Investor great Warren Buffett once said, "All there is to investing is picking good stocks at good times and staying with them as long they remain good companies."
This of course begs the question: What makes a "good company"? The answer is that good companies have solid fundamentals and sell items that people need, making them less prone to obsolescence like what you find in the technology sector. Personal goods company Church & Dwight (NYSE:CHD), spice and condiments seller McCormick (NYSE:MKC), and food conglomerate B&G Foods (NYSE:BGS) represent good examples of these types of companies. However, it always pays to look at company fundamentals such as revenue, cash flow growth, and the ability to retain cash for reinvestment in the business.
Nothing simpler than detergent and toothpaste
Church & Dwight sells a myriad of personal care and household products such as Arm & Hammer detergent, baking soda, and cat litter among other well-known brand names such as: Nair, Orajel, Oxi Clean, and Trojan. In the most recent quarter, Church & Dwight's revenue grew 0.35% with product volume contributing the most to gains which is what investors wants to see. However, net income declined 5% with marketing expenses contributing most heavily to the decline . The lack of an estimated federal tax payment stemming from Hurricane Sandy relief and lower capital expenditures served as impetus for a 55% increase in free cash flow.
Looking further at Church & Dwight's balance sheet, cash and long-term debt to equity clocked in at 14% and 31% respectively last quarter. Investors should look for companies with long-term debt to equity ratios of less than 50%. Debt creates interest costs that choke out profitability and deplete cash flow. Church & Dwight paid out a frugal 44% of its free cash flow in dividends in the most recent quarter. Currently the company pays shareholders $1.24 per share per year translating into an annual yield of 1.8%.
Gravy and spices
McCormick sells spices such as pepper, herbs, and condiments like gravy for mashed potatoes. The company caters to the individual consumer as well as the restaurant market. In the most recent quarter McCormick saw its sales, net income, and free cash flow increase 6%, 9%, and 178% respectively. Sales increases came from acquisitions, increased prices, and higher volume. Cost savings and improved margins contributed to net income increases. Lower retirement plan contributions and lower employee incentive expenditures contributed to increases in free cash flow. Looking at McCormick's balance sheet,cash and long-term debt to equity ratios clocked in at 5% and 51% respectively last quarter. The company paid out 83% of its free cash flow in dividends in the most recent quarter . Currently McCormick pays shareholders $1.48 per share per year and yields 2.1% annually.
Food for your portfolio
B&G Foods sells food under brand names such as Maple Grove syrup, Cream of Wheat, and TrueNorth nut cluster snacks. In the most recent quarter, B&G Foods grew its revenue 16% with acquisitions contributing to all of the company's revenue growth . Factoring out the acquisitions, sales experienced a 5% decrease meaning that the company doesn't demonstrate a current ability to grow revenue internally. Its net income declined 9% during the same time frame while its free cash flow increased 35% . Increased selling, general, and administrative expenses as well as increased interest expense contributed to the decline in net income. Timing of cash received from customers and accrued expenses contributed to the increase in free cash flow.
B&G's cash balance amounts to 5% of stockholder's equity. The company possesses a debt laden balance sheet with long-term debt to equity coming in at 226% last quarter. B&G Foods does pay a dividend and paid out 61% of its free cash flow in the most recent quarter. Currently the company pays shareholders $1.36 per share per year in dividends translating into a yield of 4.2% annually.
Church & Dwight has demonstrated an ability to grow revenue internally without needing to buy other companies. Both Church & Dwight and McCormick also possess lower long-term debt than B&G Foods. Church & Dwight and McCormick definitely deserve more of your attention while investors may want to shy away from B&G foods. Also, as a bonus to long-term investors in both Church & Dwight and McCormick can collect dividends while waiting for capital gains.
William Bias has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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 Motley Fool has a disclosure policy.
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