By Vita Nelson
The MoneyPaper
Socially responsible investing (or SRI) usually involves avoiding investments in tobacco, liquor, gambling, munitions, and sometimes nuclear power and poor environmental records. To be sure, most of us would like to invest in companies that are good corporate citizens, but sometimes SRI seems to be better for your soul than for your bottom line. So we've identified some of the "Saints" that are not only deemed acceptable by SRI index/fund companies, but have also proved to be profitable on a consistent basis. The flip side of the coin is that many "Sinner" stocks have provided their investors with great returns over the years and not all of us are averse to owning them. So this month's selection provides choices from both worlds, including a few that perhaps could fall into either category, depending on the investor's viewpoint. For example, some feel that nuclear power is the clean energy of the future, while others fear the danger of radiation isn't worth the risk. And Starbuck's high-caffeine products could be condemned as unhealthy, but the company is environmentally friendly. Note that each capsule summary includes one designation or the other.
American Water Works is a top 20 holding in many SRI mutual funds. Its website cites its "commitment to minimizing the impact of operations and to enhance performance in ways that are relevant to its business and important to the communities served" and that it "reduces the discharge of pollutants into lakes, streams, and rivers, and at the same time can replace potable water supplies for many common uses like landscape irrigation." The company recycles nearly two billion gallons of water annually and collaborates with organizations to explore issues such as reclaimed water quality. It also pays an annual dividend of 88¢ per share, for a yield of 3.2%, and has been in business for 125 years.
Universal Corp. was founded in 1918 and is the world's largest importer/exporter of tobacco. It has increased its annual dividend every year since 1971 (with a current yield of 46%) and has managed to provide an average earnings per share increase of 3.7% since 2000. Consensus estimates call for the company to earn about $4.60 per share in the fiscal year that ends March 31. Officers and directors own 5.7% and five funds own 39.5% of the 23.9 million outstanding shares.
High insider holdings are always a good sign and those with 10% or more include Arch Coal, 26%; Boston Beer, 24.2%; Brown-Forman, 22.7% of class A and 4.1% of class B; Fortune Brands, 28.7%; Northrop Grumman, 26.3%; Polaris, 18%; and Universal Corp, 45.2%.
Some recently featured stocks that could also qualify are Abbott Labs, Altria, AT&T, ExxonMobil, IBM, Johnson & Johnson, Kimberly-Clark, Lockheed Martin, McDonald's, Microsoft, Merck, NextEra, PepsiCo, Philip Morris, Procter & Gamble, Reynolds American, Verizon, Walgreen, and Yum! Brands.
We ran our list by our resident staff of Bob Briechle, Senior VP, AFA Financial, Inc., Dave Fish, Executive Editor of The Moneypaper Inc. and Mike Burke, editor of Investors Intelligence newsletter, who all attested to the worthiness of long-term accumulation of these shares. To limit the impact of high fees, we suggest investing larger amounts less frequently. For example, instead of investing, say $100 monthly, invest $300 quarterly, or enough to keep costs to less than 1%.
