include soda drinks like Fanta and its flagship Coke, but also bottled water like Dasani and BonAqua, as well as Powerade sports drinks and juices under the Simply and Minute Maid brands.
Source: Coca-Cola Investor Relations
Coca-Cola currently pays a $1.40 per share annual dividend which provides a 3.1% dividend yield, and has increased its dividend for 54 consecutive years. The company encapsulates what it means to be a blue chip business.
Date Founded: 1823
CAGR Since January of 1970: 12.5%
Consolidated Edison (ED) has compounded investor wealth at 12.5% a year since 1970 (the earliest price history for the company in Yahoo! Finance). For comparison, the S&P 500 generated a CAGR of 10.3% a year over the same period.
Consolidated Edison’s growth is even more impressive when you consider that the company is a low risk utility. To be fair, Consolidated Edison has benefited greatly from the trend of falling interest rates over the last 30 years.
High quality, low risk utilities act as bond substitutes. You aren’t going to get rapid growth from a company like Consolidated Edison. You are going to get reliable dividend income, growing a bit faster than inflation.
As a bond substitute, Consolidated Edison stock tends to rise when interest rates fall, just as the price of bonds rise as interest rates fall. Consolidated Edison stock has seen the ‘perfect storm’ for total returns over the last 30 years as interest rates have continuously declined.
Going forward, investors should expect total returns of around 5.5% to 6.5% a year from Consolidated Edison stock. Returns will come from earnings-per-share growth of 2% to 3% a year, as well as 3.3% from the company’s dividend yield. The company has paid increasing dividends for 42 consecutive years, making it one of just 50 Dividend Aristocrats.
The above total returns assume that interest rates remain around their current levels. This is a dubious assumption. The Federal Reserve has reversed course and is slowly raising rates. It is possible – and perhaps even likely – that interest rates will be significantly higher a decade from now than they are today.
Date Founded: 1890
CAGR Since June 1972: 9.5%
Emerson Electric is caught in a very difficult operating climate. As a global industrial, Emerson is highly exposed to the fluctuations in the global economy. Approximately 52% of Emerson’s revenue comes from outside the U.S. and Canada.
Emerson is also reliant on the energy sector. Due to the slowdown in economic growth in the emerging markets and falling commodity prices, Emerson has seen a decline in sales and earnings over the past two years. Emerson’s total sales fell 9% last year, and earnings per share adjusted for one-time gains fell 15% from 2014.
However, Emerson has an established track record of creating value for shareholders over the long term. Over the course of its 125-year history as a company, Emerson has navigated through the Great Depression, two world wars, and the 2008 financial crisis. It has a proven ability to stay the course and continue to raise its dividend, thanks to its steady profitability.
Despite the various headwinds impacting Emerson, the company still generated $2.5 billion in operating cash flow last year. In 2016, management expects modest recovery in business conditions. Emerson forecasts over $3 billion in operating cash flow this year.
The company’s plans to spur growth over the next several years are shown below:
Emerson earned $3.17 per share last year, which was more than enough to cover the $1.88 per share in dividends distributed in 2015. Emerson’s payout ratio is 59% of trailing earnings, so the company should continue raising its dividend each year. Emerson has an excellent dividend streak of 60 years of consecutive increases. Emerson Electric is one of just 18 Dividend Kings – stocks with 50+ years of consecutive dividend increases.
Emerson pays $1.90 per share in dividends, which amounts to a 3.5% current dividend yield.
Date Founded: 1913
CAGR Since June 1972: 9.3%
Entergy is a blue chip electric utility stock, with a $14 billion market capitalization.
It delivers electricity to approximately 2.8 million residential customers, primarily in the southern United States. The stock has done very well, and sits near its 52-week high, due to the rush for yield in a low-rate climate.
However, investors should be aware that in a rising-rate environment, earnings growth will likely slow for utilities as higher rates raise a company’s cost of capital.
Entergy is positioning itself to capitalize on growth in renewable energy going forward.
For example, the company launched utility-scale solar projects to customers in Arkansas, Mississippi, and New Orleans.
Moreover, due to continued low wholesale power prices, Entergy closed two nuclear power plants that were no longer financially viable.
These efforts allowed the company to raise its dividend last year for the first time since 2010. These were important steps for the company to take, as Entergy has seen its revenue and earnings stagnate for an extended period. Last year, Entergy’s revenue fell 7.9% from 2014.
If the company can reposition itself for growth, investors should expect Entergy’s future returns to be representative of a typical utility, based on modest earnings growth in the low-single digit range plus a high dividend yield. Expansion of the valuation multiple is doubtful, given that Entergy stock has a price-to-earnings multiple of 15 times forward estimates. This is on par with the S&P 500 Index.
