Where to Put Your Money Now

After shooting down your hopes of finding safety and security in the bond market, Mathew Emmert felt it only fair to provide some quality alternatives. Here, in part two of this three-part series, he provides your next two sips of a stock six-pack.

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By Mathew Emmert (TMF Gambit)
March 14, 2003

The good folks here at The Motley Fool ask questions. In fact, they ask a lot of questions. Things like, "How do you retire wealthy?" and "What do women want?" or more importantly, "If Joan Rivers gets another face lift, will her ears touch at the back of her head?"

But hey, we don't just ask questions, we answer them, too. And today's question is the same one I began to answer last week: If bonds aren't the best place for your money in this market, what's the alternative? To continue with part two of our series on stocks that provide stability and income, read on. And don't forget to tune in next week, dear reader, for part three!

A hearty meal
If you're hungry for yield, food company ConAgra (NYSE: CAG) will satisfy your appetite. The maker of Chef Boyardee and 35 other well-known supermarket brands such as Hunt's, Wesson, and Healthy Choice offers up a solid balance sheet, a history of growing earnings, and a luscious dividend yield of 4.7%.

Despite an overall decline in sales, the company is showing solid earnings growth, with its successful Healthy Choice and Banquet products offsetting declines in its lower-margin pork and beef businesses, which the company recently sold. The firm should be able to grow earnings in the 9% range over the next few years, which isn't stellar, but it's solid for a company in a business with historically thin margins. And management has been able to produce a return on equity of nearly 19%.

ConAgra raised its dividend payment for fiscal 2003, which marks the sixth consecutive annual increase, yet that payout represents less than one third of the company's free cash flow.

The food giant is the second-largest food company behind Kraft Foods (NYSE: KFT), and you'll notice their staple brands in nearly every aisle of the super market. ConAgra is well diversified within its industry, serving consumer grocers as well as restaurant and foodservice establishments.

For its fiscal second quarter, ConAgra met earnings estimates of $0.47 a share, and turned a 2% increase in packaged-food volumes into a 10% increase in profitability year over year. The company just announced its third-quarter numbers would be shy of estimates by around $0.06 per share, but said the fourth quarter would likely exceed estimates by as much as $0.06 per share. Further, the firm dropped the lower end of its 2003 earnings guidance by $0.03 to $1.57, due to expenses related to the September sale of its beef and pork businesses.

Despite the relatively non-eventful nature of the announcement, and the fact that ConAgra's fourth quarter is traditionally stronger than its third, the shares set a new 52-week low of $20.00. That puts the company at a cheap 6.4 times free cash flow (FCF). As a point of reference, Kraft trades at over 16 times FCF. And, even if the overall market is slow to recognize the value here, the hefty dividend will pay you while you wait.

Get connected
The baby bells have been crying lately, with the telecommunications industry having fallen on some pretty hard times. Competition has been brutal. Fraud seems to have taken a heavier toll on the firms that played fairly, as they struggled to keep up with the phantom growth of their unscrupulous competitors, who are now emerging from bankruptcy debt-free (talk about adding insult to injury). But all is not lost in this sector. There will certainly be companies that survive and thrive, and BellSouth Corporation (NYSE: BLS) will be one of them.

BellSouth is the third-largest independent Regional Bell Operating Company, behind Verizon and SBC, with nearly 25 million local phone lines. The company is the dominant telephone service provider in the Southeast, and has a 40% stake in Cingular Wireless, a joint venture with SBC and the second-largest U.S. wireless provider.

The market will likely remain skeptical of BellSouth until the company can demonstrate that, despite increased competition, it can still expand its business through the bundling of local, long distance, and Internet services. BellSouth has had growing success with bundled offerings over the past two years, and more importantly, competitors using their lines can't use the bundling strategy. The full impact of this endeavor, combined with aggressive cost cutting, should yield results in the coming year.

Due to the difficult operating environment for telecom firms, there are some negatives here. BellSouth's fourth-quarter results reflected continued weakness in the company's domestic wire line operations and in its Latin American business. Cingular, which was supposed to lead the future growth of the company, has been modestly disappointing, and will likely need to further reduce prices in order to generate gains in what's proving to be a brutally competitive wireless environment.

The weak market has also handed BellSouth its share of pension issues, with 2002 earnings per share reflecting a $0.63 charge for "pension related adjustments" and a $0.05 charge due to stock option expense. Despite cuts to staffing and other operational expenses, margins will most likely narrow a bit in 2003, on low wholesale access rates, increased sales, and marketing expenses, and higher pension and benefit expenses.

Despite all that, there are still numerous reasons to like this company. Even with its stronger free cash flow, BellSouth is trading below its peers based on both a price to earnings and enterprise value basis.

Basic wire line telephone service, which includes local service, long distance, and Internet access accounted for 64% of 2002 revenue, so the largest portion of the firm's earnings are standard meat and potatoes telecom. In addition, the telecom firm increased its high-speed Internet customer base to over 1 million in 2002, nearly double its 2001 figure. And the company now has FCC approval to offer long distance in every state in which it operates.

Though growth has been slow, Cingular Wireless now accounts for 21% of total revenues, and has increased its subscriber base by 1.5% in 2002, bringing it to 22 million customers. Early this year, Cingular restructured its marketing and sales organizations, and began focusing on new pricing strategies to enhance its competitive position.

The Latin American business has remained weak, as currency and political issues have been widespread. However, BellSouth's Latin American operations, consisting primarily of wireless service providers operating in 11 countries, only contribute 8% of total revenue.

All of BellSouth's business segments are fairly stable cash producing businesses, and the firm has some room to maneuver here in order to capture additional market share. The telecommunications market will remain highly competitive for the foreseeable future, but at 9.2 times free cash flow, the shares look attractive.

The firm's 22% operating margin and its ability to produce a return on equity of nearly 15% in a horrible economic environment lend further credibility. And again, the 4.17% yield will pay you while the economy improves.

Now I'm not recommending you back the truck up here, as near-term catalysts for industry growth are hard to come by. However, the relatively cheap price, and the safe, substantial dividend make the company a nice addition to a well-diversified portfolio.

Be sure to come back next Friday, when I offer up the last two stocks in the six-pack.

Mathew Emmert wonders why phone companies can invent everything except an automated way to curse out telemarketers. Despite this shortcoming, he owns shares in BellSouth Corp. You can view all of his holdings in his profile. The Motley Fool is investors writing for investors.