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All Contents © 2019The Kiplinger Washington Editors
By Andrew Feinberg, Contributing Columnist
| November 2016
Baby boomers approaching retirement might think of buying a Tesla. Though it’s pricey, it’s a good, environmentally friendly car. But Tesla Motors’s stock (symbol TSLA)? It’s really expensive and risky, most would say. Competition is looming, too, and who knows what impact that will have?
But most baby boomers still need growth from their stock holdings. Growth—but not crazy, shoot-the-lights-out growth. Ideally, you should own stocks that can provide strong and steady gains at a reasonable price—investments you can buy today and not think about for five, 10 or 20 years.
In assembling this basket of stocks, we sought companies with durable competitive advantages and the ability to lift earnings for many years. A hefty dividend wasn’t a requirement, but it was a plus. Collectively, our stocks yield 2.8%, higher than the 2.1% yield of Standard & Poor’s 500-stock index.
Stocks are listed alphabetically. Price-earnings ratios reflect estimated earnings for 2017 or fiscal years that end in 2017. Revenues are based on sales over the previous 12-month period. All figures are as of November 9.
Share price: $170.39
Market capitalization: $103.0 billion
Revenues: $30.1 billion
Estimated three-to-five-year earnings growth: 9%
Price-earnings ratio: 20
Dividend yield: 2.6%
The business: A wonderfully innovative company, 3M makes hundreds of products, from consumer goods such as Scotch Tape and Post-It notes to health care products, electronics and industrial goods, such as adhesives for aircraft. The business isn’t growing fast, with sales estimated to climb just 2.2% in 2017. But the company is constantly on the move, streamlining divisions, acquiring other firms and developing new products.
Andrew Adams, comanager of Mairs & Power Growth fund, thinks 3M can lift earnings by 9% annually for many years. “The company’s secret sauce is innovation,” he says.
Over the next few years, in fact, 3M aims to pump more of its revenues into research and development, hiking its spending on R&D to 6% of sales, from 5.5% currently. The company is also likely to make more acquisitions along the lines of its recent $2.5 billion deal to buy Capital Safety, a maker of safety harnesses and other equipment to prevent injuries in the workplace.
Why we like the stock: With a P/E of 20, the shares trade above S&P 500’s P/E of 16. But 3M should be able to boost profits by 8% to 11% a year through 2020, well ahead of the broad market’s long-term growth rate. Higher earnings should also support a rising dividend, which 3M aims to hike by 15% a year.
Share price: $109.22
Market capitalization: $46.5 billion
Revenues: $5.5 billion
Estimated three-to-five-year earnings growth: 13%
Price-earnings ratio: 17
Dividend yield: 1.9%
The business: American Tower operates more than 144,000 communication facilities that it leases to wireless carriers such as AT&T (T) and Verizon Communications (VZ). In the U.S., the firm controls much of the tower business with two rivals, Crown Castle International (CCI) and SBA Communications (SBAC). American Tower has also expanded into foreign markets such as Africa, India and Latin America, which now account for about one-third of its revenues.
That non-U.S. business should charge up growth for years. The firm will benefit from both the proliferation of smartphones and the rapid growth of data transmitted over mobile devices. Only 43% of adults globally have smartphones, according to Pew Research. A study by Ericsson projects that total mobile data traffic will grow 45% annually for the next five years. Much of that growth is in foreign markets such as India, where American Tower has invested heavily and should benefit as the country builds out its wireless infrastructure, says Jeff Rottinghaus, manager of T. Rowe Price U.S. Large-Cap Core Fund.
Doing so much business abroad does pose risks. A strong dollar would depress sales and profits earned in foreign currencies (which are worth less when converted to greenbacks). The company also faces political risks in India and other emerging countries where it does business.
Still, American Tower should be a steady earner. The firm signs long-term contracts with wireless carriers, creating a stream of recurring revenues that accounts for more than 90% of its sales. Moreover, American Tower is set up as a real estate investment trust, which means it must pay out at least 90% of taxable income as dividends, providing steady a paycheck to shareholders.
Why we like the stock: For a REIT, American Tower’s yield is low at 1.8%. But the firm has hiked its payout by 25% a year since it initiated a dividend in 2012, when it converted to a REIT. Analysts expect that pace of dividend growth to continue through 2018. The stock is also likely to deliver solid gains as adjusted funds from operations climb at an estimated 12% to 16% annual pace. (AFFO is a measure commonly used by REITs that essentially adds depreciation and amortization back to earnings). At 17 times AFFO, the stock look reasonably priced, says Rottinghaus.
Share price: $75.49
Market capitalization: $11.8 billion
Revenues: $3.1 billion
Estimated three-to-five-year earnings growth: 21%
Price-earnings ratio: 14
Dividend yield: 2.8%
The business: KLA-Tencor makes diagnostic, measurement and inspection tools for manufacturing computer chips. The firm controls more than half of the market for these tools, which help manufacturers crank out chips more efficiently and profitably. Chip-equipment maker Lam Research (LRCX) tried to buy KLA in 2015, but the deal fell apart in October 2016 because of antitrust concerns.