Entergy currently distributes a $3.40 per share dividend which provides a 4.2% current dividend yield.
Date Founded: 1870
CAGR Since January 1970: 13.7%
ExxonMobil is the world’s largest publicly-traded energy company. It is an integrated super-major with a large upstream business, which includes exploration and production, as well as a large downstream business, which includes refining and chemicals.
ExxonMobil is one of the most stable stocks in the energy sector. It has a $368 billion market capitalization, as well as industry-leading credit ratings and returns on invested capital each year. It is a pillar of stability in what can be a volatile industry—as a commodity producer, ExxonMobil is highly dependent on supportive oil and gas prices.
As the price of oil has declined by more than 50% in the past two years, this has had a deep impact on ExxonMobil’s fundamentals. The company reported a 50% drop in net profit last year.
When commodity prices decline, such as the past two years, it places a great strain on an energy company. Many energy stocks have cut or suspended their dividends over the past year to stay afloat.
However, not only has ExxonMobil maintained its dividend through the crisis, but it has actually continued to increase its dividend each year.
Earlier this year, ExxonMobil raised its dividend 2.7%. Its new annualized dividend rate of $3 per share represents a 3.2% dividend yield.
The recent dividend hike makes 34 years in a row of consecutive dividend increases. This makes ExxonMobil a Dividend Aristocrat, which is a group of S&P 500 companies that have raised dividends for at least the past 25 consecutive years. The company’s dividend history is shown in the image below:
This is a great sign of ExxonMobil’s staying power. It continues to remain profitable and reward shareholders with rising dividends each year, even when times are tough.
Date Founded: 1903
CAGR Since June 1972: 8.6%
Ford Motor Company, like other major auto makers, is benefiting from a number of fundamental tailwinds.
Low interest rates and low gas prices over the past few years have boosted Ford’s bottom line. Last year, Ford earned $10.8 billion in pre-tax profit, which was up 45% from the previous year.
Once again, Ford’s flagship F-series pickup trucks were the best-selling vehicle in the U.S, a streak that has lasted 34 years in a row.
Ford then delivered its best quarterly performance ever by earning $3.8 billion in pre-tax profit in the first quarter. Ford has successfully expanded profit margins across multiple geographic markets.
Last quarter, Ford realized record margins in North America, and has achieved profitability in Europe for four consecutive quarters. Overall, Ford’s 9.8% automotive profit margin last quarter was its best ever. This year, Ford expects to generate profitability across all geographies except South America.
Investors are doubting whether Ford’s momentum can continue much longer. The fear is that rising interest rates and gas prices could make Ford’s recent growth unsustainable going forward. This pessimism is evident by the fact that Ford stock trades for a price-to-earnings multiple of just 5 (yes, just 5!).
For what it’s worth, Ford management expects 2016 to be another very strong year, with results at least comparable with last year.
If the company can maintain last year’s level of profitability, the company will likely approve another significant special dividend next year, in addition to its current 4.5% dividend.
In early 2016, Ford distributed $1 billion to investors as a special dividend, and reiterated its intent to continue paying special dividends if it generates enough profit.
Date Founded: 1908
CAGR Since November 2010: -0.8%
Like Ford, General Motors has benefited from fundamental tailwinds including low gas prices and low interest rates.
However, General Motors stock has not provided positive returns, even after emerging from bankruptcy. This was due largely to the faulty ignition switch scandal, which resulted in a $900 million penalty last year, and the after-effects of this have lingered ever since.
General Motors’ total revenue declined 2.3% last year, and sales are up only slightly since 2012. The good news is that the company has enjoyed some positive momentum so far this year.
GM earned $2 billion in first-quarter profit, more than double the $0.9 billion profit earned in the same quarter last year. Earnings per share, adjusted for one-time items, soared 47% year over year. Both earnings and profit margin set a record in the first quarter.
General Motors is improving both in the U.S. and abroad. North America generated record earnings last quarter, and the company broke even in Europe, reversing a $200 million loss in the prior-year quarter. Its stronger level of profitability, while not currently being appreciated by the market, means the company can return more cash to shareholders.
General Motors stock holds a cheap price-to-earnings ratio of just 4 based on both trailing and forward earnings per share, and it has a very high dividend yield of 5.0%.
The company raised its dividend by 5% this year. If its earnings continue to grow, the valuation multiple could expand. Combined with the dividend, General Motors could generate much higher returns than it did since 2010.
Date Founded: 1911
CAGR Since January 1962: 8.0%
IBM is a company in transition. For many years, IBM was a dominant player in technology hardware. But as growth and profitability in hardware eroded over the years, IBM was forced to shift focus to higher-growth areas.
