I have no idea if we're in a recession, heading for one or just bumping along. But, there is no doubt we've got a softening economy with some real problems in real estate and finance. In this environment, I believe it's prudent to have some defensive positions in a portfolio. Those would be stocks that have a safe dividend yield to put a floor under the stock price and pay you while you wait along with a business model that works no matter what the economy does. I put a few of those names in my portfolio for SLO1 and wanted to look for some others.

As those familiar with my blog entries know, I like dividend paying stocks. In an earlier blog, I wrote a little about screening for stocks that pay dividends comparable to current treasury yields, have actual earnings, and predicted earnings growth going forward. That screen (and comments from Armin) turned up a large pool of stocks for further research. I haven't completed that sifting, but did come up with a name from the consumer goods sector worth considering.

Conagra (CAG) is a packaged food company. Perhaps the definition of a business model that doesn't depend on where we are in an economic cycle. CAG produces a number of brands you probably have in your kitchen, Chef Boyardee, Orville Redenbacher's, Hebrew National, Libby's, Blue Bonnet, LaChoy, Hunt's, Wesson and others. They also produce private label brands. I think that's a key element in a soft economy, people will still need groceries, but if the budget is tight, the private label brands are likely to find a place in the shopping basket over pricier name brands.

CAG sells at a forward PE of about 13. Analysts estimate 8.2% earnings growth going forward for the next five years, not stellar but respectable if the economy continues to weaken. The dividend yield based on the 28 Jan close is 3.5%, about the same as a 10-year treasury. The payout ratio of 44% leaves some cushion and room to raise the dividend going forward. The current stock price of $21.35 is near the bottom of its 52-week range. The company has a market cap of $10 billion, $128 million of cash on hand and $3.7 billion of debt. The debt level is higher than I'd like, but with solid earnings, the CFO should be able to find some ways to reduce interest expenses as the Fed continues to slash rates.

Competitors include names like Kraft, Heinz, Campbells, General Mills and Kellogs - and all of them may be worth a closer look as well. CAG trades at a discount to most of its competition, but also has slightly lower projected growth than most of them. The dividend yield is one of the highest in the sector and would be an attractive alternative to treasuries for income investors.

Risks include higher commodity prices that could be difficult to pass along to consumers. Although, my limited grocery shopping experience would indicate food companies are passing those costs along just fine. And, if we do tip into recession, lower oil prices would also bring lower food commodity prices since crop-based biofuels essentially link grain prices to energy prices.

This isn't the kind of stock that's going to double over the course of our contest and isn't a good choice for someone who's swinging for the fences. But, it shouldn't get hammered too badly if we continue into a bear market and the dividend yield should take some of the sting out of a tough market.

I haven't added this to my sloport yet, but am watching for an opportunity to redeploy cash if any of the falling knives I tried to catch ever bounce.

Disclosure: I don't have a position in CAG.

For my friend DuffBeer, this blog entry written while enjoying a nice California Zinfandel - Chateau Souverain 2003 :)

Comments: View Comments |  Tuesday January 29, 2008  |  Stocks: CAG,

This morning AT&T released a good earnings report; in line with analysts estimates; double digit year over year earnings growth after one-time charges and the stock loses over 2.5% on a strong up day???

I read through a transcript of the earnings call - strong wireless growth, lots of new subscribers, low churn rates; margins are expected to expand going forward, forward revenue and earnings guidance reiterated, continuing with the stock buyback, on or ahead of schedule in lowering costs after the Bell South merger. Expectations for 2008 are mid-single digit revenue growth and double-digit growth in adjusted earnings per share.

Basically, I didn't see anything negative in the conference call transcript. I did find an Investor's Business Daily report that states, "Despite AT&T's solid wireless results, some Wall Street analysts are betting on a slowdown in 2008, partly because of the phone company's geographic makeup."

At today's closing price of 35.75,it trades at 11.24 times forward earnings estimates and the stock's dividend yield is 4.4% with a payout ratio of 73%. With a two-year treasury yield at 2.3% and the ten-year at 3.7%, there's a pretty substantial discount in T's stock price. With a safe dividend, growing revenues and earnings, on-going share buyback and a strong track record of raising the dividend, I don't see any reason T's share price should trade at these levels. I still believe the stock is a buy below 40 and could easily trade up to the mid-50's if they continue to hit estimates. I've pitched T as a good buy a couple times over the past month or so at higher prices, it looks even more attractive now that the market's put it at a deeper discount.

