Three Stocks That Are Better Than Bonds, Emerging Markets
Walmart, Procter & Gamble, and Yum Brands trade for reasonably cheap valuations, pay bond-like dividends, and are growing rapidly in places like China, Mexico, and Brazil.
Sometimes in the market, you just have to trick yourself into doing the right thing.
That may be the case right now with a lot of investors -- "retail" and "pros" alike -- who continue their love affair with bonds and emerging markets, at the expense of US stocks.
Wouldn't it be better to avoid the bond bubble and the risk in emerging market stocks, and get the benefits of each from US stocks -- that unloved asset class?
After all, plenty of US companies look a lot like bonds. They pay dividend yields that are as high as bond yields, and relatively safe. Plus they offer the upside of emerging economies because they're expanding there. And then there's a kicker: These stocks should also do well as US shares continue to gain favor.
Three that I like the best in this category are Walmart (WMT), Procter & Gamble (PG), and Yum Brands (YUM). All trade for reasonably cheap valuations, which is no surprise since money flows continue to show that US stocks are disliked. But they also pay bond-like dividends backed by solid financial strength. And they're growing rapidly in places like China, Mexico, Brazil, and Eastern Europe.
In short, these stocks provide yields on par with bonds, minus the risk of losses that will occur when the bond bubble breaks. Yet they also get a boost from emerging market exposure. And they offer the potential for good capital appreciation as US stocks continue to come back into favor.
Walmart first started taking low prices to foreign countries in 1992 when it entered a joint venture in Mexico. It bought out the other half of its Mexican retail partner in1998 and then changed the name to Walmart de Mexico. Along the way Walmart has expanded into more than a dozen countries, including significant moves into emerging economies of China, India, Brazil, Argentina, and Chile.
It now has about 1,500 stores in Mexico, more than 400 in Brazil, and about 300 stores in China. That compares to about 4,300 stores at home in the US, including Sam's Clubs. Last year, Walmart got about one-quarter of its sales abroad, or $100 billion out of $405 billion in sales. One-third of its 2.1 million employees worked in foreign countries.
More importantly, foreign expansion is now the growth driver at Walmart. In the quarter ending July 31 international sales grew 11% to $25.9 billion. Domestic sales were essentially flat at $64.6 billion. So foreign expansion was the engine behind overall 2.8% sales growth. International sales were up because of new store openings in Brazil and China, and strong performance in Mexico.
International sales growth has outpaced domestic sales growth in the past two years. And it will become an increasingly important contributor to overall growth in the years ahead, says Morningstar analyst R.J. Hottovy, especially in China, Mexico, and Brazil. At home, the chain is gaining market share with smaller format stores, remodeling, and a shift toward selling groceries and fresh foods.
Trading at about 12 times forward earnings, Walmart looks reasonably priced especially compared to bonds -- which seem pricey given that interest rates have nowhere to go but up, as the signs of economic rebound continue to gather steam. Rising interest rates will push bond prices down, of course. Walmart also has solid financial strength supporting a 2.2% dividend yield.
Procter & Gamble
Because of Procter & Gamble's aggressive international expansion, people around the world are switching from old-school double-edge blade razors. So now they get to complain just like the rest of us that Gillette refills are too darn expensive. Procter & Gamble got 37% of its $79 billion in sales from emerging markets, primarily in Asia, Latin America, and Central and Eastern Europe, in the year ending June 30. About 42% of sales came from North America, and 21% from Europe.
But just like with Walmart, foreign markets account for a lot of the growth as the company sells more Crest toothpaste, Pampers, Tide, Duracell batteries and other household goods around the word.
In the most recent quarter, sales volume advanced 12% in developing markets compared to 4% growth in developed markets. Foreign sales were up 4%, way ahead of overall 2% sales growth. There's no reason to doubt that emerging market growth should continue, given this company's talent for reaching consumers and building brands.
The company forecasts 6% to 8% developing market sales growth in the current fiscal year, compared to 1% to 2% sales growth in developed market. Procter & Gamble forecasts 7% to 9% earnings per share growth for the current year. It pays a 3% dividend yield, and the company has been using excess cash to buy back shares, as well.
They love Colonel Sanders so much in China that ongoing rapid expansion of the Kentucky Fried Chicken chain there should continue to support decent earnings and dividend growth at Yum Brands for years.
The company currently has about 3,000 KFC outlets. But that could ultimately expand to 14,000, say analysts at Morningstar. Pizza Hut is a big hit, too. Yum Brands has about 500 Pizza Huts in China now, and that could grow tenfold in the coming years. The company also has a chain of East Dawning restaurants that sell Chinese food. Overall, Chinese consumers spent $3.7 billion on Yum Brands fast food last year.
Rapid growth in China provides a much-needed boost at Yum Brands, because it offsets more sluggish growth in the rest of the world, particularly in the US. In the most recent quarter, sales grew 18% in China, compared to 5% in the rest of the company's international operations and 1% in the US. Operating profits advanced 23% in China, compared to 16% growth in the rest of the world, and a 2% decline in the US.
China, in short, was responsible for the 5% earnings growth to $0.73 a share in the quarter. It also helps explain why Yum Brands announced a 19% increase in its quarterly dividend to $0.25 a share last quarter, which means the company pays a 1.9% dividend yield.
One challenge for Yum Brands in China is rapidly rising labor costs. But Yum thinks it can offset rising wages with price increases and cost cutting. Besides, higher wages in China isn't all bad. "The labor thing to me is sort of a dual-edged sword," CFO Richard Carucci said in the company's most recent conference call. "We like the fact that people have more money in their pockets and we have more consumers who could buy our products."
Indeed, the growing middle class in emerging economies should fuel much of the growth in earnings and dividends at all three of these companies in the coming decade.
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