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Diving Into the Dow: The Second Five

By Stephen D. Simpson, Simpson, – Updated Nov 16, 2016 at 12:12PM

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Two of our Fools banter about the relative merits of some of the biggest companies in America.

This is the second of six installments of our Diving Into the Dow series. If you missed the first installment, you needn't fret: You can find it here.

If you've already read the first piece, you'll know that my Foolish colleague, Stephen Simpson, and I spend a great deal of time using each other as sounding boards for investing ideas. We thought that opening up some of our stock banter to readers would be a good way to share some of our passion for investing with a wider audience.

After our tour through the first five companies, we both came away impressed with 3M, and Stephen was somewhat interested in AIG. So, without further delay, here is our look at the next five companies.

Altria Group (NYSE:MO)
NP: Jeremy Siegel's book The Future for Investors has forever ruined Philip Morris for me. Oops, I mean Altria Group. It was very sobering to realize that good old 'Flip Mo was the best-performing stock in the S&P 500 from 1957 to 2004 because of its dividend. At today's price, Altria's yield is still a robust 4.3%, and I have no problems owning a sin stock. Looking back over the last seven years, I see there were only two years when Altria's shares didn't trade down to a P/E multiple of 10 or lower at some point during the year. So while today's P/E of 15 isn't expensive, history says the shares are near the high end of the company's multiple range, and the shares should be available for less in the not-too-distant future.

SS: This is the ultimate sin stock, and, while I hate smoking, I won't overlook an opportunity just because I personally find it objectionable. This company has some strong brand value and a lot of pricing power, and it looks to me like most of the lawsuit troubles are coming to an end.

Still, the stock is near a 52-week high, and this is the sort of company that I'd like to buy when people are panicking. I don't think it's overvalued per se, but the yield isn't enough to entice me yet. You draw some channel lines on a long-term chart and probably look to buy the stock if or when it nears the lower line sometime in the future.

Caterpillar (NYSE:CAT)
NP: Caterpillar is quite likely the Dow component that I am least familiar with. I understand that the company follows macroeconomic trends fairly closely and benefits from those cycles, but that's not saying much. I'm pretty sure I could understand the company if I were inclined to put forth the effort but, to date, I haven't. And I don't plan on doing so until it is in deep-value territory. Caterpillar has been that cheap before, and I'm sure it will be again some day, and when it is, I'll need to devote some time to really understanding the company and its industry. Until then, I'll stick to the other Dow components that have caught my attention.

SS: What a difference a few months makes. The stock of this giant has tripled over the past three years, but now the estimates are coming down and the company is talking about rising costs and the potential damage from rising interest rates. Still closer to its high than its low, this is the kind of company I want to buy when things look terrible. Give it a few years, and I'm sure you'll read an article somewhere asking whether Caterpillar's doomed: That will probably be the time to buy.

Citigroup (NYSE:C)
NP: Despite Citigroup's participation in a number of questionable acts, I have a bit of softness in my heart for the company. In Japan, there are two options for visitors from the U.S. to access their funds in a U.S. bank. One is the post office, which, like most banks in Japan, has its ATM open only during business hours, and the other is Citibank. While I eventually set myself up with an account at a local bank when I was in Japan, I have to admit there were a few weekends when I was glad a Citibank was nearby.

That small note aside, in Citigroup we get a reasonably priced company with a sub-12 P/E ratio and a plump 3.8% dividend yield. That's the type of investing scenario that generally draws me in. The only problem is that you can get a similar P/E with a 4.5% yield in Bank of America (NYSE:BAC), and you don't get nearly as much controversy. Wells Fargo (NYSE:WFC) and Wachovia (NYSE:WB) also don't look too bad here.

SS: I've liked Citigroup for a while now, and the stock seems to be coming up nicely off of its summer lows. There's a good dividend here, as well as broad exposure to many different elements of the international financial markets.