Alcoa Inc. (AA) is one of the world's largest aluminum producers, with over 300 sites in 35 countries. Hurt by a sharp falloff in aluminum demand, AA posted a loss of $1.06 per share in 2009, but earned 24¢ in 2010, and is expected to net 90¢ per share this year. Alcoa has become more focused, cutting production, reducing headcount, and achieving significant savings on raw materials. Foreign sales account for almost half of revenues. Lightweight aluminum products are indispensable and can provide environmental benefits. Saint (No fees)
American Water Works (AWK) provides water and wastewater services to 16 million residential, commercial, and industrial customers in 32 states and Canada and owns 80 surface water treatment plants, 600 groundwater treatment plants, 1,200 groundwater wells, 50 wastewater treatment facilities, 1,200 treated water storage facilities, 1,200 pumping stations and 100 dams, and 49,000 miles of mains and collection pipes. Saint (No fees)
Arch Coal (ACI) is the nation's second largest coal producer and is the largest producer of low-sulfur coal in the eastern U.S. It has subsidiary operations in Wyoming, Utah, Colorado, West Virginia, Kentucky, and Virginia, from which it provides the fuel for about 6% of U.S. generated electricity. Fluctuations in demand have a strong effect on price and earnings. Officers and directors now own 10.76% (up from 1.1% in 2009) and two funds own 15.3% of the 162.5 million outstanding shares. Sinner (Low fees)
Boeing Company (BA) is the leading manufacturer of commercial aircraft and a major producer of aircraft for American and foreign military uses. Annual sales are running close to $70 billion. BA has an order backlog of $300 billion for new aircraft, which should push earnings to nearly $8 per share by 2014-5. Over the years dividend payouts have averaged about 30% of annual earnings, which would translate into a dividend of $2.40 per share, up from the current $1.68. Sinner (Low fees)
Boston Beer (SAM) is a specialty brewer with plants in New York, Ohio, Pennsylvania, and Oregon, SAM sells about two million barrels of ale, lager, beer, and cider annually under the brand names Samuel Adams and LongShot. Officers and directors own 46.4% and one fund owns 12.5% of the 14.25 million outstanding shares. SAM has a clean balance sheet, with no debt, no pension liability, and no preferred stock. However, share prices are near all-time highs, so start small and add to your position slowly. Sinner (High fees)
Brown-Forman (BF.B) is a major manufacturer, bottler, importer, and marketer of alcoholic beverages. Brand names include Jack Daniels, Southern Comfort, and Early Times spirits. Officers and directors own 22.7% of the 56.6 million class A shares. A strong balance sheet, high earnings predictability, and operating annual cash flow of over $500 million to add to its appeal. The dividend has been increased annually since 1985 at an average of over 8%. Earnings should increase at a similar pace. Sinner (No fees)
ConocoPhillips (COP) is an integrated energy company that produces crude oil and natural gas worldwide and also manufactures chemicals. In 1996, it earned $1.70 per share and paid an annual dividend of 63¢. For 2010, earnings hit $5.92 and the dividend was $2.64 per share. Share buybacks since 2006 have reduced the number of outstanding to 1.469 billion from 1.646 billion. COP has also lowered debt by $5 billion, just since 2008. Saint (No fees)
DuPont (DD) has operations in over 75 countries, accounting for over half of annual sales and is producer of performance materials, electronics, biotechnology, and safety and security products. It spent 5.3% of 2009 revenues on research and development. Earnings were $2.73 per share in 2008, down from $3.28 in 2007. In 2009, DD earned $2.04 per share, but that increased to $3.31 in 2010 and $3.60 is expected this year. Value Line sees share prices of $75-$85 by 2015. Sinner (High fees)
Emerson Electric (EMR) makes a broad range of electrical products and equipment. It spent about 2.3% of 2010's $21 billion sales on research and development, while net profit margins have been averaging around 8.5% since 2000. Overseas sales account for 57% of revenues. Dividends have been raised for 54 consecutive years and the current annual rate of $1.38 per share is double its 1999 level. Earnings should easily grow to over $3 per share in 2011. Officers and directors own 22.6 million of the 752.7 million outstanding shares. Saint (No fees)
Fortune Brands (FO) is a major manufacturer of liquor, boasting brand names such as Old Granddad, Jim Bean, Old Crow, Old Taylor, Gibley's, and DeKuyper. It also makes Moen faucets, office products, Master Locks, and Foot-Joy footwear, but plans to spin off or sell the home and security businesses and the golf business will be sold or spun off. As individual businesses, each should be able to operate more efficiently. Sinner (No fees)
