Thursday, November 8, 2012

3 Companies That Allow Investors to Sleep Well

Looking for long-term investment opportunities, I always look for sustainable businesses that are able to pay good dividends. In order to be a sustainable business, a company must operate in a sustainable industry. What industry do you think to be classified as “sustainable?” For me, one of the most sustainable industries is Food & Beverage. And besides being in a sustainable industry, a company should operate sustainably. By saying "sustainably", I mean a company should have no debt or comfortable interest coverage and be able to pay dividends to shareholders over time. After screening in the Motley CAPS, here are top 3 Food & Beverage companies, which have the market capitalization of at least $1 billion, have no debt or comfortable interest coverage, and pay above average dividends to shareholders.
Mondelez International (NASDAQ: MDLZ) is a former international business unit of Kraft Foods. Mondelez is a global market leader in the confectionery industry, with 15% share of the chocolate market, 30% of gum, and 7% of the candy aisle globally. Mondelez owns great brands like Oreo, Chips Ahoy, Cadbury, etc. Currently the stock is trading at $26.60 per share; the total market capitalization is $47.21 billion. As the company is expected to pay dividends of $0.52-$0.55, so the dividend yield would be around 2%. The interest coverage of Mondelez is 3.42x, which is a comfortable level for the company. It is interesting to note that Irene Rosenfeld, Kraft Foods’ CEO has chosen to be at Mondelez rather than Kraft Foods. It means to everybody that Mondelez has brighter prospects with huge potential growth from emerging markets, whereas Kraft Foods growth is being tied to the mature domestic US market. Currently, Mondelez is valued only at 13.2 P/E, 1.3x P/B and 8.7x P/CF.
Lancaster Colony Corporation (NASDAQ: LANC) is a manufacturer of specialty foods, baked goods, and pasta with several brand names such as Cardini’s, Pfeiffer, Girard’s, etc. Lancaster is trading at $72.75 per share. With the quarterly dividend of $0.36, the dividend yield is nearly 2%. Lancaster is a debt-free company. With $192 billion cash on hand and $2 billion market capitalization, the enterprise value is around $1.8 billion. Over the past 4 years, Lancaster’s share price has advanced twofold, and investors have been getting increasing and sustainable dividends as a plus. Maybe, because of the good operating performance, Lancaster is a little pricey now, it is valued at 20.7x P/E, 3.5x P/B and 16.2x P/CF.
Mead Johnson Nutrition Company (NYSE: MJN) is the global nutrition company for infant and children. A big chunk of its revenue was from nutritional products to newborns up to 5 years old. With the current quarterly dividend payment of $0.30 and the share price of $62, the dividend yield is 1.94%. The market capitalization is $12.63 billion with nearly 204 million shares outstanding. Currently, Mead Johnson has negative equity, with only $2 common stock and negative $695 million additional paid-in capital. It employs $1.5 billion long-term debt and has $787 million cash. However, because of sustainable earnings and cash flows, its interest coverage is as high as 14.52x, indicating that Mead Johnson is in a quite comfortable position to cover its interest expense. Mead Johnson is valued at 22.6x P/E and 20.8x P/CF. Because of the negative equity, so P/B ratio is not valid.
Investors should dig deeper to determine suitable stocks for themselves. Personally I would prefer Mondelez the most among the three as the $36 billion company has built its strong footprint in more than 80 countries with 44% of total revenue coming from emerging markets. Mondelez seems to have a great moat while trading at only 13.2x P/E. Lancaster and Mead Johnson have good operating performance also, but those two seem to be quite expensive with 20x P/E valuation.

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