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Stock Screen: Income Stocks with Worthwhile Total Return Potential - November 2, 2011
This screen focuses on stocks with good current dividend yields that have average or better prospects for relative price performance over the next three to five years. This combination should result in a group of stocks with worthwhile total return potential, such as Hasbro, Inc. (HAS), General Dynamics Corp. (GD), and Foot Locker, Inc. (FL).
In the first two steps of the selection process, we limited the field to equities ranked 3 (Average), or better, for Safety and Timeliness (i.e. relative price performance over the coming six to 12 months), two of Value Line’s proprietary metrics. Next, we pared our universe with respect to income generation. We selected issues with current dividend yields (based on pricing from The Value Line Investment Survey that went to press on November 4, 2011 of at least 3.0%, and projected 2014-2016 dividend yields were pegged to be at least 2.0%. At that point, equities with three- to five-year projected price appreciation of less than 60% were cast aside. We then selected the remaining issues with a projected average annual total return to 2014-2016 (price gains plus dividends) of at least 10%, which is quite favorable in light of the fact that we may experience a period of lower economic growth with a reduction in available investment returns. Finally, to be included in our list, a company had to have a Financial Strength rating of B or better, and a recent stock price of at least $10 a share.
General Dynamics Corp.
General Dynamics offers a broad portfolio of products and services in business aviation; combat vehicles, weapons systems and munitions; military and commercial shipbuilding; and communications and information technology. The company drives growth through product development, attracting new customers, and identifying acquisition opportunities in adjacent markets. General Dynamics operates through four business groups: Aerospace (Gulfstream brand mid- and large-cabin business jet aircraft), Combat Systems (combat vehicles, battle tanks, munitions, rockets and gun systems), Marine Systems (nuclear-powered submarines, surface combatants, and commercial ships), and Information Systems and Technology (mobile computing solutions, information assurance and encryption technologies, and automated network management solutions).
The company saw earnings advance a healthy 8% in the September quarter. It secured orders for 35 Gulfstream jets during this time frame and its current $18 billion backlog should keep the unit at full operating capacity for the foreseeable future. Although there has been speculation that weaker demand for tanks and combat vehicles may eventually materialize as a consequence of the U.S. government cutting approximately $350 million from the defense budget over the next 10 years, we think strong demand from a number of Asian and Middle Eastern countries will partially offset this trend, leading to very respectable risk adjusted total return potential out to mid decade. The Marine business should also be a meaningful bottom line contributor in the years ahead, as contracts were recently signed to produce two Zumwalt ships, and the manufacturing of two Virginia Class submarines is progressing well.
The company’s 3.2% dividend yield is significantly above the Value Line average. Too, this equity’s high marks for Earning’s Predictability and Stock Price Stability may interest more risk-averse investors.
Foot Locker, Inc.
Foot Locker is a leading global retailer of athletic footwear and apparel operating in two segments— Athletic Stores and Direct-to-Customers. The Athletic Stores segment is one of the largest athletic footwear and apparel retailers in the world; its formats include Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Footaction, and CCS. The Direct-to-Customers segment sells merchandise through catalogs, mobile devices, and websites. As of January 29, 2011, it operated 3,426 primarily mall-based stores in the United States, Canada, Europe, Australia, and New Zealand.
Thus far, 2011 has been a banner year for the company despite a difficult consumer spending environment. Indeed, same-store sales advanced a lofty 11.8% in the July quarter, which we attribute to new styles of running and basketball shoes. According to management, FL kept the momentum going in the October interim, thanks to mid-single digit private label comps during the back to school selling season. The NBA lockout raises some concerns over near-term basketball shoe demand, but Value Line Analyst Steven Shnayder is cautiously optimistic that the effect won’t be as severe as some investors are speculating.
The company’s CEO of two years Ken Hicks has ambitious goals for the operating margin over the next three years. He thinks that lower SG&A expenses, expansion in the higher-margined direct to customer business, as well as increased sales per square foot will be the primary drivers. If recent impressive margin results are any indicator, the company should be able to achieve its goal. This ought to contribute to the solid long-term total return potential we currently project. And, the 3.0% dividend yield is quite respectable.
Hasbro is a leader in children’s and family leisure time products and services. The company’s offerings include a broad variety of games, such as traditional board, card, and hand-held electronics. Toy offerings are comprised of boys’ action figures, vehicles, girls’ toys, plush products, preschool toys and infant products. Hasbro uses movie and television programming associated with its brands to re-invent products and drive sales. In addition, it licenses certain trademarks, characters and other property rights to third parties for use in connection with films, digital gaming, consumer promotions, and for the sale of non-competing toys. Major owned brands include Transformers, Playskool, NERF, My Little Pony, G.I. Joe, Tonka, Milton Bradley, and Parker Brothers, as well as licensed toys and accessories for Star Wars, Marvel¸ and Sesame Street.
Hasbro is coming off a strong September quarter where revenues and net income advanced 5% and 10%, respectively. Strength from its lineup of Transformers: Dark of the Moon action figures and toys was a driver, and we expect strength to continue due to the recent Blu-ray DVD release, new global animated television series, and more licensing partnerships. Sales of NERF products were strong overseas and a re-launch of its Vortex line of footballs ought to boost holiday sales in the United States. Also, although somewhat lesser known among the investing community, Beyblade products (A Japanese cartoon featuring groups of kids who battle one another using highly powerful spinning tops called "Beyblades") are selling exceptionally well around the world. Lastly, newly licensed Sesame Street products including Let’s Rock Elmo ought to prove successful in the December quarter.
We expect the momentum to continue into 2012 thanks to movie releases from Marvel: Spider Man 4 and The Avengers, as well as Hasbro’s own Battleship and GI Joe 2 films, and significant international expansion via direct distribution agreements in Brazil, Russia, and China. Beyond 2012, the company’s total return prospects appear bright as more of Hasbro’s intellectual property is used for major motion picture releases including Risk, Candy Land, and Stretch Armstrong. This should also benefit margins to a degree, as these agreements are very lucrative. Further, the company generates healthy free cash flow, pays a respectable 3.2% dividend yield, and receives high marks for Safety, Stock Price Stability, and Earning Predictability, largely due to its diversified product lineup, expanding global presence, and highly valued brands.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.