DuPont is up 15% year-to-date in 2012, and seems to be heating up. However, shares remain almost 10% off their 2011 peak. What’s more, DuPont has a forward P/E of under 11 based on fiscal 2013 earnings — and a current P/E of just 14.
Admittedly, long-term performance isn’t much to scream about. The stock has a five-year return of 6% vs. 3% for the Dow — outperforming, but not by much. More troublesome is a 10-year return of just 12% vs. 26% for the benchmark Dow Jones Industrial Average.
However, there is reason to think that the past several years have been an important turning point for DuPont, as it has refocused through divestitures, acquisitions and product development. And if the last few years of big growth can’t be replicated in the years ahead? Well, then investors still can be content with DuPont’s industry dominance and nice dividend — making it an attractive low-risk investment with limited downside.
Johnson & Johnson
Many investors might not see any pharma stock as “low-risk” right now, even with a plump dividend yield. However, Johnson & Johnson (NYSE:JNJ) is not your typical pharmaceutical company because of its very strong consumer health business. Band-Aid bandages, Tylenol medications, Neutrogena skin care and Acuvue contact lens products are just a few of the items J&J sells at the grocery store instead of behind the pharmacy counter.
On the dividend front, you’ll be hard pressed to find a company with a better track record of distributions. The company has paid dividends since 1944, but more importantly has raised its dividend annually for 49 years in a row! In the past 10 years, the company has boosted distributions by a 12.4% annual rate. Think about that — as companies from Citigroup (NYSE:C) to General Electric (NYSE:GE) to Ford (NYSE:F) have shadows of their pre-recession dividends, Johnson & Johnson has been upping the ante at more than 12% per year on average.
And don’t think those increases have been from a measly sum to a slightly bigger sum. The annual payout is $2.28 a year with a headline yield of 3.5%. It has a slightly higher dividend payout ratio than these other two picks, of around 64%, but it also is one of the only four blue-chip stocks to get a AAA debt rating from Standard & Poor’s.
But enough about the dividend: Let’s talk about the prospect for growth and stability. The trouble with Johnson & Johnson lately has been serious concerns about product quality — including more than 50 drug and device recalls since 2010 thanks in part to problems at manufacturing facilities. This has been a major distraction and a hit to the company’s reputation.
However, even amid those costly recalls and the tarnish on the J&J brand, the company has managed to post four consecutive quarters of year-over-year revenue growth. And while profits took a hit in fiscal 2011, the company is projecting earnings growth of more than 45% in fiscal 2012!
More interesting to me is the 2011 buyout of Swiss-American medical device maker Synthes for a massive $21.3 billion. Before the deal was announced, JNJ stock was hanging out at around $59 a share. After the deal was announced, the stock spiked 10% in a matter of days.
But continued recall woes have been a distraction, and Wall Street has been focused on changes in the corner office as longtime leader William Weldon will hand the reins over to a former Army Ranger. JNJ is now about 7% off its 52-high attained last summer, and is in the red year-to-date in 2012.
Calling JNJ a turnaround play is a bit of an overstatement, since this company never was at risk of going anywhere. But it’s safe to say that now is a good buying opportunity as the company looks to refocus and win back Wall Street.
And if it doesn’t? Well, the bad news is baked in and the Synthes acquisition is going to naturally inflate numbers in the next few quarters. Look for proof of that when JNJ reports on Tuesday, April 17.
Jeff Reeves is the editor of InvestorPlace.com. Write him at firstname.lastname@example.org, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. As of this writing, he did not own a position in any of the stocks named here.