Transportation and Automotive Sector Ideas

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CH Robinson Worldwide -- >>> 5 Value Dividend Stocks with Wide Moats



By Meena Krishnamsetty

May 1, 2013



http://beta.fool.com/insidermonkey/2013/05/01/5-wide-moat-value-dividend-stocks/32454/?source=eogyholnk0000001




Warren Buffett has been one of the most prominent investors in companies with wide moats. He often referred to his investment targets as companies that possess “long-term competitive advantage in a stable industry” or, in other words, “an enduring ‘moat’ that protects excellent returns on invested capital.” Wide moats and excellent ROIC, likely the best measure of economic profitability, generally go hand-in-hand. What’s more, over longer time horizons, wide moats also seem to go hand-in-hand with solid total returns.

For illustration, the Morningstar Wide Moat Focus Index, consisting of 20 wide-moat stocks that Morningstar considers “best value,” has outperformed the broader market over both three- and five-year periods. Its annualized excess return over the five-year period was more than double the U.S. market’s return.

This is just one of the few strategies with market-beating potential available to investors today.

Wide-moat stocks can be good investments, particularly if they boast value attributes. Based on the aforementioned Morningstar’s wide-moat stocks with compelling value characteristics, here is a closer look at five such stocks that pay dividend yields above 2.0%.

Let’s get started

Exelon (NYSE: EXC), the largest U.S. nuclear power company, is a wide-moat company in the unregulated electricity business. This company’s yields ballooned due to speculations of a dividend cut amid falling profitability. The speculation materialized back in February, when the company slashed its dividend by 41% in order to preserve its debt rating and to free up some $700 million annually for investments in generation projects that will provide quick returns. Exelon’s fortunes are tied to unregulated electricity markets, in which electricity prices have slumped in recent years in response to falling natural gas prices amid oversupply driven by the shale gas boom.

The stock is thus also a play on natural gas, whose prices have started to recover this month, buoying Exelon along. Exelon currently yields 3.4% on a payout ratio of 50% of the current-year EPS estimate. The dividend payout ratio is expected to rise this year and next as analysts forecast lower EPS in both years. Most of the bad news is priced into Exelon’s valuation, so the stock looks fairly priced at 14.5 times forward earnings, below its respective industry’s 16.5. Better natural gas pricing, which is possible but unlikely in the medium term, could lead the stock price higher. In terms of hedge fund interest, Citadel’s Ken Griffin was bullish about this stock last quarter.

The Western Union (NYSE: WU), a money transfer company, is a leader in its industry with strong competitive advantages due to its vast scale of operations that dwarfs those of its competitors. On average, the company processes 28 transactions per second, servicing some 70 million senders and receivers as well as 100,000 business-to-business customers. Its leading position in the industry is preserved through a regulatory environment that creates significant barriers to entry. Western Union is currently facing some headwinds, as it forecasts lower revenues this year, which should lead to an EPS decline of up to 19.5% from the year earlier.

Still, Western Union sees 2013 as a transition year in which it will “adjust its value proposition in consumer money transfer and invest for future growth.” Western Union’s revenues and profitability are likely to recover in 2014 and 2015, driven by a 7% growth in cross-border remittances and faster growth in the digital formats. Trading at 10.6 times forward earnings, below its five-year average, and boasting a dividend yield of 3.5%, Western Union is an attractive value and income play. The company’s payout ratio is low at 36% of the current-year EPS estimate. Western Union has had an excellent record of dividend growth over the past five years, increasing dividends at an average CAGR of 62%. Last quarter, the stock was popular with Chieftain Capital’s John Shapiro.

Who’s the best of the rest?

