The stock market is brimming with companies all too willing to take on excessive risk, but that doesn't mean conservative investors have to join in to reap potential benefits. You might be surprised to find that more than a few stocks with market-beating potential that fit your risk profile.
We asked three top Motley Fool contributors to highlight a stock that meets the condition of allowing a conservative investor to sleep soundly at night but offer better than average returns on investment. Read on to find out why Kroger (NYSE:KR), McCormick (NYSE:MKC), and Altria (NYSE:MO) fit the bill.
A recession-proof business
Brian Feroldi (Kroger): Supermarkets are a great industry for conservative investors to look at, since no one stops buying food during an economic slowdown. However, the grocery industry is mature and extremely competitive, so investors need to be choosy about which companies they buy.
My favorite company from this industry is Kroger, which operates a number of brands that span the value chain. Value-conscious consumers can shop at stores such as Kroger and Ralph's, while those looking for premium-priced foods can visit a Harris Teeter. This diversity is a big reason Kroger has gained market share in the industry for 12 consecutive years.
With a strong portfolio of brands in place, Kroger's management team can stay focused on creating value for its shareholders. They do so by constantly working to lower their cost structure to offer consumers more competitive prices. When combined with the company's big push into offering affordable organics, Kroger's same-store sales have steadily ticked higher. In turn, management has an ever-growing pile of profits to pass along to shareholders, which it has happily done through dividends and buybacks.
Yet despite boasting a winning strategy and a long history of delivering for shareholders, Kroger's stock can currently be purchased for less than 13 times next year's earnings estimates. I think that's a bargain price for a high-quality company that offers up a dividend yield of 1.6%.
Spicy dividend growth
Demitri Kalogeropoulos (McCormick): Seasonings might not sound like the type of business that throws off steadily growing earnings, but at least for the market leader, it sure is. After all, McCormick has sent shareholders a dividend in each of its 93 years as a public company. It most recently boosted that payout by 9% to an annualized $1.88 per share.
Its prime positioning among retailers gives it a wide base from which it can generate sales even in weak markets. Thanks to its collection of branded flavorings, including McCormick and Old Bay, it generated $4.4 billion of revenue in its last fiscal year, up 2.7%. Better yet, the company had no trouble passing along higher prices to home
cooks. Prices rose by an average of 1.5% last year, which helped McCormick's operating margin jump to 14.5% of sales, representing a five-year high.
Management sees positive long-term trends propelling the global industry with strong growth over the next decade. In 2017, it's on track to continue adding market share by expanding sales between 5% and 7%. Price increases and cost cuts are expected to combine to push profits up by 10%.
Its dividend has plenty of room to grow, since it currently takes up less than 50% of earnings and just about one-third of the $658 million in cash flow that McCormick generated last year. Investors might not consider its modest sales expansion pace particularly exciting, but there's nothing boring about a payout that's risen in each of the past 31 years and is up 27% just since 2014.
Lighting up a smokeless future
Rich Duprey (Altria): It's no surprise to anyone that cigarettes are a declining business, as fewer and fewer people partake in the habit, so the fact Altria saw a decline in the business, with volumes down 2.7% in the first quarter wasn't really a item of concern. The tobacco giant was still able to increase revenue 2%, while adjusted operating income rose 8% from last year. The drop in the smokeless business seemed a bit more disconcerting, but even that could be explained by the impact of the recall it was forced to initiate and cost it $60 million in potential operating income.
It remains true that the tobacco industry will continue coming under pressure from anti-smoking activists, politicians, and regulators who seek to stub out cigarettes further by raising taxes on smokes, but companies such as Altria and Reynolds American (NYSE: RAI) are largely able to offset their impact on profits by raising prices. The ability to command such pricing power without an overly large loss of customers obviously speaks to the addictive qualities of smoking but is also an otherwise enviable position to be in.
It's what has enabled Altria to enjoy such phenomenal returns over the years regardless of the ebb and flow of the industry. And there are more opportunities for growth in the future from electronic cigarettes, which still represent an area of expansion despite regulatory efforts. Actually, it's because of the regulatory environment, since the FDA's new rules will squeeze out small manufacturers while benefiting large ones such as Altria.
Philip Morris International (NYSE:PM) is attempting to gain a reduced risk designation from the FDA, and if it's successful, it will market its iQOS e-cigs under Altria's Marlboro brand. There's also the possibility Philip Morris makes an acquisition play for Altria, much as British American Tobacco (NYSE:BTI) is doing with Reynolds.
Coupled with a dividend of $2.44 per share that yields 4.3%, an investment in Altria continues to be a top pick for income-seeking conservative investors.