It has done this by building its cloud, mobile, and big data businesses. While IBM’s turnaround has taken a long time to materialize—revenue has declined for 16 quarters in a row—it is gradually seeing signs of progress.
IBM groups its higher-growth businesses into a single unit called the strategic imperatives. Collectively, these businesses generated $29.8 billion of revenue over the past four quarters, and now represent 37% of IBM’s total revenue.
This is a good sign for IBM’s turnaround because these segments are growing at high rates. Last quarter, total cloud revenue soared 34% year over year. Mobile revenue nearly doubled last quarter, while revenue from security increased 18%.
IBM is not generating high levels of earnings growth, but the good news is it may not need to. Conceivably, IBM could still generate annualized returns at least on par with its average returns over the past 54 years if it simply keeps earnings intact.
IBM generated $14.92 in adjusted earnings per share last year, which is an implied 10% earnings yield based on IBM’s current share price.
IBM stock is very cheap. It has a price-to-earnings multiple of just 10, and a 3.6% dividend yield. IBM returned $9.5 billion of cash to investors last year, including $4.6 billion of share repurchases and nearly $5 billion of dividends. IBM has increased its dividend for 20 years in a row.
Date Founded: 1898
CAGR Since January 1970: 6.9%
International Paper is in a difficult transition period, but it has navigated a tough climate admirably. The stock is down 18% in the past two years, which has weighed on its cumulative shareholder returns, due to a structural change in the paper products industry.
Simply put, people aren’t using paper products, at home or at the office, nearly to the extent that previous generations did. The growth in online functions such as e-mail means less demand for paper products. In the boldest prediction of 2016, I believe computers are here to stay.
But International Paper has repositioned itself with a focus on streamlining itself to maximize profitability. The company has averaged $1.8 billion in free cash flow over the past five years, and last year’s earnings per share of $3.65 was its highest total in 20 years.
Furthermore, last year International Paper achieved 11% returns on capital, and it has marked six straight years in which it has generated returns on capital greater than its cost of capital.
It has improved its balance sheet to slim down and improve efficiency. For example, last year International Paper sold its 55% China joint venture, which removed $400 million from its balance sheet.
These efforts to reduce debt and cut costs have allowed International Paper to resume dividend growth. After slashing its dividend by 90% in 2009, during the depths of the financial crisis, International Paper has raised its dividend at double-digit rates for four years in a row.
The stock trades for a price-to-earnings multiple of 17, which is a slight discount to the S&P 500 Index, and International Paper offers a hefty 4.1% dividend yield, which is double the market average yield.
Date Founded: 1891
CAGR Since January 1970: 11.2%
Merck is a U.S. pharmaceutical giant. The company currently has a market cap of $158 billion. This makes Merck the 4th largest publicly traded health care corporation in the world according to Finviz.
It has oriented its portfolio towards biotechnology in recent years, and has made significant progress in emerging new therapeutic areas. The company’s product pipeline is shown below:
Source: Merck 2016 JP Morgan Health Care Conference Presentation
For example, last year Merck received expanded indications for melanoma and non-small-cell lung cancer drug Keytruda. It also received FDA approval for chronic hepatitis C drug Zepatier, and also for Bridion, an injection which helps reverse neuromuscular blocking agents during surgery.
Merck has had patent protection issues of its own, which is why it has also turned to acquisitions in addition to internal R&D. Worldwide sales last year were flat on a constant currency basis. Sales declined 6% including currency effects.
Merck is reshuffling its pipeline to focus on areas that the company deems will be higher-growth going forward, including cancer, hepatitis C, and Alzheimer’s disease. To invest more aggressively in these areas, the company has divested non-core assets, including the sale of its international ophthalmics business last year. Merck also sold its consumer care business to Bayer (BAYRY) in 2014, for $14.2 billion.
On the plus side, Merck still generates a lot of cash. The company is very shareholder friendly; it puts this cash to good use. Merck returned $9.3 billion to investors last year in combined dividends and share repurchases, and it increased its dividend by 2.2% in November. The company grew adjusted earnings per share by 2.8% last year.
Merck currently pays a $1.84 per share annual dividend, which amounts to a solid 3.1% dividend based on its June 27 closing price. Until sales and earnings return to stronger growth, Merck at least pays investors well to wait.
Date Founded: 1901
CAGR Since July 1986: 8.6%
Over the past year, Nordstrom’s returns have fallen well short of its average return over the past 30 years—the stock has lost half its value in the past 12 months.
The company has been caught up in the broader downturn in physical retail, brought on by the emergence of online retail, where Amazon.com (AMZN) has dominated.
