Tom Konrad CFA
The Perfect Stock
My ideal stock is:
- Green (in that the company is helping to make the economy more sustainable)
- Pays a good dividend (in the current low-interest rate environment, I consider 4% to be “good”)
- Has earnings and free cash flow large enough to easily sustain the dividend, and
- Has low debt, leading to low earnings and cash flow volatility.
I like such stocks because I can buy them, and pretty much ignore them. This leaves me time to research more speculative green stocks, while still knowing that much of my portfolio is producing reliable income. Until recently, however, my ideal stock did not exist.
The recent decline of many green stocks has changed that, and I’m finally building a core of my portfolio around such reliable income producers. For a list of the dividend stocks I am buying, see the end of the article here.
Dividend Stocks to Watch
Money Vision photo via Bigstock
Still, many green companies I like don’t meet all my criteria. Here are five I’m watching, and why.
#1 General Electric (NYSE:GE)
Why it’s Green: GE is involved in almost every green sector. It’s a leading wind turbine manufacturer, produces all sorts of efficient vehicles, machinery, and appliances, and has a strong smart grid division. The company’s Ecomagination initiative has long been core to its growth strategy.
Why I’m Watching, Not Buying: At $18.24, the dividend yield is a little lower than I’d like, at 3.7%. Earnings and free cash flow are easily enough to support a higher dividend, but GE’s debt to equity ratio (3.65) is uncomfortably high.
What I’m Waiting for: GE’s high debt will probably be a barrier to me adding it to what I consider the “safe” part of my portfolio, but if the dividend were to rise to 5% or more, and income still looked stable, I would probably buy, but to continue to watch the stock for signs of weakness.
#2 Siemens (NYSE:SI)
Why it’s Green: Siemens is also a leading wind turbine manufacturer, as well as a leader in electric transmission and distribution technology. Siemens’ automation technology helps innumerable industries use energy more efficiently.
Why I’m Watching, Not Buying: At $80.22, Siemens’ dividend is 3.5%. Earnings could easily support a higher dividend, but free cash flow is weak. Debt is at a comfortable 60% of equity.
What I’m Waiting for: I’d like to see free cash flow improve, and maybe a modest price decline to make this stock a better value.
#3 Honeywell (NYSE:HON)
Why it’s Green: Honeywell is a leader in efficient buildings, a key area society needs to address to become more sustainable.
Why I’m Watching, Not Buying: At $53.58, Honeywell’s dividend yield is 2.8% well below my threshold. Income and cash flow are easily strong enough to support the dividend, and debt is also reasonable at 2/3 of equity.
What I’m Waiting for: A fall in the stock price. All Honeywell needs is the right price, and I’ll be a buyer. If it fell below $40 today, I’d be buying.
#4 Johnson Controls (NYSE:JCI)
Why it’s Green: Johnson Controls is a leader in efficient buildings, and a leading battery manufacturer.
Why I’m Watching, Not Buying: At $29.17, JCI’s dividend yield is 2.5% well below my threshold. Earnings are easily enough to support a higher dividend, and debt is low, but free cash flow is negative.
What I’m Waiting for: Like GE, Johnsons Controls is not likely to make it into the “safe” part of my portfolio any time soon, but a fall in the stock price might see me pick it up for the more speculative part of my portfolio.
#5 Veolia (NYSE:VE)
Why it’s Green: Veolia is a leading water and waste management company. It also has a mass transit division, although it is looking to sell that.
Why I’m Watching, Not Buying: I own Veolia, but consider it speculative, not safe. The company has a cash flow problem, but is currently working to restructure its operations. Earnings are volatile, and, while the dividend is attractive at 6.8%, the company follows the European practice of setting a new dividend every year. I’m far from sure the 6.8% level will be maintained. Debt is high at over 2x equity.
What I’m Waiting for: The results of restructuring. The company has the revenues and businesses to be a reliable cash producer. If Veolia is able to sell some divisions and pay down its debt, the current low price ($12.18) would allow it to transform itself into my ideal stock.