KLA and its stock should be just fine on their own, though. Chip makers are embarking on a new generation of smaller, more powerful chips, transitioning from the current standard 10-nanometer wafers to 7-nanometer wafers, says Lori Keith, comanager of Parnassus Mid Cap Fund. Transistors on 7-nanometer wafers are so minuscule (with up to 20 billion transistors on a single wafer) that it’s becoming increasingly difficult to identify flaws, making good diagnostic systems more critical. KLA’s new 3900 Series inspection system—used for 7-nanometer wafers and capable of working with 5-nanometer wafers—is gaining traction, she says.
Why we like the stock: With a P/E of 14, KLA looks a bit pricier than rivals Applied Materials (AMAT) and Lam Research. But KLA possesses better profit margins and growth prospects. Although the chip industry is cyclical, with big ups and downs, the trend toward ever-smaller chips in smartphones and other mobile devices should make KLA’s inspection and measurement tools “increasingly relevant,” says Keith. Had the Lam Research deal closed, the takeover price would have been about $92 per share. KLA-Tencor trades 18% below that, making it a bargain.
Share price: $51.12
Market capitalization: $85.1 billion
Revenues: $33 billion
Estimated three-to-five-year earnings growth: 12%
Price-earnings ratio: 22
Dividend yield: 1.3%
The business: Nike’s shoes, apparel and other athletic gear, adorned with its trademark swoosh, may seem ubiquitous. But the company isn’t the speed demon it once was. Sales rose just 5.8% in the fiscal year that ended in May 2016, Nike’s slowest growth since its 2013 fiscal year. Revenues are climbing faster in foreign markets, where Nike gets 55% of its sales. But unfavorable foreign-currency exchange rates and weakness in China have weighed on its bottom line. Some investors are also gravitating to Under Armour (UA) and Adidas (ADDYY), which are growing faster. Add it all up and Nike’s stock has tumbled 21% in the past year.
The good news (if you don’t own the shares) is that this should be an excellent time to swoop in. Nike aims to boost annual sales from $32 billion to $50 billion by 2020. The firm is making a big push to sell more women’s apparel. It’s expanding direct sales to consumers through its website. It’s also trimming manufacturing costs with a new plant in Mexico that will produce the same volume of shoes as its Asian plants, but with one-third of the workforce. Hourly wages are similar for Nike’s Chinese and Mexican workers, but the firm saves a bundle on shipping from Mexico.
Why we like the stock: As a growth stock, Nike never gets dirt cheap. But its P/E has fallen to 22, well below the 28 it hit in late 2015. Scott Klimo, chief investment officer at Saturna Capital, which manages the Amana mutual funds, estimates that Nike could earn $4.00 a share in its 2021 fiscal year, up from a projected $2.69 in the fiscal year that ends next May. He estimates that the stock will produce annualized returns of 11%, including dividends, through 2021.
Share price: $95.29
Market capitalization: $25.4 billion
Revenues: $15.4 billion
Estimated three-to-five-year earnings growth: 8%
Price-earnings ratio: 15
Dividend yield: 1.7%
The business: A world leader in paints and coatings, PPG sells products that cover cars and trucks, vehicle underbodies and buildings. The firm also makes sealants, aerospace adhesives and innovative products such as sprayable “rubber” for golf balls, a coating that could also help extend the lifespan of aging pipes, a much bigger market.
PPG, in fact, spends far more on research and development than competitors such as Valspar (VAL) and Sherwin Williams (SHW). It sells coatings and paints made with nanotechnology that results in deeper, richer pigments. These recently launched products represent a growing portion of its sales. PPG also looks well positioned in emerging markets such as China, where it dominates the automotive paint business.
Why we like the stock: Shares of PPG have slumped 18% from highs hit in April 2016. Sluggish sales in Europe and Asia have curbed its earnings, but PPG looks well-positioned for a pick-up in global growth. At 15 times earnings, the stock trades below the 19 P/E of rival Sherwin Williams. If PPG can lift earnings at a 8% rate per year—the company’s current forecast—the shares should return an average of about 10% a year (including dividends).
Share price: $46.67
Market capitalization: $79.9 billion
Revenues: $21.4 billion
Estimated three-to-five-year earnings growth: 5%
Dividend yield: 2.4%
The business: Wells Fargo (WFC) is Warren Buffett’s largest stock holding. But his favorite bank stock may now be U.S. Bancorp, the seventh-largest position in the portfolio of Buffett’s holding company, Berkshire Hathaway (BRK.B).
U.S. Bancorp has racked up a great record. Surprises are rare, and in banking that’s a good thing. The bank held up relatively well during the Great Recession and its shares significantly outpaced other financial stocks over the past 10 years, returning an annualized 5.1% (including dividends), compared with a 2.1% annualized loss for SPDR S&P Bank ETF (KBE), an exchange-traded fund that holds bank stocks.