Essentially, any product offered at department stores could be bought on Amazon, typically for a lower price tag. And, the other huge advantage for Amazon is that it offers the convenience of shopping at home, and Amazon also offers two-day shipping for subscribers of its Prime service.
Amazon’s revenue increased 22% in the fourth quarter last year, and revenue growth then accelerated to 28% in the first quarter 2016. As a result, it is easy to see why brick-and-mortar retailers are struggling.
Nordstrom’s earnings per share fell 64% last quarter. Earnings per share clocked in at $0.26 per share, which missed estimates by a huge amount. Analysts had expected $0.47 per share. Nordstrom’s same-store sales, a crucial metric for retailers that measures sales at locations open at least one year, dropped 1.7%. This was the first quarterly decline in comparable sales in seven years for Nordstrom.
Nordstrom is seeing a measure of success with its popular Nordstrom Rack off-price brand, but this was more than offset by continued weakness at its core Nordstrom banner.
The good news is that Nordstrom stock is cheap, and could be attractive for bargain hunters. The stock trades for a price-to-earnings multiple of 13, and it offers a 3.6% dividend yield.
Date Founded: 1906
CAGR Since July 1985: 13.9%
ONEOK is the General Partner and owns 41% of ONEOK Partners LP OKS, which owns and operates a major natural gas liquids system.
ONEOK has a huge asset base, which includes 55 billion cubic feet of natural gas storage capacity; 37,000 miles of pipelines; and 840,000 barrels per day of natural gas liquids fractionation capacity.
Natural gas prices fell significantly over the past two years, which established a significant headwind for Oneok. The very difficult climate caused revenue and earnings per share to decline by 36% and 22%, respectively, in 2015. One positive note is that, since Oneok is a midstream company, it is not as reliant on changes in commodity prices as companies in the upstream exploration and production segment. Oneok primarily operates fee-based contracts, meaning its assets collect fees based on volumes transported and stored.
Continued growth in volumes has kept Oneok profitable through the deep downturn in commodity prices. Natural gas and natural gas liquids volumes rose 18% and 6%, respectively, in the first quarter. Oneok’s earnings per share soared nearly 40% in the first quarter, from the same quarter last year. Another factor boosting earnings is that the company operates a high-quality network of assets and it can increase rates regularly. In the first quarter, Oneok raised its average fee rate in the natural gas gathering and processing segment by 23% from the previous quarter.
Oneok maintained a 1.3 distribution coverage ratio, meaning it generated 30% more cash flow than it needed to pay its first-quarter distribution. With a 5.2% dividend yield, which is significantly above the S&P 500 average dividend yield, it is critical for Oneok to generate enough cash flow to sustain its distribution.
Date Founded: 1849
CAGR Since June 1972: 12.0%
Pfizer is the world’s largest pharmaceutical company and has a long track record of rewarding shareholders. The company recently declared its 311th consecutive dividend, amounting to a streak of 77 years.
Pfizer’s financial performance over the past five years has been spotty. The company generated $61 billion in revenue in 2011, but sales have steadily fallen to $48.85 billion last year.
The major reason for this is generic competition. Pfizer lost patent protection on its flagship Lipitor cholesterol drug in that time period, which was significant for the company as Lipitor itself once raked in $10 billion in annual sales.
This means Pfizer is a company in transition. It has responded to its slowing growth by turning to acquisitions, both large and small, to replenish its pipeline. Pfizer bought Wyeth in 2009 for $68 billion, acquired Hospira last year for $17 billion, and recently bought Anacor Pharmaceuticals (ANAC) for $5.2 billion.
The core strategy of these moves is to boost growth quicker than the company could organically. If Pfizer were to pursue developing its own pipeline from scratch, it would be a very costly and time-consuming effort. Instead, Pfizer has decided it can simply buy growth to immediately grow revenue, and pursue earnings growth through cost synergies.
Management expects the growth initiatives it has employed over the past several years to finally see results this year. Full-year revenue is expected to grow to $49-$51 billion, which would represent the first year of revenue growth for the company since 2011.
While the company works to return to growth, it offers investors a hefty 3.3% dividend yield.
Date Founded: 1847
CAGR Since April of 2008: 13.3%
Philip Morris (PM) has compounded investor wealth at 13.3% a year since April of 2008 (the earliest price history for the company in Yahoo! Finance). For comparison, the S&P 500 generated a CAGR of 7.4% a year over the same period.
Philip Morris’ price history is cut short due to the split of Altria (MO) and Philip Morris in 2008. Altria controls the Marlboro (and others) cigarette brand in the United States, while Philip Morris controls international sales of the Marlboro (and other) cigarette brand.
