Sunday, July 14

Week 106 - Lifeboat Stocks Revisited

Situation: Defensive stocks will become the anchor for your retirement savings. They’ll need to form at least a third of your stock portfolio going forward and more after you retire. Those companies are in the 4 defensive industries: communication services, utilities, healthcare, and consumer staples. Stocks issued by the best such companies are what we call Lifeboat Stocks (see Week 8, Week 23 and Week 50 for further discussion). 

For this week’s update, we’ll merge two databases: the 201 stock Dividend Achievers, which are those companies that have increased their dividend annually for the past 10 or more yrs; and the Barron’s 500 Table, which lists the 500 exchange-traded companies that scored highest on sales and cash flow growth for the most recent year (2012), comparing those scores to each company’s score for the previous year (2011). Previous criteria remain in place, such as the requirement that the stock be A-rated by S&P and the company’s bonds carry an S&P rating of BBB+ or better; losses during the Lehman Panic no more than 2/3rds as great as for the lowest cost S&P 500 Index fund (VFINX), and total returns greater than VFINX since a) the last inflation-corrected S&P 500 Index peak on 3/24/00, and b) over the past 5 yrs. Stocks also have to have a 5-yr Beta less than that for the S&P 500 Index (which is set at 1.00). We added two companies that have only increased dividends for 9 consecutive yrs: General Mills (GIS) and Costco Wholesale (COST).

We turn up 16 companies (Table), all of which have outperformed VFINX over the past 5 yrs. Ten companies maintained or increased their Barron’s 500 rank in 2012: Southern (SO), McKesson (MCK), General Mills (GIS), AmerisourceBergen (ABC), JM Smucker (SJM), Johnson & Johnson (JNJ), Coca-Cola (KO), Costco Wholesale (COST), Procter & Gamble (PG), and Kimberly-Clark (KMB). Of those, MCK, ABC, SJM, COST and KMB had Retained Earnings (RE) after paying dividends. In other words, those 5 companies can use some free, after-tax money to fund upcoming projects. Thirteen of the 16 meet our criteria for hedge stocks, so ownership of stock in any of those companies does not need to be backed up with an equivalent investment in US Treasuries or Savings Bonds (see Week 104). Those are the 13 that have a 5-yr Beta less than 0.65, which excludes MCK (0.84), ABC (0.75), and BDX (0.83).

Bottom Line: Retirement is draining if you have sleepless nights worrying about stocks. So opt for a heavy concentration of stock in companies from the four “defensive” industries, i.e., communications services, utilities, healthcare and consumer staples. We call the best of those Lifeboat Stocks and have come up with 16 for you to examine further. Johnson & Johnson (JNJ), Procter & Gamble (PG), and Coca-Cola (KO) are the hardy perennials here, but we find 5 others that look almost as good on our screens for both remote and recent Finance Value: Southern (SO), General Mills (GIS), JM Smucker (SJM), Costco Wholesale (COST) and Kimberly-Clark (KMB).  

Risk Rating: 3

Full Disclosure: I have stock in JNJ, PG, KO, and GIS.

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