Don't Get Stuck With These No-Growth Stocks

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When you look at the most successful stock investments of all time, you'll find a common theme behind all of them. In every case, smart investors bought into the stock before or during a period of explosive growth for the company. Over the years, as the company grew its sales and earnings, the share price moved inexorably higher. Those who went the distance without letting the inevitable gyrations of the stock market coax them into selling their positions earned great rewards.

In that light, you might wonder if there's ever any place in your portfolio for stock in a company that isn't growing anymore. After all, if the best days for a company are long gone, isn't owning shares the same thing as riding a sinking ship all the way down?

The value of growth
If this argument sounds familiar, that's because it's at the core of one of the most fundamental arguments among investors. Growth investors believe that companies with the best prospects for higher earnings in the future make the best investments, because if they succeed, their share prices will rise to mirror that success. Of course, their higher risk means that in many cases, these companies won't succeed in sustaining fast growth rates, which can create big disappointments for shareholders.

In contrast, value investors point to the excessive valuations that growth followers often pay for hot stocks. Instead, value investors stick with less exciting stocks that have much lower growth rates but which also carry much cheaper multiples to their earnings. By paying less for shares, they hope to make up for the slower growth their companies have.

But where both growth and value investors would agree is that the best stocks will always enjoy at least some growth. After all, a contracting business is a dying business, and unless the market puts an extremely low valuation on such a company's stock, it'll be hard to justify buying it.

Are these companies heading down?
Fortunately, there aren't that many companies among the blue-chip S&P 500 Index that analysts see facing falling earnings in the coming years. But there are a few, and if you have any of them in your portfolio, it's worth asking yourself whether you're prepared for the ramifications of what reductions in net income would mean to the value of your shares.

Here are the 10 biggest stocks that are expected to see earnings declines over the long haul:


Median Expected Long-Term Growth Rate

Current P/E

Dividend Yield

Eli Lilly (NYSE: LLY  ) (7.1%) 7.9 5.7%
Exelon (NYSE: EXC  ) (4.3%) 10.1 5.3%
Sprint Nextel (NYSE: S  ) (2.5%) NM 0.0%
Forest Labs (NYSE: FRX  ) (2.0%) 15.3 0.0%
Frontier Communications (NYSE: FTR  ) (2.5%) 43.3 8.2%
Ameren (NYSE: AEE  ) (5.8%) 41.8 5.3%
XL Group (1.4%) 19.4 2.0%
Windstream (Nasdaq: WIN  ) (0.8%) 19.4 7.6%
Wyndham Worldwide (1.6%) 14.4 1.7%
Pitney Bowes (4.0%) 13.4 6.5%

Source: Capital IQ, a division of Standard & Poor's.

A quick look at these companies doesn't reveal any obvious pattern. But if you dig a bit deeper, some categories of stocks become more evident:

  • With some high-dividend, low-growth stocks, investors clearly expect to reap the bulk of their returns from collecting dividend checks. For instance, with rural telecom companies Windstream and Frontier, whose bread-and-butter landline business could the 21st century equivalent of the buggy whip, all their shares have to do is tread water in order for shareholders to get a strong return.
  • In other cases, high dividends and slow growth combine with low valuations to reveal uncertain futures. Lilly is a great example here; as with most big pharma stocks, coming patent expirations and the need to continually develop its pipeline raise grave doubts about how it will meet future challenges. For now, it's fine and can pay a good dividend, but what the company will look like five years from now is anyone's guess. Forest Labs is in a similar situation, although it doesn't have the dividend to bolster its shares. Utilities Exelon and Ameren are in much the same boat, as changing regulatory environments make it hard to predict future growth.
  • On the other hand, some stocks have such high valuations that investors are evidently hoping for an unexpected event to bail them out. With Sprint, for instance, an expected turnaround never surfaced, and it may well be that the only thing holding up share prices is the hope of a possible takeover bid by a competitor.

Don't get trapped
In rare cases, stocks that have stopped growing can still be decent investments. But most of the time, you can find better places to put your money. If a company you own has seen its past growth stop in its tracks, make sure you're utterly convinced it's a good investment before you decide to stay on board for the long haul.

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Fool contributor Dan Caplinger sees the fastest growth from his 5-year-old daughter. He doesn't own shares of the companies mentioned in this article. Motley Fool Options has recommended writing covered calls on Exelon, which is a Motley Fool Inside Value recommendation. Sprint is a former Inside Value pick. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy keeps growing and growing and growing....

Read/Post Comments (5) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 22, 2010, at 1:52 PM, paddlinfaster wrote:

    I would like to see a rebuttal from the INSIDE VALUE guys who have been listing EXC as a BEST BUY NOW for the past 2 months.

  • Report this Comment On November 22, 2010, at 2:29 PM, ChessBob wrote:

    When is the last time a utility went out of business? EXC's diviend is safe, the stock is way under valued.

  • Report this Comment On November 22, 2010, at 4:31 PM, PeyDaFool wrote:

    I also wholeheartedly disagree with your position on EXC, Dan. I just picked up shares and I'll buy more if the price continues to slip. With a payout ratio of less than 55%, we're looking at a nice earner who can dish out the cash to shareholders for time to come.

    With the dividend over 5%, I'm not certain we'll see many dividend increases until EXC begins to bring in more cash with their wind and solar ventures, not to mention an expected increases in the price of natural gas.

    I'm long on EXC and will be reinvesting my dividends for the long haul.

  • Report this Comment On November 24, 2010, at 11:07 AM, refriedbean wrote:

    Windstream has a 7.6 percent yield and they are much, much more than a rural land line provider and I wouldn't care if they never grew, as long as they keep ringin' my cash register. Honalulu!

  • Report this Comment On November 24, 2010, at 11:39 AM, ChessBob wrote:

    What do value investors look for? Stocks who are over sold, high yeilds and the dividend is safe. Tah Dah go look in the dictionary and you see EXC.

    I looked at GermanInvestors picks of dividend stocks and he had SXL and VCO, both are near the their 52 week high! VCO's dividend is not safe. Look at their earnings per share vs how much their dividend. But those two companies are better buy than EXC right now. Well I can't agree with that.

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