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Stock Screen: Stocks with Low Risk - May 21, 2012
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 equities be ranked 1 (Highest), for Safety and 2 (Above 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 in the upper 10% of our Universe. Finally, we required that each stock pay a meaningful dividend, with a floor set at a yield of 2.1%. A complete list of companies meeting these criteria is displayed below. Subscribers can click on the names of the companies for quick access to full page Value Line reports. From this list, we have chosen to highlight Anheuser Busch Inbev Sa Nv (BUD) and Abbott Laboratories (ABT).
Anheuser Busch Inbev Sa Nv
Anheuser-Busch InBev N.V. is the world’s largest brewing company. It produces, markets, distributes, and sells a portfolio of over 200 beer brands, including Budweiser, Stella Artois, Beck’s, Leffe, Hoegaarden, Skol, Bud Light and Brahma. The company’s operations are headquartered in Leuven, Belgium, but span the globe. Indeed, 2011 sales breakdown was as follows: North America, 39.2%; Latin America North, 29.5%; Latin America South, 6.9%; Western Europe, 10.2%; Central & Eastern Europe, 4.5%; Asia Pacific, 5.9%; Global Export & Holding Companies, 3.8%.
The profits continued to flow at BUD in the first quarter, with the company handily exceeding expectations on the way to posting 74% share-net growth. Increased sales in the United States helped the top line advance nearly 4%, as did strength in Latin America and Asia. However, the strong earnings performance was mainly attributable to lower financing costs and taxes. The latter was a result of a bigger footprint in countries like Brazil, which tend to be subject to lower taxes than the U.S. and Europe.
Value Line analyst Richard Gallagher sees no reason why the momentum should stop anytime soon. He expects new product introductions to help drive continued top-line success, while cost-saving initiatives aid margins. Strong cash flow generation, meanwhile, ought to continue to be a boon in the acquisition game, allowing for the construction of new breweries, and enabling management to stay focused on improving the balance sheet, thereby further reducing future interest expenses.
Gallagher’s cash flow expectations not only support the company’s growth prospects, but also suggest risk is relatively low. We expect the dividend yield to remain above average going forward thanks to healthy annual increases. This ought to help limit the downside risk of this stock, which is already ranked favorably for both Safety and Price Stability.
Abbott Laboratories engages in the discovery, development, manufacture, and sale of health care products worldwide. It has a wide product assortment, but operates through four primary segments: Pharmaceutical Products develops, manufactures, and sells a broad range of adult and pediatric prescription pharmaceuticals; Diagnostic Products makes diagnostic systems and tests for blood banks, hospitals, labs, physicians’ offices, etc.; Nutritional Products offers a wide range of adult and pediatric nutritional products; Vascular products has coronary, vessel-closure, and endovascular devices.
The company edged past healthy expectations in the first quarter, thanks to continued strength from its anti-inflammatory drug Humira and recent cost-saving measures. The drug has received EU approval for its use in treating ulcerative colitis, and is being considered in other treatments. Either way, a vast pipeline and ongoing cost cutting ought to result in solid earnings gains going forward.
Risk-averse investors ought to like what they see here. The stock gets impressive ranks for Safety, Price Stability, and Financial Strength. Abbott not only has an attractive pipeline, but deep pockets as well. Strong cash flow ought to continue to benefit shareholders, with solid annual dividend hikes as a main attraction. The proposed split into two separate companies should result in investors receiving shares of stock in both entities.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.