Monday, November 14, 2011

Two Quality Investments

Though the sharp rebound in stock prices over the past month has caused me to be cautious about the stock market overall, I still find individual stocks that remain attractive.  Merck and Vodafone are two examples that meet my criteria for competitive and financial strength, attractive valuation, and sustainability.

Last week Merck announced a dividend increase and an positive update of its prospects for important new drugs.  The dividend yield is 5%, which compares quite favorably with the overall stock market and for savings and fixed-income alternatives.  Merck generates significant excess cash after capital spending and dividend outlays, and it sells for less than 10 times estimated 2011 earnings per share. 

Vodafone was featured favorably in this week's Barron's magazine.  Its 45% ownership of Verizon Wireless will soon show tangible results, as Vodafone will receive a $4.5 billion dividend from the joint venture.  Since Vodafone will pass the Verizon Wireless dividend on to shareholders, the total dividend yield by Vodafone will be 7.5%.  That even exceeds the yield on many junk bonds.  Vodafone also has leading market positions in key markets and a management that is committed to returning cash to shareholders through dividends and share buybacks.  The stock sells for only 10 times earnings, despite the substantial stake in Verizon Wireless that is not consolidated on Vodafone's financial statements.

In addition, both Merck and Vodafone are widely recognized as sustainability leaders.  The companies' performance on environmental, social, and governance (ESG) criteria is exceptionally admired.  As positive sustainability assessments are increasingly recognized as an indicator of management quality that leads to superior returns for investors, the prospects for these two investments are indeed bright.

Steve Lehman  

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