4 Reliable Stocks to Own During Tough Times

Friday, July 22, 2011 - 11:00am

by Lisa Springer

In response to rising debt woes in Europe and the United States, wary investors are taking steps to preserve capital, boost income and protect themselves from inflation. A great way to accomplish these goals is to hold consumer-staple stocks, which provide the daily necessities people use such as toothpaste and toilet paper.   

The safety of these stocks is the reason investors love them during tough times. In the past five years, consumer-staple stocks, as measured by the Consumer Staples Sector SPDR (NYSE: XLP) exchange-traded fund (ETF), have gained 30%, easily outperforming the S&P 500 rise of 10% in the same period. 

While rising raw material costs can hurt the profit outlook for these companies, consumer-staple companies have so far been able to pass higher production costs along to customers through price increases without hurting sales. Proctor and Gamble (NYSE: PG), for instance, announced on April 3  price increases of as much as 7% on products such as Pampers diapers and Charmin toilet paper. Kraft (NYSE: KFT) and Smuckers (NYSE: SJM) made even bigger hikes earlier this year, increasing the price of their coffee by 22% and 10%, respectively.

In addition, the consumer-staple sector is known for high dividend payouts and consistent growth. Here are four stocks that offer reasonable valuations, strong financials and a solid, growing dividend.

1. Kimberly-Clark (NYSE: KMB)
Dividend yield: 4%

Kimberly-Clark is a leader in hygiene products, with well-known brands like Kleenex, Scott, Huggies, Pull-Ups and Kotex. The company enjoys the No. 1 or No. 2 spot for market share in each of its brand categories.

Kimberly Clark is fiscally fit, with long-term debt at less than 58% of market capitalization and cash flow exceeding $2.5 billion each year. It has posted 39 straight years of dividend growth and has increased the dividend by 9% a year for the past 10 years. The $2.80 yearly dividend equates to 60% of the company's earnings and leaves it with plenty of buffer to cover payments during tough times. 

Kimberly Clark is valued at 13 times next year's earnings, which compares favorably with forward price-to-earnings (P/E) multiples of 15 for Proctor & Gamble, 16 for Colgate (NYSE: CL), and 18 for Clorox (NYSE: CLX). The company targets long-term yearly sales growth of 3% to 5% and mid-to-high single-digit earnings growth.

2. H. J. Heinz Co. (NYSE: HNZ)
Dividend yield: 4%

Heinz recently celebrated the 100th anniversary of its Heinz 57 Sauce, but the company is best known for Heinz Ketchup, which holds a 60% U.S. market share. Heinz also sells other condiments and sauces, as well as frozen food, soup, snacks and infant formula.

The company has raised dividends by 8% a year in the past seven years. The last increase was a 7% hike in May to a $1.92 annual rate. Payout is conservative at 59%, but it supports a generous 3.6% yield. Debt has declined for four years in a row to just 50% of capitalization, while cash flow has been an impressive $1.6 billion in the past 12 months. Earnings have grown nearly 19% annually for five years and the company's return on equity is a rich 39.6%.

Heinz shares are priced at a modest 15 times forward earnings. The company's trailing price/cash flow ratio (P/CF) of 13 is well below the average P/CF ratio of 17 for the food stocks sector.

3. ConAgra Foods Inc. (NYSE: CAG)
Dividend yield: 4%

ConAgra Foods supplies packaged foods to supermarkets and restaurants. The company's brands are found in 97% of U.S. households and include popular names like Banquet frozen dinners, Chef Boyardee canned pasta, Peter Pan peanut butter and Wesson cooking oil.  ConAgra has grown dividends 28% in the past four years, which includes a 15% hike last September to a $0.92 annual rate. The payout is a modest 49% of earnings, and the yield is an attractive 3.5%.

In the fiscal year ending in May, ConAgra boosted net income by 17% through a combination of internal growth, cost-cutting and stock repurchases. The company targets sustainable earnings growth of 6 to 8% a year. ConAgra's long-term debt is exceedingly low, at 20% of capitalization, but may increase if the company is successful in its $4.9 billion bid for Ralcorp (NYSE: RAH), which owns Post cereals. The merger would create the third-largest U.S. packaged food company. Conagra shares appear bargain-priced, at 13 times next year's earnings.

4. Reynolds American (NYSE: RAI)
Dividend yield: 6%

If you don't object to tobacco stocks, then Reynolds is a brand worth holding. The company owns six of the 10 best-selling cigarette brands in the United States -- Camel, Pall Mall, Winston, Kool, Doral and Salem -- and accounts for one of every three cigarettes sold domestically.  

Reynolds' earnings improved 15% last year, and the company anticipates mid- to high- single-digit earnings growth this year. Reynolds has raised its dividend seven times since going public in 2004, including an 8% increase last February to $2.12. Debt has declined three years in a row and currently stands at just 36% of capitalization. The 80% payout is a bit rich, but with $3 billion in cash and annual cash flow exceeding $1 billion, Reynolds can readily afford dividend payments. The shares yield an impressive 5.7% and are reasonably priced at a 13 times forward earnings. 

Action to take --> My top pick for conservative investors is Reynolds because of its frequent dividend increases and rich yield. More aggressive investors should consider ConAgra Foods, which could expand its presence in the booming private-label food business by acquiring Ralcorp.

P.S. -- If you're looking for quality stocks with high yields, you should take a look at this one. It pays a 19.2% dividend yield. It borrows cheap, gets paid handsomely and then pockets the spread. You'll get the full story on this cash machine and others like it in this video.

Lisa Springer does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.