Intel Corp. (INTC) is the world's largest semiconductor manufacturer and the market leader in producing microprocessors, microcontrollers, memory chips, motherboards, and networking products. Record annual earnings of $2.05 per share were posted in 2010, assisted by pent-up global chip demand, up from 2009's depressed results of 77¢. A low market price of under $20, a price/earnings ratio of just under 10, a secure 3.5% dividend yield, and $22 billion in cash assets, with a total debt load of just $2.33 billion, make Intel a strong Buy. Saint (High fees)
JPMorgan Chase (JPM): This bank plays a prominent role in domestic and international credit markets and has a presence in over 50 foreign countries. With a $660 billion loan portfolio and a book value of $43.06 per share, JPM earned just 84¢ per share in 2008, but bounced back to net $2.24 in 2009 and $3.96 in 2010. The very same day that regulators gave the go-ahead to boost its dividend, JPM raised its quarterly payout to 25¢ per share from 5¢ and announced a $15 billion share repurchase. Saint (High fees)
NiSource Inc. (NI) is an energy holding company with subsidiaries that provide natural gas, electricity, and other products and services to about 3.8 million customers within a corridor that runs from the Gulf Coast through the Midwest to New England. It delivers an attractive dividend yield, as well as earnings growth from infrastructure investments in a diversified array of mostly regulated businesses. This Fortune 500 company derives its power generation from coal (77%), Natural Gas (22%), and Hydro (1%). There are no nuclear plants in the mix. Saint (No fees)
Northrop Grumman (NOC) makes military aircraft, space and electronic systems, and specialty vehicles, and supplies information services. It also makes fuselages for Boeing's 747 airliners, avionics for aircraft and missiles, and builds cargo and warships. Earnings have grown by 13% over the past five years. Three funds own 26.2% of the 291.3 million outstanding shares. Dividends have increased each year since 2004, growing from 89¢ to $1.88 per share, for a current yield of 2.8%. Cash stands at $3.7 billion, while total debt is just $4.8 billion. Sinner (No fees)
The world's coal company, Peabody Energy (BTU) sold 246 million tons of coal in 2010, producing $6.86 billion in revenues and earnings of $2.86 per share. Its coal supplies 10% of U.S. electric power and 2% of electricity worldwide on six continents. BTU is in a position to supply ample coal for many years, with mines in Australia, China, Mongolia, and Indonesia. Dividend increases have been coming slowly and shares are yielding less than 1%. Sinner (High fees)
Polaris Industries (PII): Polaris is the source of much enjoyment and considerable annoyance, since it designs and manufactures all-terrain vehicles (ATV's), snowmobiles, and motorcycles (under the Victory label). The company also runs an active sideline in a variety of accessories and spare parts, which are sold by dealers across North America and Europe. The firm funds a healthy dividend for a manufacturer, providing a yield of 2.2%, and has increased the payout for 16 consecutive years. Long-term debt is a very modest 20% of capitalization. Sinner (No fees)
Raytheon Company (RTN) is a major defense electronics firm, providing defense electronics for command, control, communications, and intelligence systems sold to the military and international customers. Share buybacks have reduced outstanding shares to 359.7 million from 453 million in 2004. Cash assets of $3.6 billion match its total debt load, giving Raytheon high grades for financial strength and safety. Dividends have been increased annually since 2005, rising from 80¢ to $1.50 per share. Sinner (No fees)
Starbucks Corp. (SBUX) purchases and roasts whole bean coffees and operates in 50 countries worldwide through almost 17,000 stores, of which more than half are company-owned. It offers about 30 blends of premium coffees and also sells music, books, and gift items, as well as pastries, sandwiches, salads, oatmeal, yogurt parfaits, and fruit cups. Dividends were initiated last June at 10¢, then raised to 13¢ per share in September. SBUX earned $1.28 per share in fiscal 2010 (ends Sept. 30) and analysts are expecting $1.75 in fiscal 2011. Saint? (High fees)
Universal Corp. (UVV) is the largest independent leaf tobacco dealer in the world, doing business in more than 35 countries and employing more than 25,000 permanent and seasonal workers. It does not manufacture cigarettes, but its main customers include Philip Morris International and Altria. Trading just above the book value of $40.89 per share, UVV yields 4.6% on its annual $1.92 dividend and has increased payouts for the past 40 consecutive years. Sinner (No fees)
Wells Fargo (WFC) is the fifth largest bank holding company in the United States, with 11,000 offices in all 50 states, Canada, and Central America. Earnings came in at $1.77 per share in 2009, up 70¢ in 2008. WFC received permission from regulators to pay a special dividend of 7¢ per share together with the quarterly 5¢ dividend, bringing the first quarter payout to 12¢. The board has authorized the repurchase of 200 million shares. Berkshire Hathaway owns 6.53% of 5.27 billion outstanding shares. Saint (High fees).