C.H. Robinson Worldwide (NASDAQ: CHRW), the world's largest third-party logistics provider, is another company with a wide moat in its industry due to its scale and operating network. The company pays a dividend yield of 2.4% on a payout ratio of 46% of the current-year EPS estimate. Its five-year annualized dividend growth rate is 9.6%. The company’s long-term CAGR target for net revenues, operating income, and EPS has been 15% since the company’s establishment. C.H. Robinson’s performance over the past decade has mostly matched or exceeded these targets, with net revenues, operating income, and diluted EPS growing at an average CAGR of 13.5%, 17.1%, and 18.2%, respectively.

While analysts are generally upbeat about C.H. Robinson Worldwide’s prospects, their forecasted EPS CAGR of 12.4% annually for the next five years falls short of the company’s long-term target. Still, an improving economy bodes well for C.H. Robinson Worldwide. Moreover, acquisitions, more outsourcing of logistics needs, and market share expansion will bolster the company’s financial performance in the future. Based on a forward P/E of 19.8, the stock is priced above its industry, and looks pricey.

However, it trades at the lower end of its price-to-book range over the past decade. Last quarter, C.H. Robinson Worldwide was William Gray’s new pick (see Orbis Investment Management’s top picks).

General Dynamics (NYSE: GD), an aerospace and defense company, holds the dominant position in shipbuilding and marine systems and combat vehicles. The company is one of legendary investor Warren Buffett’s major holdings. What makes General Dynamics attractive is its strong profitability, solid balance sheet, robust cash flows, and attractive valuation. Still, the company operates in a challenging macro environment characterized by notable uncertainty amidst the process of fiscal sequestration. A few months ago, the company reported a $2.1 billion quarterly loss due to write-downs. Moreover, due to planned defense budget cuts and the effect of sequestration, the company issued weak 2013 profit guidance, projecting EPS expansion of up to 3.4% this year.

Analysts are more upbeat about the company’s long-term position, forecasting the EPS CAGR of 7.1% for the next five years. General Dynamics’s total backlog at the end of 2012 was $51.3 billion. Particularly strong have been orders for marine systems, including those for the development of the U.S. Navy’s next-generation submarines. The company’s long-term prospects are intrinsically tied to the U.S. military, which, despite the efforts to reduce the defense budget, will face pressures to modernize, keeping outlays at high levels. General Dynamics is valued attractively, boasting a free cash flow yield of 5.5%, forward P/E of 10.3 (below its industry’s 11.8), and below-industry price-to-book of 2.2.

Intel (NASDAQ: INTC), the world’s largest chipmaker, ranks 6th on the Forbes World’s Most Powerful Brands list. Intel operates in a cyclical industry and exerts dominance in the PC sector that is on a secular decline. IT research firm IDC recently announced that global PC fell 13.9% year-over-year in the first quarter, which marked “the worst quarter since IDC began tracking the PC market quarterly in 1994,” according to IDC. Still, Intel expects its sales to grow in the low single digits this year. The declining PC sector is pushing for a major transformational shift at Intel. The company is slowly transitioning toward the mobile device market.

Moreover, it is moving into semiconductor foundry business, as indicated by the recent deal with Altera for the future manufacturing of Altera’s FPGAs based on Intel’s 14nm tri-gate transistor technology. Speculations surfaced in early March about possible discussions between Intel and Apple regarding a new foundry deal. These deals bode well for its future growth prospects. Still, Intel is a great value and income play, boasting a forward P/E of 11.6 and a dividend yield of 4.3%. Intel has a payout ratio of 47% and five-year annualized dividend growth of 13.7%. Last quarter, value hedge fund First Eagle Investment Management (check out its top holdings) was bullish about Intel.

An ‘ROIC’ of a conclusion

Among the stocks listed above, C. H. Robinson Worldwide has the highest ROIC, at 34.4%. It is followed by Western Union and Intel, which boast ROICs of 22.5% and 18.0%, respectively. General Dynamics and Exelon have ROICs of 11.6% and 7.2%, respectively. Each is an impressive investment moving forward, as companies with wide-moats, good value, and solid income streams don’t come along too often. We’d pay attention to the players mentioned here.

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