The biggest issue that I see with Citigroup is that the doldrums in the banking sector have left a lot of high-quality companies with low valuations. Is Citigroup so much better than Bank of America, U.K.-based Lloyds TSB (NYSE:LYG), or dozens of high-quality regional or community banks? I'd answer with a tentative yes, but I can't ignore the other, less controversial ideas out there.

Coca-Cola (NYSE:KO)
NP: Coca-Cola is still a bit more expensive than I'd like to see it. It's not ridiculous, but, given the anemic growth over the past few years, I'd like to see a P/E less than 15 and a dividend yield better than 3%. I doubt I'll ever see that, but if I were to get such an opportunity, I'd be all over it, because it's rare that a company with such a strong brand and distribution system can be had for a bargain. But if I'm going to pay closer to 20 times earnings, I find longtime foe PepsiCo (NYSE:PEP) to be a more interesting proposition.

SS: All of you Warren Buffett disciples should cover your eyes, because I'm about to commit heresy. I just don't see the big deal about Coca-Cola. The stock looks really expensive to me, and I just don't see why I should pay about 2.5 times its growth rate for it when there are so many other high-quality companies trading at more reasonable valuations. Is the brand valuable? Yes. Is the product popular? Yes. Are there still good global growth prospects? Yes. But to me, the stock already more than reflects all of that.

DuPont (NYSE:DD)
NP: DuPont's history of innovation is staggering, and I think the company's recent share repurchase announcement is a step in the right direction. Having worked in the materials industry -- or chemical industry, if you prefer that -- I've learned that commoditization and competition are extremely fierce and that the rise and fall of energy prices wreaks havoc on margins. DuPont doesn't strike me as particularly cheap here, unless you believe that energy prices will stabilize and DuPont can hold the line on margins while growing sales. I'm not yet convinced.

SS: This one bugs me a bit. I fully expect energy prices to remain high next year, and I'm a bit worried about competition in the company's agricultural business, but I've got this nagging hunch that next year could be better for chemical companies like DuPont. Of course, investing on a hunch is one of the preeminently dumb things you can do, and I know that. Still, with the stock trading below the midpoint of its 52-week range and lagging the S&P for the past year, it might be worth at least a little more due diligence and a spot on an investor's watch list.

Foolish final thoughts
When we began thinking about this series on Dow stocks, we gave some thought to a logical way to break them up into groups that would make it fun for you while keeping it interesting for us as well. Writing about our five favorite Dow stocks might have been fun, but we'd inevitably be left with a group of five laggard companies that didn't interest us, making that assignment a chore. In the end, we settled on something close to alphabetical groupings, because it provided a simple mix of companies and the likelihood that at least one company per group would be exciting for us to talk about. It's sad to say, but we didn't quite get there with this second group, though it must be said that we both think Citigroup has its merits. However, the final four installments promise more stock excitement.

Lloyds TSB and Coca-Cola are Motley Fool Inside Value recommendations.

Nathan Parmelee and Fool contributor Stephen Simpson have no financial interest in any of the companies mentioned. The Motley Fool is investors writing for investors.

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Stocks Mentioned

Altria Group, Inc. Stock Quote
Altria Group, Inc.
MO
$41.68 (-3.67%) $-1.59
Citigroup Inc. Stock Quote
Citigroup Inc.
C
$44.26 (-2.90%) $-1.32
Bank of America Corporation Stock Quote
Bank of America Corporation
BAC
$31.73 (-2.37%) $0.77
The Coca-Cola Company Stock Quote
The Coca-Cola Company
KO
$58.60 (-1.11%) $0.66
Wells Fargo & Company Stock Quote
Wells Fargo & Company
WFC
$40.41 (-2.67%) $-1.11
Caterpillar Inc. Stock Quote
Caterpillar Inc.
CAT
$164.24 (-3.70%) $-6.31
Pepsico, Inc. Stock Quote
Pepsico, Inc.
PEP
$168.52 (-0.05%) $0.08
E. I. du Pont de Nemours and Company Stock Quote
E. I. du Pont de Nemours and Company
DD
Lloyds Banking Group plc Stock Quote
Lloyds Banking Group plc
LYG
$1.96 (-7.11%) $0.15

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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