The tobacco industry has been through well documented struggles. Cigarette consumption is slowly declining globally as more people prioritize long-term health over the short-term nicotine buzz of a cigarette.
This sounds like bad news for Philip Morris… And yet the company has absolutely trounced the market since 2008, generating returns of 13.3% a year for investors.
How is this possible?
For one, Philip Morris has the strongest cigarette brand in the world in Marlboro. The company is slowly gaining market share in many key global markets.
Also, the company is making efficiency gains and raising prices. Philip Morris is very shareholder friendly. The company repurchases a significant amount of its shares. Reducing share count, gaining market share, and increasing margins more than offset slow cigarette volume declines on an industry level.
Philip Morris stock currently has a high dividend yield of 3.9%. The company’s high dividend yield combined with expected earnings-per-share growth of around 7% a year going forward give Philip Morris shareholders expected total returns of 11%+ a year.
Date Founded: 1879
CAGR Since October 2001: 7.2%
Principal Financial Group is a diversified financial services company. It offers a wide range of products and services including insurance, retirement planning, and asset management.
As a financial institution, Principal’s earnings have been weighed down this year by low interest rates. First-quarter diluted earnings per share fell 10% year over year.
However, the company continues to generate high levels of profitability..
Last year, Principal increased earnings per share by 11%. This allowed it to raise its dividend by 8% in the first quarter this year after a 17% dividend increase last year. Principal also repurchased 5.5 million shares in 2015, further adding to its capital returns.
Last year, Principal closed on its $335 acquisition of AXA’s Hong Kong pension. This helped add to Principal’s growth last year, as did a 4% increase in fee income. These moves have helped the company continue to grow despite the prolonged period of low interest rates.
Principal appears to be an attractive choice for value and income, across several metrics. The stock is cheap, with a trailing and forward price-to-earnings multiple of 10 and 8, respectively. This is about half the valuation of the S&P 500.
In addition, the stock trades for 1.1 times book value and offers a 3.7% dividend yield. The stock is cheap, as investors have become more pessimistic of insurance stocks in general.
Still, Principal should have little trouble achieving its historical rate of return going forward. If it can simply increase earnings by 3% per year, it will return more than 7% a year after taking account of the dividend. And, any expansion in the valuation multiple would be a bonus.
Date Founded: 1837
CAGR Since January of 1970: 11.8%
Procter & Gamble (PG) has compounded investor wealth at 11.8% a year since 1970 (the earliest price history for the company in Yahoo! Finance). For comparison, the S&P 500 generated a CAGR of 10.3% a year over the same period.
Every $1 invested in Procter & Gamble in 1970 is worth $384 (if dividends were reinvested) today. The company is a wealth compounding machine.
Procter & Gamble has 21 brands that generate over $1 billion in annual sales. The table below lists many of the company’s well-known consumer brands by segment, along with sales and earnings numbers for fiscal 2015.
Procter & Gamble’s growth has stalled since 2008. The company had earnings-per-share of $3.64 in 2008. In 2015, earnings-per-share were just $4.02. Share repurchases were the only reason earnings-per-share did not decline. Revenue declined by 8.7% from 2008 through 2015. Net profit declined 4.5% over the same period.
Procter & Gamble’s weakness over the last 7 years is due to a lack of focus. The company has generated net profits of over $10 billion a year every year since 2007. This gives Procter & Gamble the ability to outspend its competition.
This competitive advantage is diluted when advertising spend is spread over too many brands. Procter & Gamble has shed its non-core brands in recent years. This bodes well for shareholders.
The company is now expected to earnings-per-share somewhere between 6% and 8% a year going forward. This growth combined with the company’s dividend yield of 3.1% gives shareholders expected total returns of between 9% and 11% a year going forward – close to the company’s long-term historical CAGR.
Date Founded: 1875
CAGR Since December 2001: 8.8%
Prudential Financial is a major financial services company, with more than $1 trillion in assets under management. Prudential is primarily an insurance company, engaged in life insurance, annuities, retirement products, and other investment services.
Insurance companies have an excellent business model. While most businesses have one main income stream, insurance companies make money in two ways:
- Prudential earns income by writing and collecting premiums
- And also by investing its large sums of accumulated capital
Similar to banks, insurance companies also rely on a wide net interest margin to increase profits. With interest rates near historic lows, Prudential has suffered with weak investment income.
Still, the company performed very well last year thanks to strong results in its core businesses.
Adjusted earnings rose 9% for the full year. Prudential saw growth across asset management, and ended the year with record assets under management. In addition, Prudential benefited from strong growth in life insurance policy sales and group insurance sales.