I added to my sloport position in T today and have been adding to my real account on dips at these levels.

Thanks for reading, comments welcome.

ETA: Link to Forbes article with similar opinion

Comments: View Comments |  Thursday January 24, 2008  |  Stocks: T,

I've done a little tinkering with my sloport since the end of round one. Mostly trading around positions and easing cash into the market - a.k.a. catching falling knives. Good news is I'm beating the S&P, bad news is NAV has dropped below par.

I cashed out my Rocky Mountain Chocolate Factory position at a loss, they reported a weak quarter and seem like the kind of discretionary company that will have trouble in a soft economy.

The market hammered Graham Corp (GHM), my biggest winner from round one, down to an attractive buy point. I closed out near 60 in late Oct on a run-up after a blow-out quarter. The company has since split 5-for-4 and is trading in the low 40's, a nice discount to where I sold out. They make heat exchangers and similar equipment for refiners, oil sands operations, etc. Fwd PE is a little pricey at 21, but growth has been strong. I think this company is a buy below 45 and, if they continue the trend of strong earnings reports, the stock could trade up to the mid-50's / low 60's.

I've done a little more work researching divvy payers, but haven't had time to dig down enough to make any picks. A few that look pretty attractive so far are MCD, GE and CAG. If I ever finish the screening and research, I'll write up the results.

In my real portfolio, I've put some cash to work over the last few days. Added a little bit to WFC at 27, RIG in the low 128's and opened a small position in BUD in the low 51's. Still have some dry powder in reserve.

Wells has been painful over the past several months, but the quarter they just reported showed increasing revenues, enough earnings to easily cover the dividend and continued good management. Still some ugliness ahead, but as long as the dividend looks safe, it's tough to see it dropping from here (famous last words).

RIG - what's not to like at this price, oil companies will need to keep going to deeper water for new finds, that demand will keep dayrates going up, and RIG is king of deepwater drilling. If they maintain the current PE and meet earnings estimates, the stock will be near 170 by year-end.

Don't know if Duff drinks any of BUD's stuff, but it seems to have a floor just under 51 and pays a dividend about equal to treasuries after taxes.

I've decided to continue into SLO-2 in the 'long term' category. Looking forward to trading comments with friends from round one and making new friends in round two.

Comments: View Comments |  Wednesday January 16, 2008  |  Stocks: BUD, CAG, GE, GHM, MCD, RIG, WAG,

Thought I'd keep blogging occasionally even tho' SLO-1 has wrapped up. Still haven't decided if I'm going to play in the next round yet

Bond yields are starting to look down right anemic. At today's market close, the 2-year yield is 2.76%, the 5-year 3.16% and the 10-year 3.84%. With those yields, I'm considering moving some of my bond fund investment to dividend paying stocks. Three candidates from my SLO-port are Novartis, Unilever and Anheuser Busch. Those three have done reasonably well over the past several months, but I wanted to see what else might be kicking around out there, so decided to play around with Yahoo's stock screener.

The screen was set to look for stocks yielding between 3.5% and 6%. The lower limit is 90% of the 10-year's yield; the upper limit was selected to try and screen out companies with problems. I wanted to stick to companies with earnings, so the PE filter was set greater than zero and less than 20. I also wanted some predicted earnings growth to protect the dividend and provide some room to raise it, so the screener's estimated 5-year earnings growth rate parameter was set for greater than 5%.

The screen turned up 110 stocks, with at least some hits in every sector except for conglomerates (GE and PPG were close, but their yields were a little below my cutoff). Even tech turned up nine hits. So, I've got to refine the screen a bit and still have some work ahead of me. May also go back to toroandbruin's entries on screeners (1, 2, 3, 4, 5, 6) and try some of the alternatives to the Yahoo screener.

I haven't looked into the hits in any detail yet, but there seem to be plenty of candidates that at least pass a cursory filter on fundamentals. In this uncertain environment, stocks with safe dividends present a very attractive alternative to bonds for income investors and that should put somewhat of a floor under the prices.

At time of posting, I don't have positions in any of the companies mentioned in this entry.

Thoughts and comments are welcome.

Comments: View Comments |  Monday January 7, 2008