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Stock Screen: Stocks with Low Risk - April 13, 2012
Investors can usually find stocks with low risk or stocks with strong expected relative price performance fairly easily. The challenge comes when you want to combine these two features, as the presence of one attribute often means that a stock lags in the other. In this screen, however, we seek to combine the best of both worlds, and search for issues that meet both of these criteria. To generate our list, we first required that all stocks be ranked 2 (Above Average), or higher, for Safety and 3 (Average), or better for Timeliness (i.e. relative price performance in the year ahead), two of Value Line’s many proprietary ranks. Then, to further reduce the relative collective risk that is usually associated with stocks that offer high returns, we limited our cut to equities with a Price Stability Index (another one of Value Line’s proprietary measures) in the upper 10% of our Universe (the Index runs from 5 to 100, with 100 being the top score). Finally, we required that each stock pay a meaningful dividend, with a floor set at a yield of 2.1%.
Not surprisingly, equities arising from this screen are largely considered defensive in nature, and our list is dominated by established and conservatively run companies, including Nestle SA ADS (NSRGY), Becton, Dickinson (BDX), Automatic Data Processing (ADP).
Nestle SA ADS
Nestle SA, which traces its roots back to 1866, has grown to become one of the largest nutrition, health, and wellness corporations in the world. Some of its well-known product lines include Gerber (baby food), Poland Spring (bottled water), Purina (pet food), and Nescafe (coffee).
The company’s near-term prospects are not too spectacular. That’s partially because it derives a good portion of its profits from Europe, which is undergoing economic difficulties in the wake of a sovereign debt crisis. The company has been aggressively repurchasing its common stock, though it appears that 2011 share net advanced only at a modest 4%. But assuming some improvement in business conditions, the bottom line might well grow at a stronger rate in 2012.
We are upbeat about Nestle’s operating performance over the 2015-2017 horizon. That’s based, in part, on our belief that Europe’s present problems will be behind it. What’s more, the United States economy ought to be on firmer footing, if the employment picture brightens and the housing market perks up. Opportunities abound in emerging countries (including China and India) as well, made possible by the rise in income levels. Of course, this all augurs well for demand for the company’s wide array of popular products, such as Nespresso, Dolce Gusto, PowerBar, and Kit Kat.
The stock offers good, risk-adjusted total-return possibilities. That’s supported by the generous, well-covered annual dividend (which was $2.08 a share in 2011) and prospects for additional increases in the payout. Furthermore, the Safety rank stands out and the Beta coefficient is low relative to the market average.
Becton, Dickinson is a medical technology company serving such entities as healthcare institutions, life science researchers, and clinical laboratories. Its operations consist of three segments: Medical (51% of 2011 sales), which manufactures an array of medical devices; Diagnostics (32%), providing products for the safe collection and transport of diagnostic specimens, as well as instrumentation and reagents used to detect diseases; and Biosciences (17%), a producer of research and clinical tools that facilitate the study of cells.
The company began fiscal 2012 (ends September 30th) on a weak note, as share net in the December interim slid about 10%, compared to the year-earlier figure. That reflected a difficult comparison and tough macroeconomic conditions. Higher input costs and a rise in expenses related to recent acquisitions did not help, either. On the plus side, Becton bought back some $400 million worth of stock during that period, and there are plans to devote another $1.1 billion to repurchases over the remaining three quarters.
The stock has been a market favorite, which is not surprising. Indeed, it boasts a low Beta coefficient and an excellent score for Price Stability. Stock buy backs and a decent dividend yield add to the appeal. Finally, from a performance perspective, these shares offer good total-return potential out to 2015-2017, supported by our upbeat earnings projections over that span.
Automatic Data Processing
Automatic Data Processing is the country’s largest provider of business outsourcing solutions, serving about 570,000 customers at present. It has three divisions: Employer Services (70% of 2011 revenues), which provides payroll and tax services; Professional Employer Organization (16%), a provider of comprehensive human resources solutions to smaller companies; and Services (14%) for auto and truck dealerships, including accounting, inventory, leasing, and parts ordering.
The company has been generating healthy results thus far in fiscal 2012 (ends June 30th). Indeed, the operating environment is improving, as corporations are starting to expand and new business formation is picking up. ADP has also been able to enter new markets, via a number of small acquisitions, including PhyLogic Healthcare, which provides revenue cycle management and medical billing outsourcing services. In all, we expect earnings per share to rise close to 10% in fiscal 2012.
The stock has risen a bit in price over the past several months. It seems that can be attributed partly to signs that the job market is getting better (albeit gradually), which, of course, augurs well for the prospects of ADP and other payroll processors. What’s more, our 3- to 5-year projections indicate that capital appreciation potential is worthwhile, compared to the Value Line median. The excellent Price Stability rating is another plus.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.