This demonstrates that insurance is a highly lucrative business. Prudential created shareholder value last year by increasing book value per share by 4%.
This growth allows Prudential to return significant amounts of cash to shareholders. Prudential increased its dividend by 21% last year and increased its share repurchase program by 50% for 2016, to $1.5 billion.
Prudential could generate very strong annualized returns for shareholders going forward.
The stock is very cheap—shares trade for a trailing and forward price-to-earnings multiple of 6 times—and the stock offers a 3.9% dividend yield.
Date Founded: 1903
CAGR Since January 1980: 12.8%
Public Service Enterprise Group is a diversified utility. It has shifted its business focus in recent years to regulated operations. For example, the regulated utility business now represents more than half of the company’s annual operating earnings.
This will continue going forward, as more than 70% of Public Service’s future capital expenditures are for its regulated industry. This focus on regulated operations provides stability, which is the primary goal of a utility.
Public Service is also diversifying its energy sources.
The company has made great strides in solar power generation. Last year, Public Service completed solar projects in California and Maryland, and acquired projects in Utah, Colorado, and North Carolina. In all, Public Service’s solar portfolio now comprises 16 utility-scale projects across 12 states, encompassing 277 megawatts of capacity.
Public Service has generated excellent returns for shareholders over the long term, thanks to its earnings and dividend growth.
Last year, the company grew earnings per share by 5.4%, after 7% earnings growth the year before. Public Service has grown earnings per share for three years in a row.
Along with its earnings growth, the company raises its dividend regularly. Public Service increased its dividend last year, which was the 12th raise in the past 13 years.
Public Service pays a $1.64 per share annualized dividend which results in a 3.6% dividend yield, and the dividend is likely secure. The company maintains a manageable 53% dividend payout ratio as a percentage of trailing 12 month earnings per share.
Date Founded: 1902
CAGR Since April 1983: 12.0%
Target has generated double-digit returns for decades on end. It has been very successful in creating wealth for its shareholders.
In recent years, however, the company hit some significant bumps in the road that it is still trying to recover from. In December 2013, Target announced it had been hacked, and millions of holiday-season shoppers’ personal information was exposed.
This resulted in a major public relations headache and Target suffered falling sales over the following year. Target’s problems were exacerbated by its ill-fated expansion in Canada. Target experienced success initially, but Canadian consumers simply did not adopt the Target concept. Target closed all of its 133 Canadian stores in 2015, a venture that cost the company $2 billion.
The good news is that shoppers eventually gravitated back to Target, and the company helped itself by investing in its digital capabilities.
Last year, Target grew comparable sales and adjusted earnings per share by 2% and 11%, respectively. Sales growth was led by Target’s e-commerce platform, which posted 34% revenue growth in the fourth quarter.
Target has done well to start 2016, even though the retail climate has been tepid so far this year. Target’s comparable sales rose 1.2% last quarter, which is commendable as many retailers are seeing comparable sales fall this year. Adjusted earnings per share jumped 16% last quarter, thanks to 23% growth in e-commerce sales.
Target is a Dividend Aristocrat, having raised its dividend each year for the past 45 years. It has an incredible track record of steady dividends—Target has paid 196 quarterly dividends without interruption.
Setbacks have made the company relatively cheap on a historical basis. Target’s dividend yield is near all time highs.
The company’s current dividend yield is 3.3%. Now is a good time to buy into this high quality Dividend Aristocrat. Target’s mix of growth, dividends, and safety makes it a favorite of The 8 Rules of Dividend Investing.
Date Founded: 1897
CAGR Since June 1972: 9.6%
Dow is in a difficult period, due to the downturn in the agriculture and commodities sectors. The company suffered a 16% drop in revenue last year.
However, the company managed to grow adjusted earnings per share by 12%, thanks to cost cuts and stock buybacks. Dow repurchased $2.7 billion of its own stock in 2015.
Even though growth has slowed due to the slowdown in global economic growth, Dow remains consistently profitable with high returns on capital. The company generated $7.5 billion in operating cash flow last year. It expanded return on capital by 130 basis points for the year, to 12.1%.
Dow’s major growth catalyst going forward is its pending $130 billion merger with Dupont (DD). By combining the two chemicals giants, it will create an industry behemoth with $90 billion in annual revenue. And, as is typical in these types of mega-deals, the two companies will likely realize significant cost synergies to boost future earnings growth.
Dow has made a number of moves in recent weeks to expand the projected savings. The plan is to merge with Dupont and then split into three independently-traded companies, in the agriculture, material science, and specialty products markets.
Dow expects to generate $3 billion in cost synergies from the merger, along with $1 billion of what the company terms ‘growth synergies’, which are additional cost-cutting measures.
