Top-Rated Stocks That Treat Shareholders Right

The flip side to shareholder-friendly stocks expected to underperform the market? Highfliers that pay little heed to their owners' interests. Conversely, there are top-flight companies that also treat their shareholders with respect.

Institutional Shareholder Services -- the big name in corporate proxies -- measures how well a company performs in as many as 63 categories covering four broad areas. Moreover, each company is scored relative to its market index and its industry group. It assigns the stocks a rating that it calls its corporate governance quotient, or CGQ.

Some evidence supports the notion that companies with weaker governance have higher risk, decreased profitability, and lower valuations. We'll look at stocks that Motley Fool CAPS investors have marked to outperform the market and that also sport above-average CGQ scores, either in their index group or among industry peers.

Company

CAPS Rating (out of 5 max)

Index CGQ Ranking*

Industry CGQ Ranking*

Qualcomm (Nasdaq: QCOM  )

****

68.9%

96.2%

Automatic Data Processing (NYSE: ADP  )

****

81.3%

99.1%

Aflac (NYSE: AFL  )

****

50.0%

82.5%

USEC (NYSE: USU  )

*****

92.3%

87.3%

ExxonMobil (NYSE: XOM  )

****

77.8%

98.1%

Source: Yahoo! Finance, Motley Fool CAPS. 

*Relative placement when compared with companies in index or industry. Higher is better.

Although finding good companies and holding them for the long term is one of the greatest secrets to success in investing, there are many factors an investor should consider, and how well a company treats shareholders shouldn't be least among them. View these rankings as a way to gauge how these businesses stack up against one another relative to their shareholder policies.

Go to the head of the class
It doesn't take much to scare investors nowadays. Most financial companies are suspect now, and after the debacle that was AIG (NYSE: AIG  ) , life insurers aren't too far behind. French insurer AXA (NYSE: AXA  ) , for example, just reported that its full-year profits fell 84% and it may seek a secondary offering to raise capital. So when an analyst warns clients to watch out for an insurer's exposure to shaky hybrid financial investments, you can expect investors to head for the exits.

And that's exactly what happened to Aflac after a Morgan Stanley analyst suggested that the insurer's exposure to European hybrid financial instruments could substantially wreck its capital ratios if even a portion of the losses were realized. Needless to say, Aflac's stock dropped 30% on the news.

Aflac management didn't come out and say the analyst was a quack, but it quickly quelled some of the anxiety. Management noted that 98% of the debt securities and perpetual debentures the company owns are investment-grade and estimated that its year-end risk-based capital ratio is 425% to 475%. Further, because Aflac does most of its business in Japan, the high value of the yen to the dollar has held back its results a bit; otherwise management expected that the capital ratio would have exceeded 600%. And those hybrid securities? They amount to only 12% of Aflac's total $69 billion investment portfolio, meaning the insurer is in no danger of collapse.

While the market still hasn't shaken off the jitters raised by what appears to be a false alarm, investors like CAPS All-Star justinkelley simply find an opportunity:

After the realization hits that this is a great company and that sell-off was much overdone, this stock will be back. I expect numbers around thirty in the coming weeks.

A Foolish quotient
Many factors go into whether a stock is a buy or a sell, but do corporate governance policies enter into your equation? It pays to start your own research on these stocks on Motley Fool CAPS. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made -- all from a stock's CAPS page.

Aflac is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings. The Motley Fool has a disclosure policy.


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