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
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 Corporation (NYSE:EXC)’s valuation, so the stock looks fairly priced at 14.5x forward earnings, below its respective industry’s 16.5x. 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.
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 10.6x 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. The Western Union Company (NYSE:WU) 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?
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, Inc. (NYSE:CHRW). 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 19.8x, 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, CHRW was William Gray’s new pick (see Orbis Investment Management’s top picks).
General Dynamics Corporation (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 Corporation (NYSE:GD) 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 Corporation (NYSE:GD)’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 Corporation (NYSE:GD) is valued attractively, boasting a free cash flow yield of 5.5%, forward P/E of 10.3x (below its industry’s 11.8x), and below-industry price-to-book of 2.2.
Intel Corporation (NYSE: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 Corporation (NYSE:INTC) 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 Corporation (NYSE:INTC). 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 Corporation (NASDAQ:ALTR) for the future manufacturing of Altera Corporation (NASDAQ:ALTR)’s FPGAs based on Intel’s 14nm tri-gate transistor technology. Speculations surfaced in early March about possible discussions between Intel and Apple Inc. (AAPL) regarding a new foundry deal. These deals bode well for its future growth prospects. Still, Intel Corporation (NYSE:INTC) is a great value and income play, boasting a forward P/E of 11.6x and a dividend yield of 4.3%. INTC 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 Corporation (NYSE:INTC), which boast ROIC of 22.5% and 18.0%, respectively. General Dynamics Corporation (NYSE:GD) and Exelon have ROIC 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, and for more intriguing strategies, read out one in particular, here, on Insider Monkey.
Disclosure: none