Dow Chemical stocks is cheap, with a price-to-earnings ratio of 9. And, the stock pays a $1.84 per share dividend which yields 3.7%.
Date Founded: 1852
CAGR Since June 1972: 13.5%
Wells Fargo is one of the country’s biggest banks—it’s the nation’s biggest mortgage originator. As such, it is tethered to movements in U.S. interest rates.
The continued low-rate policy employed by the Federal Reserve, to boost economic growth, has had a distinctly negative effect on Wells Fargo.
When rates are low, Wells Fargo makes less money on the difference between interest paid on deposits versus the interest earned on longer-dated loans. This is referred to as net interest margin. The prevalence of low rates has caused Wells Fargo’s net interest margin to contract, and its valuation multiple has followed suit.
For example, last year Wells Fargo generated $86 billion of revenue and $23 billion of profit. Revenue and earnings per share grew just 2% and 1%, respectively, from the prior year. In light of disappointing U.S. economic data, the Brexit vote in 2016, and the likelihood that interest rates will remain low for an extended period, investors have become increasingly bearish on the financial sector.
While low rates slow growth in the company, Wells Fargo is still performing well relative to peers.
Despite this, pessimism has pushed down Wells Fargo’s valuation to a price-to-earnings ratio of just 10. In addition, Wells Fargo’s dividend yield has been elevated to 3.2%.
But these levels could represent a great buying opportunity for long-term investors.
While the short-term environment could continue to be difficult, with periods of major volatility, it stands to reason that interest rates will rise over the long term. Rates are at historically low levels, and despite geopolitical risk rearing its ugly head once again, the U.S. economy remains on a fairly firm track of modest growth.
If and when rates do rise, it will be a significant tailwind for the U.S. banking industry, and in particular Wells Fargo.
Date Founded: 1851
CAGR Since October 2006: 1.4%
The Western Union Company revolutionized the financial technology industry by enabling cross-border payments. It is now a global leader in its industry, with the capability to move money in 130 currencies and a presence in 200 countries and territories across the world.
That being said, the stock has not performed well over the past several years, because growth has slowed considerably.
Western Union’s revenue is virtually unchanged over the past five years. Western Union generated $5.4 billion in 2015, and the same amount in 2011. In that time, it has successfully grown earnings per share from $1.57 in 2011 to $1.67 last year, due primarily to share repurchases.
Still, Western Union is highly profitable and generates significant cash flow. The company’s operating cash flow was $1.1 billion last year, of which it returned $817 million to shareholders in share repurchases and dividends.
If the company can return to revenue growth, it could receive a higher valuation multiple. In order to accomplish this, Western Union is investing in new technological capabilities to capture growth in emerging areas of financial technology, such as mobile payments.
A major part of this growth strategy involves further expansion in emerging markets. To that end, last year Western Union signed an agreement with Mexico’s Grupo Financiero Banorte’s UniTeller network that allows consumers to send money directly to more than 60 million bank accounts in Mexico.
Western Union is an attractive stock pick for value and income, at a price-to-earnings ratio of 12.2 and a 3.3% dividend yield.
Western Union has not performed well over the past decade. However, future returns could be fairly strong, given the cheap valuation and high dividend.
Date Founded: 1900
CAGR Since May 1973: 6.6%
Weyerhaeuser is a real estate investment trust, or REIT, which focuses on timber-related properties including timberlands and wood products. It owns and operates nearly 7 million acres of timberlands, mostly in the United States.
As a REIT, the stock is an attractive choice for income investors, as REITs are required to distribute at least 90% of their cash flow. Weyerhaeuser stock currently pays a $1.24 per share dividend, which yields 4.0%.
But Weyerhaeuser has had a difficult period in recent years. To an extent, it is suffering from the same headwinds as International Paper—lower demand for paper products. Last year, Weyerhaeuser’s earnings, adjusted for one-time items, decreased 17%. Business conditions have not improved to start 2016—diluted earnings per share fell 35% in the first quarter, year over year.
In response, Weyerhaeuser has turned to merger and acquisitions activity to reposition itself for future growth. It merged with Plum Creek Timber, and it after a lengthy period of evaluating strategic options for its cellulose fibers business, the company sold the business to fellow blue chip stock International Paper for $2.2 billion.
The changes in the company over the last several years are shown in the image below:
This was one of the company’s worst-performing business segments. Due to falling prices for pulp, lower sales volumes, and higher maintenance costs, the cellulose business lost $20 million in the fourth quarter last year. While the business returned to profitability in the first quarter, sales fell 10% from the fourth quarter.
