Screening the Highest Dividends in Defensive Stocks (MO, RAI, LO, KMB, LLY, HNZ, CAG, TAP, DPS, AWK)

We may have just witnessed an oversold bounce in the stock market, or we may be in for more days of recovery.  The markets are flirting with six weeks of negative performance and one day is not going to take away the caution that many investors feel.  The global growth and the U.S. recovery have both stumbled as far as many investors are concerned and now many are looking for cover while still keeping some stock market exposure.  Dividends offer safety for investors, but the go-to sector for investors who want exposure to stocks and want some comfort about what they own is the defensive stock group.  We keep a defensive stock universe and we routinely run screens in and around this list along with outside peers.

The big screen today is defensive stocks with the highest dividends.  Our screen came to a near-tie from Altria Group Inc. (NYSE: MO), Reynolds American Inc. (NYSE: RAI) and Lorillard, Inc. (NYSE: LO).  We also found Kimberly-Clark Corporation (NYSE: KMB), Eli Lilly & Co. (NYSE: LLY), HJ Heinz Co. (NYSE: HNZ), ConAgra Foods, Inc. (NYSE: CAG), Molson Coors Brewing Company (NYSE: TAP), Dr Pepper Snapple (NYSE: DPS), and American Water Works Company, Inc. (NYSE: AWK).

CIGARETTES:  The cigarette space yields three industry leading players, each with a payout exceeding 5%.  Reynolds American Inc. (NYSE: RAI) leads with a dividend of 5.61%, followed by Altria Group Inc. (NYSE: MO) paying 5.57% and Lorillard, Inc. (NYSE: LO) paying 5.23%. Among the three companies, dividend payout ratios range from LO’s low of 65.0% to RAI’s high of 80.88%. Forward P/E’s range from LO’s low of 11.76 to RAI’s high of 13.31. RAI’s shares currently trade around 38, with a 52-week range of $25.53 to $39.87.  With shares trading near $27.50, MO’s 52-week range is $19.53 to $28.13.  LO’s shares currently trade around $102, LO’s 52-week range is $70.87 to $116.90.  Fitch recently gave a report that it expects that tobacco players can easily mitigate legal pressures and regulatory pressures ahead.  Maybe some investors feel guilty for owning stocks that make a living by killing their customers, but those dividend checks are big enough to clean up a conscience.

CONSUMER PRODUCTS: Kimberly-Clark Corporation (NYSE: KMB) is the winner here in dividends for the consumer products sector with a dividend of almost 4.2%. It leads consumer product peers by far and it was one of our own stocks to own for the next decade.  That has not changed.  At $65.65, its has a 52-week range of $59.62 to $68.49, and Thomson Reuters sees a consensus price target of $68.58.  Some have been concerned that rising input costs and in-store promotion costs are too large of a challenge.  We think that Kimberly-Clark (and most peers) can actually survive and thrive either way.

BIG PHARMA: With a dividend of 5.2%, Eli Lilly & Co. (NYSE: LLY) leads major drug manufacturers.  Eli Lilly has a dividend payout ratio of 46.38% and a forward P/E of 10.05.  With shares trading near $38, LLY’s 52-week range is $32.81 to $39.40.  Five other significant drug companies also pay attractive dividends in excess of 4%, including AstraZeneca PLC (NYSE: AZN), GlaxoSmithKline plc (NYSE: GSK), Sanofi-Aventis (NYSE: SNY), Bristol-Myers Squibb Company (NYSE: BMY) and Merck & Co. Inc. (NYSE: MRK).  Dividends in this group range upward from Merck’s 4.25% to AstraZeneca’s 4.94%.

FOOD – MAJOR DIVERSIFIED: HJ Heinz Co. (NYSE: HNZ) leads its industry with a dividend of 3.6%. The company’s forward P/E of 14.56.  With shares trading near $53.50, Heinz’s 52-week range is $42.88 to $55.00.  The consensus price target is $56.81 per Thomson Reuters, so most of the return here may be left in the form of dividends.  Goldman Sachs may have cut its rating to “SELL” recently but it still offers what looks to be the top dividend.

FOOD – PROCESSED & PACKAGED GOODS: ConAgra Foods, Inc. (NYSE: CAG) leads this segment of the food industry with a 3.8% dividend. ConAgra has a dividend payout ratio of 55.20% and a forward P/E of 12.88.  With shares currently trading around 24.50, CAG’s 52-week range is $21.02 to $25.82.  ConAgra is one which does not always feel as defensive as some food stocks, but that dividend is hard to beat.

BEVERAGES – BREWERS: Molson Coors Brewing Company (NYSE: TAP) leads brewers with almost a 2.9% dividend. The company’s payout ratio is 26.26%.  Its forward P/E is 11.26. With shares trading near $44.50, TAP’s 52-week range is $41.88 to $51.11.  The beer sector has not acted quite as defensive as other defensive sectors.  Trends of micro-brews and smaller brews have been troublesome, as has input price trends.  Still, we recently named the now-Canadian Coors owner as a value stock likely to benefit from the summer trends.  In this heat wave, how many people can drink big red wines?

BEVERAGES – SOFT DRINKS: With a dividend of 3.2%, Dr Pepper Snapple (NYSE: DPS) leads this segment of the beverage industry.  Dr Pepper’s dividend payout ratio is 41.30% and its forward P/E is 13.34.  With shares trading around $40, DPS’s 52-week range is $33.60 to $42.44.  Dr. Pepper may still be more growth-oriented than a Coke or Pepsi and it has raised its dividends.  It is now paying a higher payout than both Coke and Pepsi.  Shares are also close to the analyst target of $42.92.

WATER UTILITIES: American Water Works Company, Inc. (NYSE: AWK) leads the municipal water space with a dividend of about 3.1%.  AWK’s payout ratio is 54.64%. Its forward P/E is 15.54. With shares trading near $28.50, the stock’s 52-week range is $19.92 to $30.70.  This one is as defensive as you can get.  You don’t have to an iPhone to live but try living without your water company.  The company’s dividends have risen and are likely to keep rising though time, it has nothing short of monopolies in the local markets which it operates, and its stock has risen and risen until recently.  There is a reason that this was one of our stocks to own for the next decade.

Call this what you want… value investing, dividend investing, or income investing.  Many of these stocks are held by investors for years and years.

JON C. OGG