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Mash Up of Dividend Growers and Low Volatility Stocks: Formula For Success (Part Three)

Of the eight stocks that showed up in YCharts' mash up of a dividend growth portfolio and a low-volatility portfolio – see Part One of this series -- Exxon-Mobil (XOM) is the least expensive. A 9 PE ratio over the past 12 months is one third lower than the broad market, and below the average for the energy sector.

That low valuation is partly a function of slow economic growth keeping oil prices in check, during a stretch when Exxon-Mobil and all diversified energy companies have had to significantly boost their capital expenditures to replace (and ideally boost) reserves.

XOM Capital Expenditures Quarterly Chart

XOM Capital Expenditures Quarterly data by YCharts

For investors looking to rotate out of positions that have become a tad rich in this latest leg of an increasingly long bull market, Exxon-Mobil is the only one of the eight stocks that gets an “Attractive” rating from Charts.

Exxon-Mobil’s 2.6% current dividend yield is above the market average and more than a half a percentage point ahead of a 10-year Treasury. The dividend grew 42% over the past five years. While that’s only half the pace of Walmart (WMT) -- another of the eight stocks on our select list -- it’s still well above the 8.5% rise in inflation over the past five years. A dividend payout ratio below 25% assures the dividend can keep growing. Moreover, Exxon-Mobil has paired solid dividend growth with stock buybacks -- another key way management can “return” money to shareholders. Adding a 5% buyback of shares over the past year to its dividend yield produces a compelling net total payout yield.

XOM Net Payout Yield TTM Chart

XOM Net Payout Yield TTM data by YCharts

Exxon-Mobil is also the sort of global behemoth that tends to outperform in market meltdowns. From September 2008 through the market bottom in early March 2009, Exxon-Mobil stock slumped 15% while the S&P 500 sunk 46%. In fact all eight stocks on our list did better than the overall market during that epic swoon, a signal their current membership in the lowest volatility quintile of the S&P 500 is not a fluke. Exxon-Mobil and McDonald’s (MCD) (also -15%) held on best, 3M (MMM) was the worst of the lot, falling 40% during that stretch.

Among the two beverage companies on our dividend growth/low volatility list, Coca-Cola’s (KO) 23% slide during the ’08-’09 battering was a lot better than the 32.5% fall for PepsiCo (PEP) shareholders.

Coca-Cola also looks like the better investment today. Both stocks have very similar valuations, with trailing 12-month PE ratios close to 20, and forward PE ratios in the vicinity of 18. Those valuations are at a premium to the market -- typical for defensive consumer stocks these days -- but Coca-Cola at least has managed to keep its earnings growth in gear.

KO EPS Diluted TTM Chart

KO EPS Diluted TTM data by YCharts

So you’re paying a similar valuation for one company in a self-described turnaround (PepsiCo) and the other in business-as-usual mode. PepsiCo announced last year it would spend an additional $600 million on marketing to better compete with Coca-Cola. Last week PepsiCo’s global chief of marketing -- who had been in the spot for less than a year -- left the company. During his stint, revenue growth was hard to find.

Coca-Cola also delivers a better income outlook for investors. A 3.25% current dividend yield is already ahead of PepsiCo’s 2.8% payout. Both companies have boosted their dividends at a strong 8.5% annualized rate over the past five years, but Coca-Cola’s 38% payout ratio gives it an edge over the 54% payout ratio for PepsiCo.

Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at editor@ycharts.com.

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