High Return on Equity, A Primer For Future High Dividends (PM, CL, SCSS, CPB, TRW, KO, BLL)

Our screen today is for companies with an attractive Returns on Equity (ROE) in the consumer goods sector.  It is our view that ROE is one of the better quick indicators of a well-managed company.  We also wanted to see what sort of dividends were being paid out as well.  Except where otherwise noted, the source for all performance and financial data is Finviz.com.

Our screen produced seven respected companies.  We list them here in descending order of their respective ROE’s:  Phillip Morris International, Inc. (NYSE: PM), Colgate-Palmolive Co. (NYSE: CL), Select Comfort Corporation (NASD: SCSS), Campbell Soup Co. (NYSE: CPB), TRW Automotive Holdings Corp. (NYSE: TRW), The Coca-Cola Company (NYSE: KO), Ball Corporation (NYSE: BLL).  These seven companies sport ROE’s ranging from 36.4% to 167.8%.  Their PE ratios range from 7.5 to 19.8, while their forward PE’s range from 7.2 to 15.3.

Among these seven companies, Phillip Morris, Campbell Soup, Coca-Cola and Colgate Palmolive pay the better dividends.  Some of these companies already offer high dividends, but using the return on equity may help us determine which can offer high dividends (or even higher dividends) in the future.

Phillip Morris International, Inc. (NYSE: PM) boasts a nearly startling 167.8% ROE. Is that too good to be true? In the face of health warnings and litigation, the cigarette giant’s annual earnings are up more than 21%.  PM’s forward price to earnings ratio is 13.3.  The dividend looks high at a yield of 3.8%, but that is low for a tobacco company as it is still considered more of a growth story than the domestic tobacco players.  The shares currently trade near $68.  Its 52-week price range is $42.64 to $71.75.

Colgate-Palmolive Co. (NYSE: CL) shows an eye-catching 98.8% ROE, again something that seems almost too good to be true.  The personal products company boasts quarter-over-quarter growth of 68%.  Colgate’s forward PE is 15.4 and it pays a dividend yield of 2.7% to its common stock holders. Currently trading around $86, CL’s 52-week price range of $71.61 to $87.58.

Select Comfort Corporation (NASDAQ: SCSS):  The home furnishings company sports a ROE of 76.2%. Its quarter-over-quarter earnings are up 110%, having recovered from a 26% annual earnings drop.  The company has a forward PE of 13.1, it has traded since the late-1990s, yet has no dividend… Maybe it is time to loosen up the company’s purse strings for shareholders.  SCSS shares trade just under $15, up 4.6% from yesterdays close.  Its 52-week trading range is $4.92 to $17.86.

Campbell Soup Co. (NYSE: CPB) is shown to have a ROE of 74.9%.  Its quarter-over-quarter earnings are up 18%.  The company’s forward PE ratio is 13.7 and it offers a high dividend yield of about 3.4%.  CPB’s shares are trading almost unchanged today after closing at $33.92 yesterday.  Its 52-week trading range is $32.38 to $36.68.

TRW Automotive Holdings Corp. (NYSE: TRW):  The auto parts company boasts a 48.0% ROE.  TRW’s quarter-over-quarter earnings are up 32.3%.  The company’s forward PE is 7.2 but there is no dividend today.  After closing at $52.36 yesterday, the shares currently trade near $54, up more than 3%.   The 52-week price range is $26.20 to $63.26.

The Coca-Cola Company (NYSE: KO) return on equity is 42.3%.  Its annual earnings are up almost 73%.   Coke’s forward PE is 15.2, a tad greater than its current PE of 12.6.  It boasts a 2.9% dividend yield.  With the shares currently trading near $65.50, its 52-week price range is $48.07 to $68.28.

Ball Corporation (NYSE: BLL), the maker of Ball home canning jars and other packaging and container products, shows a ROE of 36.4%.  The company’s annual earnings are up 44% and its quarter-over-quarter earnings are up more than 22%.  Ball’s forward PE is 11.7 and its dividend yield is only 0.7%.  The shares currently trade near $38.  Its 52-week price range is $25.53 to $39.51.

As with any screens, we always recommend for investors to use their own methodology for their own investment objectives.  Return on equity and dividend screening with forward P/E ratios can be wonderful tools for value, growth, and income investors.  That being said, we are the first to admit that there are many pieces to a puzzle.  As always, don’t forget our one underlying mantra in investing that never changes regardless of the business and market cycle: “Know what you are investing in.”

Jim Berdou