Two Stocks That Pay You Up Front
October 29, 2010 – by Richard Band
The next bear market is probably some distance off, but we’ll want to move gradually into a more defensive position as the final peak for the cycle comes into view.
This central theme — that we’re in a cyclical bull market that likely won’t carry all the way back to the 2007 highs before peaking in 2011 or 2012 — colors my stock picks for November. I need to make money now! So, I’m looking for stocks that will pay me a good dividend up front.
I’m keen on defense contractor Raytheon (NYSE: RTN). Yes, I’m well aware that the Obama administration is making a determined effort to rein in defense spending as the Iraq war winds down. Barring a new overseas conflict, the US defense budget will grow slowly, if at all, over the next three to five years.
However, RTN is rapidly expanding its electronic homeland-security business — products and services it can sell to not only the U.S. government but also foreign customers. In coming years, RTN hopes to boost foreign sales to 25% of its total, up from 20% at present.
Meanwhile, the stock is at a rock-bottom nine times next year’s estimated earnings — a whopping 33% discount to its five-year average P/E. The low price tag gives you an ample margin of safety, as does the generous 3.2% yield. RTN has sweetened its dividend 70% over the past five years. (It now pays out $1.50 a share).
Buy RTN at $47 or less. I’m projecting a total return (dividends plus price gain) of 20%-25% in the year ahead.
If you’ve got a little extra change in your pocket, consider insurance broker Marsh & McLennan (NYSE: MMC). About half of MMC’s revenues come from insurance-related services, a relatively steady business in good times and bad. The other half derives from MMC’s consulting and outsourcing lines, which offer more growth potential but are also more closely tied to cyclical swings in the economy.
What catches my eye first about the stock is MMC’s plump 3.3% dividend, well covered out of current earnings. I also see that Marsh is sitting on a $1.1-billion cash windfall from the August sale of its Kroll subsidiary. That’s a meaningful wad for a company with a total market value of just under $13 billion.
Chief executive officer Brian Duperreault, new man at the helm, has already earmarked $500 million for stock buybacks. With the dividend alone costing far more than the yield on MMC’s cash hoard, repurchasing stock makes eminent good sense.
Furthermore, Duperreault promises he’ll only make accretive acquisitions — the kind that add almost immediately to earnings per share. Assuming he sticks to his plan, MMC’s push into emerging markets (already successful) could drive double-digit earnings growth for the next five years.
Buy MMC at $24 or less.