When the stock market gets the wobbles, as recently, it’s usually a good time to focus in on quality firms.
Good-quality companies with consistent performance and attractive financial characteristics rarely sell cheaply, but periods of market weakness can provide an opportunity to buy the shares a little lower.
GlaxoSmithKline (LSE: GSK), SABMiller (LSE: SAB), Dignity (LSE: DTY) and Britvic (LSE: BVIC) are all firms with attractive underlying businesses and may be worth keeping an eye on for a decent entry point.
With an update in May, pharmaceutical giant GlaxoSmithKline fleshed out what kind of growth we are likely to see from the firm. The directors expect revenue to increase at a compound annual growth rate in low-to-mid single digits from 2016 to 2020.
That signals potentially steady, if unspectacular expansion, which should power the company’s ability to keep its dividend payout progressing over the period. At today’s share price of 1347p or so, Glaxo’s forward dividend yield runs at around 6% with earnings covering the payout just once.
Low dividend cover seems to arise thanks to continued raising of the annual dividend in recent years despite falling earnings. With patent-expiry worries fading, we could see earnings rebuild over the period to 2020, but it seems a good idea to base any decision to invest in GlaxoSmithKline around the dynamics of the dividend payout.
Although SABMiller also grows slowly, the brewer’s cash-generating ability remains robust enabling a solid record of dividend advancement. Like pharmaceutical products, alcoholic beverages, based around often-loved beer brands, drive repeat purchasing and customer loyalty, making SABMiller something of a ‘defensive’ potential investment — often, our favourite tipple is the last expense to face the axe during austere times.
At a share price of 3354p, SABMiller’s dividend yield sits at about 2.3% for 2016 and the payout is covered a respectable twice by forward earnings. We find the strength here in the consistent record of rising dividends, powered by the firm’s gargantuan cash flow.
Business seems certain
Dignity is the UK’s only stock market listed provider of funeral-related services, and ongoing business seems more certain than in any other sector!
The firm acts as something of a consolidator to the industry, buying up undertaker operations as fast as it can. For example, back in May the firm said it had acquired 10 funeral locations since the start of the year, for an investment of approximately £8 million.
As you might imagine, cash flow is consistent and, on the back of that, the firm runs a large debt-load to fund its acquisition policy. However, over recent years a record of double-digit earnings growth presents as a thing of beauty.
There’s no denying Dignity’s ‘defensive’ nature, but at a share price of 2174p, the dividend yield sits at just 1.1% for 2016. That payout, however, is covered more than four-and-a-half times by forward earnings, suggesting the directors think the firm’s impressive growth has much further to run.
Cash-generating soft drinks
We find another consumer goods company in Britvic. This time, the firm’s focus is soft drinks and brands such as Robinsons, Tango, J2O and Fruit Shoot power that all-important cash flow thanks to customer loyalty and repeat purchasing.
There’s a long record of steady dividend progress — a dividend that rises annually is the greatest attraction of this kind of ‘defensive’ proposition, I reckon. At a share price of 730p the forward yield runs at around 3.4% for 2016 and forward earnings cover the payout more than twice.
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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has recommended Britvic and GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.