Fundamental Principles
Many investors make the mistake of looking for stocks that are down sharply as if they were goods that had been marked down for bargain sales. Stocks are subject to more variables affecting their prices than even out of season women’s fashions or day old bread. They are also subject to fluctuations from exaggerated investor sentiment.
Within a statement on his commitment to enhancing life through giving, Warren Buffett said that his “wealth has come from a combination of living in America, some lucky genes and compound interest.” He noted that our economy “rewards someone who saves the lives of others on the battlefield with a medal, rewards a great teacher with thank-you notes from parents, but rewards those who can detect the mispricing of securities with sums reaching into the billions.”
His advice is always worth considering and I remind readers that charitable lending is available at www.kiva.org. This site groups $25.00 individual loans into small loans to entrepreneurs in the developing world. I have enjoyed participating and all my loans have been repaid in full.
Looking for mispriced securities turns up a promising bunch of blue chip, dividend-paying stocks in large companies trading at quite reasonable valuations. Why these values exist is unclear. This may stem from investors trying to recoup past losses too quickly by diving into the more publicized stocks being talked about by the media or through stepped up selling of these highly liquid securities by holders needing funds.
For whatever reason, buying on relatively low stock valuations during the early stages of a business recovery has proven rewarding in stock market history. This should be even truer in the existing record low interest rate environment. 3M Company (MMM-$87), for example, has increased sales and earnings mildly during the recession but is forecast to hit $5.75 earnings per share this year, an increase of over 20%. It yields 2.4%. To get this yield on a certificate of deposit today, a five-year commitment is needed. Moreover, 3M has increased its dividend for 51 straight years.
Yes, we might slump into a second recession and “the Rockies may crumble” but 3M’s dividend is here to stay. DuPont (DD-$41) is a little more aggressive with a more cyclical customer base. It yields 4% and should hit $3.00 a share earnings for the full year, a bigger jump and an even more modest valuation on earnings.
United Technologies (UTX-$72) is growing on improving business conditions with its jet engines, Carrier and Otis divisions and on government spending for aerospace and helicopters. Yield is 2.2% with 16 consecutive years of dividend increases. Its earnings have been stable and this year will see around $4.71, another reasonable value. This company continues strong research spending into innovative products like an unmanned version of its Black Hawk helicopter.
With painful unemployment levels persisting, consumer stocks demand caution. Clorox (CLX-$64) has been a steady performer in difficult times. Earnings will be around $4.25, up 7%. Yield is 3.4% on a dividend recently increased for the 33rd. straight year.
Sigma-Aldrich (SIAL-$57) and IBM (IBM-$130) have the smaller dividend yields (1-2%) typical of technology companies but excellent histories of dividend increases. The diversified engine lineup from Cummings (CMI-$80) is powering it to the largest cyclical pickup in this report. Earnings are soaring as orders for big trucks resume after deferral during the recession. Increasing business spending this fall will power the overall market; stocks like these will provide rewarding leadership as their prices move toward normality.