look beyond the ‘in favor’ sectors… May 10, 2013

| Friday, May 10th, 2013 | Comments Off on look beyond the ‘in favor’ sectors… May 10, 2013

Four companies comprise the ‘household products’ industry within the S&P 500 Index. They are long standing, high quality enterprises whose products we use every day. The four companies are Procter & Gamble, Clorox, Kimberly – Clark and Colgate-Palmolive. Understandably, investors have recently been seeking reliable companies paying consistent dividends, and franchises such as the four in the household products industry fit that bill. But as often becomes the case, the markets desire for too much of one thing can leave better value elsewhere. Take a basket of four ‘old’ technology companies for example and let’s compare a few items briefly. Using Microsoft, Intel, Texas Instruments and Cisco Systems as a comparative basket of stocks, it is interesting to see that investors may be able to get significantly better values, while still get what they are looking for on the dividend front.

P/E P/Cash Flow Div Yield 5 Yr Div Growth Net Debt to Capital
Household Products 19.1 16.2 2.80% 9% 63%
Old Technology 13.1 9.7 3.20% 15% 17%

Yes, this is simply a ‘snap-shot’ of these stocks and there are many items to consider.  But a few things here are clear – earnings and cash flows can be purchased significantly cheaper in the old tech basket than the household products group currently – over 30% cheaper –  and nothing is given up in the form of current income.  In fact, the old tech group pays almost 15% more current income, in addition to growing that dividend income at a faster pace the last five years.  Finally, there are many ways to measure ‘quality’, but one measure is most certainly debt, and on that metric as well the old tech basket laps the currently very popular household products.

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