Ben Graham value pack: 10 growth & income plays

by J. Royden Ward, editor Cabot Benjamin Graham Value Letter

Investing in conservative stocks to build or rebuild the core of your portfolio makes sense right now.

Investors should buy companies that have a long history of steady earnings and dividend growth, through good times and tough times.

The obvious benefit of adhering to a disciplined system of value investing like ours is that you build long-term profits and, ideally, financial independence.  

The less appreciated benefit, but no less important, is that you are afforded peace of mind.  

As a value investor, you know, even in the market’s darkest hours, that your undervalued holdings will not only rebound when the pressure comes off the market but eventually motor higher as investors grow more optimistic about their various business prospects.

We don’t believe anyone knows whether the stock market is going to go up or down during the next six months or so, but we do not recommend sitting on the sidelines.

The following 10 dividend-paying companies are recommended to be held long-term:

Colgate-Palmolive (CL) is a leading consumer products company with dominant positions in toiletries, detergents and other household products. New products and further expansion into developing countries will produce strong growth in the future.

International Business Machines (IBM) has transformed itself into the world’s largest information technology company.

IBM is taking advantage of increasing demand for software services from overseas customers, who make up 65% of total sales. Corporations have delayed new technology upgrades, but a recent surge in demand indicates a multi-year recovery is in progress.

Johnson & Johnson (JNJ) is the world’s largest and most diversifi ed health care company. Johnson & Johnson is focused on faster-growing health care segments and on divesting underperforming divisions.

Several new products look very promising. The aging of baby boomers ensures solid growth for leading healthcare companies such as Johnson & Johnson.

McDonald’s (MCD) operates 32,500 fast-food restaurants in 118 countries and generates $23 billion in sales.

International sales have provided much of the company’s revenue and earnings growth during the past 20 years and now contribute 65% of total sales. Diners are opting for less-expensive restaurants like McDonald’s.

Oracle (ORCL) The leading enterprise software maker’s aggressive acquisition program is now paying off with faster sales and earnings growth. Oracle is not slowing down, either.

The company acquired Sun Microsystems, which will diversify Oracle further. Oracle has begun paying a small dividend for the first time in its history. We expect the company to fully participate in the technology recovery.

PepsiCo (PEP) is a global leader in the soft drink and snack food industries. The company is expanding in international markets and focusing on health and wellness beverages and foods.

The company’s new snack foods contain more fi ber and whole grains. PepsiCo purchased its two largest bottlers for about $6 billion, and any redundant costs will be noticeably reduced.

Teva Pharmaceuticals (TEVA) is the largest generic drug producing company in the world. Based in Israel, Teva develops, makes and sells generic and proprietary-branded (store brand) drugs.

Teva’s aggressive acquisition and product development programs are driving remarkable sales growth. The new U.S. healthcare plan will favor the use of low-priced generic drugs.

TJX Companies (TJX) is the largest U.S. retailer of discount apparel and home fashion goods with 2,700 stores in the U.S., Canada, Germany, Ireland and the United Kingdom. TJX opened more stores than planned in 2009 and renovated many of its existing stores.

These moves attracted many new customers who were drawn to low prices and good-quality merchandise. We expect TJX to retain its new found customers and expand its store base aggressively during the next couple of years.

Wal-Mart (WMT) is the world’s largest retailer with $40 billion in sales. The company employs 2.1 million workers.

Shoppers seeking low retail prices are boosting Wal-Mart’s sales and earnings results despite the current economic slowdown in the U.S. The company is delaying U.S. expansion to focus on faster-growing international growth.

Walgreen (WAG), a leading drug store retailer, reported weak sales and earnings results for the most recent quarter, but the long-term outlook for this blue-chip stock remains healthy. New management is renovating existing stores and cutting operating costs.

New programs designed to improve service and to provide healthcare have been well received and should lead to better growth ahead. Drug retailers, such as Walgreen, will benefi t from the new U.S. healthcare plan.

The stocks of large, industry-leading companies, such as the 10 companies highlighted here, have been largely ignored by investors during the past decade.

Many of the companies have increased sales, earnings and dividends at a steady, reliable pace, but the share prices have lagged noticeably behind smaller, more speculative stocks.

The stocks of many industry leading companies are now grossly undervalued and are poised to rise substantially during the next several years. Now is a great time to upgrade your portfolio.

Learn more about this financial newsletter at J. Royden Ward's Cabot Benjamin Graham Value Letter.