The nation’s fifth-largest commercial bank, U.S. Bancorp has a culture of efficiency, strict lending standards and technological leadership. With $422 billion in assets, U.S. Bancorp can gain advantages from its size. But because it holds less than $1 trillion in assets, regulators require the firm to keep just 8.5% of its capital in reserves, well below the 11.5% reserve requirement of its four larger competitors: JPMorgan Chase (JPM), Wells Fargo, Citigroup (C) and Bank of America (BAC). Holding less capital enables U.S. Bancorp to offer cheaper loans than the bigger boys. It also helps make U.S. Bancorp more profitable, with returns on assets and common equity (measures of profitability for banks) that exceed big rivals.
Why we like the stock: Mairs & Powers manager Adams thinks U.S. Bancorp should be able to boost earnings by 8% a year as it continues to expand geographically and delivers industry-leading profit margins (analysts, on average, are less bullish, forecasting long-term profit growth of 5% a year). Add the stock’s 2.4% dividend yield to Adams’s growth forecast and investors can expect annualized returns of about 10%. Although the stock isn’t cheap, at 14 times earnings—a steeper P/E than those of U.S. Bancorp’s big competitors—it looks worth the price.
Share price: $83.24
Market capitalization: $196.5 billion
Revenues: $14.4 billion
Estimated three-to-five-year earnings growth: 16%
Price-earnings ratio: 25
Dividend yield: 0.7%
The business: Investing in Visa provides a great way to capitalize on the great migration of consumer spending from cash to electronic payments. According to the financial industry publication Nilson Report, spending with cards will rise at an 8% annualized rate through 2019, while cash and check-based payments will decline by 6% a year.
Although Visa’s name appears on millions of cards, financial firms that issue the plastic are responsible for unpaid bills, leaving Visa off the hook. This is an outstanding, transaction-fee-based business. And it’s quite profitable. Visa’s adjusted operating-profit margins—essentially the cash profits from running the business, less expenses—are 66%.
Visa does face stiff competition. Rivals include American Express (AXP), Discover Financial Services (DFS) and Mastercard (MA), along with upstarts such as PayPal Holdings (PYPL) and Square (SQ), as well as ApplePay, a service from Apple (AAPL). Visa’s sales growth slowed to 8.6% a year from 2011 to 2015, after soaring at a 22.3% annual rate from 2006 to 2010. Sluggish retail sales in China haven’t helped the business.
But long term, Visa looks well positioned. The company does business with PayPal and some of the other electronic-payment firms. Visa recently signed branding deals for its cards with Costco (COST) and USAA. And it acquired Visa Europe, which was poorly managed and charged relatively low fees because the banks themselves owned it.
Why we like the stock: Visa and Mastercard are both terrific businesses. But Visa possesses a lower P/E ratio, and the firm has three major growth drivers (the Costco and USAA deals, and the acquisition of Visa Europe) that Mastercard lacks. Analysts expect Visa to boost revenues by 10.5% in 2017, and earnings by 17%. Over the next decade, Visa should be able to boost profits well above 10% a year—growth that its stock should match.
Share price: $34.23
Market capitalization: $20.7 billion
Revenues: $7.3 billion
Estimated three-to-five-year earnings growth: 4%
Price-earnings ratio: 31
Dividend yield: 9.9%
The business: Before you read another word, understand that Williams Partners is a master limited partnership. That means it pays out most of its cash profits from running the business, supporting distributions that give the stock its enormous yield. But MLPs have complex tax-filing requirements that can make the stocks a headache to own. Consult an accountant about the tax consequences if you plan to invest.
A pipeline company, Williams owns one of the energy industry’s great assets: the 10,200-mile Transco pipeline, which runs from South Texas to New York City. The pipeline can transport 10.9 billion cubic feet of natural gas per day, enough for the daily needs of 265,000 homes. Demand should climb steadily as U.S. gas production booms and more electric utilities make the switch from coal-fired energy to cleaner-burning gas.
Williams is investing in pipelines to transport gas from the booming Marcellus and Utica shale regions of the Midwest and Northeast. Over time, demand from liquefied-natural-gas processing plants should lift sales, too. Williams also extracts natural gas liquids and petroleum distillates from “tar sands” in Alberta, Canada, where production is thriving.
Williams’s stock could tumble if oil prices were to plunge back to their lows from earlier in 2016 (when a barrel of West Texas Crude oil dropped below $27). Energy prices have climbed sharply since then, and the company appears to be in stronger shape than it was when oil prices collapsed. The firm has renegotiated some contracts and sold assets that were more directly exposed to commodity prices. With revenues improving, the firm’s annual distribution of $3.40 a share appears “pretty safe,” says John Roth, manager of Fidelity New Millennium, a member of the Kiplinger 25.
Why we like the stock: Don’t be put off by the high P/E of 31. It reflects estimated earnings of $1.11 per share in 2017. But most analysts value MLPs on measures such as “distributable” cash flow, net asset value and their potential to increase distributions. The stock looks attractive on those measures, says Roth. Another reason to buy the shares: Williams Companies (WMB) owns about 60% of Williams Partners and may buy the rest of the business at a share price above the current level.