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Stock Screen: Stocks with Low Risk - October 5, 2011
Investors can usually find stocks with low risk or stocks with strong expected relative price performance fairly easily. The challenge comes when you want to combine these two features, as the presence of one attribute often means that a stock lags in the other. In this screen, however, we seek to combine the best of both worlds, and search for issues that meet both of these criteria. To generate our list, we first required that all stocks be ranked 2 (Above Average), or higher, for Safety and 3 (Average), or better for Timeliness (i.e., relative price performance in the year ahead), two of Value Line’s many proprietary ranks. Then, to further reduce the relative collective risk that is usually associated with stocks that offer high returns, we limited our cut to equities with a Price Stability Index (another one of Value Line’s proprietary measures) in the upper 10% of our universe (the Index runs from 5 to 100, with 100 being the top score). Finally, we required that each stock pay a meaningful dividend, with a floor set at a yield of 2.1%. Not surprisingly, equities arising from this screen are largely considered defensive in nature, and our list is dominated by established and conservatively run companies, including Becton, Dickinson (BDX), Colgate-Palmolive (CL), and Stanley Black & Decker (SWK)
Becton, Dickinson and Co. is a medical technology company serving healthcare institutions, life science researchers, clinical laboratories, industry, and the general public. Its three segments, in descending order of size are: Medical (manufactures a broad array of medical devices; Diagnostics (collects and transports diagnostic specimens); and Biosciences (produces research and clinical tools). Annual sales for the year ended September 30, 2011 were likely around $7.8 billion.
The trailing ten- and five-year average annual earnings per share increases are 6% and 12.5%, respectively. Recently, sales of pharmaceutical systems, diabetes care products, reagents, and medical instruments have all been quite strong. Value Line analyst Erik A. Antonson expects the company to post a mid-teens earnings advance for fiscal 2011. Too, the dividend has increased in each of the past 15 years, and the current yield is a respectable 2.3%.
Becton, Dickinson enjoys impressive scores for Financial Strength, Stock Price Stability, and Earnings Predictability. The stock is trading near the low end of its 12-month trading range. Based on estimated earnings for the year just under way, the P/E ratio is below historical norms.
Colgate-Palmolive, whose annual sales are running at about $17 billion, makes claim to 44.7% of the global toothpaste market. It sells products in over 200 countries and territories, generating 75% of revenues outside the United States. The company’s major brands include Colgate toothpaste, Palmolive cleansers, Ajax, Fab, Murphy, Mennen shave cream, and Hill’s pet food.
This consumer products stalwart has a stellar long-term record of annual earnings and dividend increases. Market-share gains in the toothpaste and toothbrush categories helped CL report a 30% year-over-year bottom line advance in the first half of 2011. Its expansion in foreign markets, particularly Latin America and Asia, should continue for the foreseeable future. Recent product introductions, such as Colgate Optic White toothpaste (removes stains and whitens teeth in one week), also augur well for near-term revenue and earnings performance.
CL has held up quite well in the midst of the recent market downturn as a relatively low beta is proving advantageous. Sizable free cash flow —estimated at $1.2 billion for 2011— is surely helping matters, and can easily maintain the company’s ongoing stock-repurchase program, which also benefits share earnings. Meanwhile, the current dividend yield is healthy at 2.6%.
Stanley Black & Decker
Founded in 1910, Stanley Black & Decker is a global manufacturer of hand tools, power tools, accessories, and mechanical access devices. The Security Solutions unit (about 25% of sales) provides access and security systems. Ongoing (and plentiful) annual product introductions are a key factor behind the company’s very strong sales and earnings rebound following the poor recession-related results of 2009. This year’s product launches include a variable-speed self-propelled cordless mower, a lithium ion pruning saw, a pivoting paint roller, and an all-in-one laser level.
The just-completed acquisition of Sweden-based Niscayah for $1.2 billion (including debt assumption) has considerably bolstered the company’s security business. Niscayah, is one of the largest access control and surveillance solution providers in Europe. Its profit contributions, augmented by the potential for $80 million per annum in cost synergies, augur well for solid earnings growth in both of the next two years.
This stock has a favorable Safety rank. The current dividend yield of 3.1% is above the historical norm, with the reverse being true for the P/E ratio. Moreover, the already solid capital structure stands to improve meaningfully by mid-decade.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.