The Best Dow Stocks for the Next Decade

The world is changing fast.

Economic dominance is undergoing an epic shift. According to the International Monetary Fund (IMF), the gross domestic product (GDP) of the world’s emerging markets will eclipse that of the developed world by 2017.

Such a tectonic shift in the world economy is changing the way the world does business.

Consider this: The World Bank estimates that the global middle class will triple to 1.2 billion in 2030 from 430 million in 2000, and China and India will account for two thirds of the expansion.

In fact, after decades of unprecedented economic expansion, the percentage of total households with annual disposable incomes of $5,000-15,000 is already expected to reach 31.7% in China and 14.6% in India this year. This number is expected to rocket to 46.2% in China and 41.1% in India by 2020.

What can these hundreds of millions of brand new consumers afford to buy?

They will most likely start with basic products that satisfy life’s necessities like soap, toothpaste, band aids and toilet paper.

Who can sell these things to them?

The answer is local companies as well as large multinationals that possess the scale and wide geographical distribution networks to stock the shelves. Such companies exist on the Dow Jones Industrial Index.

These companies have deeper pockets than some governments — and they know all the tricks. For example, they know how to get the best shelf space, how to distribute efficiently, how to advertise in a new market and how to drive out competition. These companies have become some of the world’s most dominant companies by doing these things better than anyone else for years. Newly established and still-learning local establishments in emerging market countries are no match for these well-seasoned goliaths.

Dow stocks for the next decade
Founded in 1837, Proctor and Gamble (NYSE: PG) is the world’s largest consumer products company, with operations in more than 180 countries and sales of $79 billion in fiscal 2010. The company features a huge array of famous brands covering everything from dog food to cosmetic care products including Gillette, Bounty, Charmin, Crest toothpaste and Tide detergent, just to name a few. About 60% of 2010 sales came from overseas and 32% of total company sales came from emerging markets.

#-ad_banner-#How big is Proctor and Gamble?

The company has a market capitalization of about $170 billion, which is larger than the GDP of many countries. The household products giant has 43 brands with sales in excess of $500 million a year and 23 products with more than $1 billion in sales every year. In fact, P&G has an estimated 4.2 billion customers throughout the world –that’s about 65% of the 6.5 billion people estimated to be living on the planet.

The company estimates that it generates the equivalent of $12 in sales every year for every living person on earth. P&G plans to ratchet that number up to $14 per person in five years — primarily through growth in emerging markets.

While P&G has doubled sales in emerging markets since 2001, there is still plenty of room to grow. Consider that P&G is the largest consumer goods company in China, with a market share four times larger than its nearest competitor. Yet, China still only spends about $3 per capita annually on P&G products, compared to $20 in Mexico and $100 in the United States. P&G estimates that increasing sales in China and India to the levels of Mexico would add $40 billion per year in revenue.

P&G forecasts core earnings growth of +7% to +9% in 2011. The company also pays a quarterly dividend which has increased for 56 straight years. The stock currently yields about 3.2%.

Johnson & Johnson (NYSE: JNJ) is the world’s largest and most diverse health care company, selling everything from heart stents to band aids. The company has been in business over 120 years and engages in the development, manufacture and sale of health care products through more than 250 operating companies located in some 60 countries and generated $62 billion in revenue in 2009.

J&J is a world leader in three different health care segments: pharmaceutical, medical devices and diagnostics and consumer health products. The pharmaceutical segment has several leading drugs including rheumatoid arthritis drug Remicade. Consumer products include household staples such as Listerine, Carefree and Tylenol. J&J has incredibly strong brands, with 70% of sales coming from products with a No. 1 or No. 2 global market share.

The fastest growing segment of the world’s population is 65 and older — and older people need more health care. Slightly more than half of sales are generated outside the U.S., and 26% of first half 2010 sales came from outside of the U.S. and Europe. While first half sales increased just +2.3% overall, sales in the Asia-Pacific/Africa regions increased +14%. This also accounted for 17% of total sales, up from 15% in the first half of 2009.

The stock pays quarterly dividends and currently yields about 3.4%. Dividends have risen for 48 straight years, supported by sales that have increased for 78 straight years.

Action to Take –> Both Proctor & Gamble and Johnson & Johnson are cheap now, selling at price-to-earnings ratios well below their five-year averages. Both companies have relatively defensive earnings and strong, growing dividends. Emerging markets add a strong element of growth to compliment steady cash flow elsewhere. Both companies are attractive defensive core holdings at current prices.

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