Maybe you’re not one of the millions addicted to PBS’ Downton Abbey, if you aren’t I won’t bore you, but my favorite character is the pretentious and pompous but well-meaning Lord Grantham who lost his fortune on stock in a Canadian railroad that went bankrupt. “But it was a sure thing,” he bleats.” Everyone one said it was a sure thing.” His man in the city, as he calls his stockbroker, dourly reminds him they had warned him to be more diversified.
Now after a bailout by his son-in-law they argue over the management of the estate, Lord Grantham suggests they invest the estate funds with…”some chap in America, Ponzi,…er Charles Ponzi, he guarantees a return in three months.” Doh!!! Poor boneheaded Lord Grantham. Two lessons, here: diversification and if it sounds too good to be true and so on.
Profits With Pedigrees
Less than 100 companies usually make up the list, making up a Wall Street version of Debrett’s. Finding a safe yield with not too high a payout ratio (thereby excluding REITs and MLPs) winnows it down and choosing the best of the best led me to energy stock Chevron Corporation (NYSE:CVX) , which I picked over Exxon Mobil Corporation (NYSE:XOM) because its yield is higher at 3.10%. Also Chevron is performing more nimbly, up 10.95% with a lower P/E of 8.75. It also has a sustainable payout ratio of 26.00%. The return on equity is a respectable 20.54%.
Another thing about Chevron is that it has chemicals and mining divisions so it’s not just an oil company. It also has interests in coal, insurance, real estate and alternative fuels. This major integrated oil company was founded in 1879.
The antithesis of Charles Ponzi was American financier J.P. Morgan whose company JPMorgan Chase & Co. (NYSE:JPM) is still around after 190 years. Dunderheaded Lord Grantham would have done much better to invest in JPMorgan. All corporate governance risks are low despite the London whale trading scandal of last year. The company trades at a 9.45 P/E with a 2.50% yield at an even more sustainable payout ratio of 22%.
JPMorgan stock has outperformed the S&P 500 up 31.39% compared to 13.95% for the S&P and just hit a 52 week high on February 12 which is another reason I picked it. Investors are trying to get in before the March Federal reserve stress test which it will undoubtedly pass with flying colors. The big bank will then highly likely raise the dividend. J. P. Morgan is trading under book and CEO Jamie Dimon raised guidance for 2013 at the last earnings release.
Parker-Hannifin Corporation (NYSE:PH) is a global manufacturer and supplier of motion control products mainly for automobiles, airplanes, tractors, and machine tools and thus is a good barometer of the health of the industrial economy. This is another name that hit a 52 week high on February 12. And why not with a forward P/E of 12.67 and a 1.80% yield with a payout ratio of 24.00%.
This is one of those names with so many moving parts (literally, all those pumps and valves) that it ends up being an industrial consumer discretionary name with its international exposure as well as ever growing yield. It rounds out the portfolio for the infrastructure and industrial upgrades the President called for in his State of the Union speech.
Parker Hannafin is the youngest of these companies, founded in 1918. It just raised the quarterly dividend 5% on January 25.
Lord Grantham should have bought stock in iconic American agriculture play, Deere & Company (NYSE:DE). based in the heartland of Moline IL and founded in 1837. This too was a difficult choice between Deere and Monsanto Company (NYSE:MON), another agriculture Dividend Aristocrat, as some might argue Deere sells tractors but it is also into forestry and construction equipment, thus another infrastructure play as well. Monsanto has a higher P/E and a lower yield and socially responsible investors take issue with some of the company’s practices.
Deere is trading at a 12.32 P/E and offers a 2.00% yield at a 23% payout ratio. The company offers a “brilliant” 44.92% return on equity and seems to have broken out from its mire in the $75-$80 range. The company just reported Q1 earnings on February 13 and despite beating on earnings and raising guidance has been selling off over 3%. This is due to their own predictions for lower corn and soybean cash receipts for farmers leading to worries over ag equipment sales.
Ta Ta For Now
I can’t wait for Lord Grantham’s next investment idea. It’s usually the only comic relief in the costume drama except for The Dowager Countess’ witticisms. All of these companies could have been much better alternatives for Lord Grantham. Near term upside for Deere may be limited but any one of these is a good long term hold..
The article The Aristocratic Touch originally appeared on Fool.com and is written by AnnaLisa Kraft.
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