The company has aggressively cut costs to boost profitability, which allowed Weyerhaeuser to raise its dividend by 7% last year.
Date Founded: 1908
CAGR Since December 1981: 9.2%
Williams Companies is a large energy company operating in the midstream business. Midstream companies own and operate oil and gas transportation and storage assets including pipelines and terminals. The company operates more than 13,000 miles of natural gas pipelines in the U.S.
Williams has had a brutal year, due to the downturn in commodity prices, as well as its failed $33 billion merger attempt with Energy Transfer Equity (ETE). On June 24, a Delaware court judge ruled that Energy Transfer Equity could terminate the merger agreement.
Williams’ stock is down more than 60% in the past year as its fundamentals have deteriorated. The chart below is not pretty:
In 2015, Williams reported a net loss of $557 million, which completely reversed a $2.1 billion profit from 2014. Last year, Williams’ dividend coverage ratio fell below 1.0. The previous year, its dividend coverage ratio was 1.2 times.
Unfortunately, the company’s fundamentals continued to erode to start 2016. Williams reported a net loss of $65 million in the first quarter, compared with a $70 million net profit in the year-ago period. Williams’ dividend coverage deteriorated once again, to 0.89 times in the first quarter.
Williams has a sky-high dividend yield of 12.4% based on its ~$22 stock price.
However, this is because the stock price has collapsed, and not because of underlying dividend growth. This is an important distinction, as a sky-high dividend yield is often a sign of trouble. Williams Companies may currently be a blue chip stock thanks to its history, but the company is a high risk investment.
Investors should be aware that the company is losing significant amounts of money, and since no company can operate at a loss forever, there is a distinct risk that the current dividend is unsustainable.
Date Founded: 1909
CAGR Since September 1985: 10.1%
Xcel Energy is a diversified electric utility. It generates power from a wide range of energy sources, including fossil fuels such as coal, but also nuclear and natural gas, as well as renewable forms of energy such as solar, wind, and biofuels. It offers electricity service to 3.5 million customers and natural gas service to 2 million customers across 8 U.S. states.
The company has a profitable business and generates steady growth.
Last year, Xcel grew core earnings per share by 3%. Going forward, management has set a goal of 4%-6% growth in annual operating earnings, 5%-7% dividend growth each year, and a target dividend payout ratio of 60%-70%.
Last year it achieved success on many of these fronts. 2015 was the 11th consecutive year in which the company met or exceeded its internal forecast. In addition, Xcel raised its dividend by 6% in 2015, representing the 12th consecutive year of a dividend hike.
Xcel Energy has generated double-digit annualized returns over the past 30 years.
Going forward, its returns will be heavily comprised of dividends. The stock has a $1.36 per share annual dividend, which offers a 3.1% current dividend yield. Xcel may not be able to generate enough earnings growth to continue rewarding investors with double-digit returns.
And, expansion of Xcel’s valuation multiple is doubtful. The stock currently trades for a trailing and forward price-to-earnings multiple of 21 and 19, respectively. As a result, prospective investors may want to wait for a better buying opportunity before initiating a position.
Date Founded: 1906
CAGR Since January 1977: 3.3%
Xerox has generated subpar returns over the past 39 years, due to the structural erosion of its core business. The company’s history makes it a blue chip stock, but its future growth is far from guaranteed.
Workplace based electronics like printers and fax machines are not used nearly to the extent they used to, as a greater percentage of work is done over the Internet. This has caused a deterioration in Xerox’s sales and profit for an extended period.
For example, Xerox generated $22.8 billion of revenue and $1.08 in adjusted earnings per share in 2011. Five years later, and the company is still in decline.
Last year, Xerox generated $18 billion of revenue and $0.98 per share in earnings. From 2011-2015, revenue and earnings per share declined 21% and 9%, respectively. Revenue has declined every year since 2011.
A centerpiece of Xerox’s turnaround is that it will split itself into two separate, publicly traded entities, by the end of 2016. It will split the document technology business from the business process outsourcing business.
Management believes that separating the two businesses will allow each team to more efficiently focus on their unique client needs. The rationale is that the two independent companies could collectively receive a higher valuation multiple than the single entity does today.
An overview of the split businesses is shown below:
Source: Xerox New Path Forward
Indeed, Xerox stock trades for a forward price-to-earnings multiple of 8.5 and offers a 3.3% dividend yield. If the company is able to successfully return to growth, the stock could handsomely reward investors who are buying at these levels.
However, this is not guaranteed. Splitting the company up into two pieces won’t change the core issue, which is the decline in printing and related equipment. Xerox’s total revenue declined 4% in the first quarter, primarily because revenue fell 10% in the document technology business.