Sure Dividend

About the Author Sure Dividend

Sure Dividend is designed specifically to simplify the process of investing in high quality businesses with shareholder friendly managements for individual investors. Sure Dividend takes a quantitative approach to this task, while providing qualitative analysis backed up by fundamentals. The Sure Dividend approach uses The 8 Rules of Dividend Investing to simplify the process of investing in high quality dividend growth stocks.

High Quality Dividend Stocks for Retirement

Retired investors have different investment needs than investors still in the accumulation phase. Retirees require a mix of current income, safety, and growth that is difficult to find. This article examines 12 dividend stocks that match retirees needs for current income, safety, and growth.

Each of the 12 dividend stocks below has 25+ years of dividend payments. Each has a dividend yield above 3%. Each has a below-average stock price standard deviation. Finally, each of these 12 dividend stocks has showed earnings-per-share and dividend-per-share growth over the last decade well above inflation.  The 12 dividend stocks for retirement are analyzed in detail in the next sections of this article.

Southern Co

Dividend Yield: 5.0%
Projected Growth Rate: 3% to 4%
Stock Price Standard Deviation: 17%

Southern Co (NYSE:SO) is one of the largest publicly traded utilities in the United States. The company currently has a market cap just under $40 billion. Southern Company has generated over $2 billion in income over the last twelve months.

Southern Company supplies electricity to 4.5 million customers in Georgia, Alabama, Mississippi, and Florida. The company generates 91% of its earnings from its utility businesses. The remaining 9% of earnings come from the company’s competitive wholesale electric business. Southern Company’s operations consist of the following subsidiaries and affiliates:

  • Alabama Power
  • Georgia Power
  • Gulf Power
  • Mississippi Power
  • Southern Power
  • Southern Nuclear
  • SouthernLINC Wireless

Southern Company has paid steady or increasing dividends since 1982. The company also performed exceptionally well during the Great Recession. Southern Company’s earnings-per-share through the Great Recession and subsequent recovery are shown below to illustrate its excellent performance during this difficult time:

  • 2007 earrings-per-share of $2.28
  • 2008 earrings-per-share of $2.25
  • 2009 earrings-per-share of $2.32
  • 2010 earrings-per-share of $2.36
  • 2011 earrings-per-share of $2.55

Southern Company’s long history of growth and stability are evidence of its competitive advantage. Southern Company’s competitive advantage is its monopoly electricity provider status in the markets it serves. Electric utilities are natural monopolies due to the high cost of building power plants and high switching costs. To illustrate this point, most people don’t relocate simply because they don’t like their utility provider.

Southern Company is expecting earnings-per-share growth of between 3% and 4% in 2015. Investors should expect long-term earnings-per-share growth of around 3% to 4% in 2015 and beyond. Utility income growth tends to be stimulated by GDP growth in the area it serves.  The GDP in Southern Company’s service area is expected to grow at 3% in 2015, and Southern Company should match or slightly exceed this growth. As with most utilities, investors should not expect rapid growth from Southern Company. Total returns should be between 8% and 9% from growth (3% to 4%) and dividends (5.0%).

General Mills, Inc.

Dividend Yield: 3.1%
Projected Growth Rate: 7% to 9%
Stock Price Standard Deviation: 17%

General Mills, Inc. (NYSE:GIS) is one of the largest packaged food manufacturers in the world. The company currently has a market cap of $33 billion. General Mills generated $1.4 billion in income over the last 12 months from its global food operations.

General Mills has paid dividends for 116 consecutive years. The company’s longevity speaks to its sustained success. General Mills also performed very well during the Great Recession and through the subsequent recovery. The image below from General Mills’ investor relations shows the company’s adjusted-earnings-per-share growth through the Great Recession and subsequent recovery:

GIS Recession Growth

General Mills’ competitive advantage comes from its strong brands. An outline of some of General Mills more popular and well-known food brands by category is below.

Cereal
Cheerios
Chex
Wheaties
Lucky Charms
Trix

Healthy/Natural/Organic
Annie’s
Cascadian Farms
Immaculate
LARA Bar
Food Should Taste Good

Baking Products
Betty Crocker
Pillsbury
Bisquick
Gold Medal
Yoki

Other
Haagen-Dazs ice cream (joint venture)
Progresso soup
Yoplait yogurt
Gardetto’s
Nature Valley

General Mills supports its portfolio of high quality consumer food brands with significant advertising spending. The company has spent between $840 and $920 million each year on advertising since 2010. General Mills is a global business. It’s high quality brands, strong advertising, and global reach form its competitive advantage.

2015 is projected to be a difficult year for General Mills. The company is restructuring to reduce expenses. Cereal consumption is declining in the United States and other developed markets as consumers slowly switch to healthier options. General Mills plans to counteract this trend by focusing on the health aspects of its cereals such as ‘gluten free’ and ‘low sugar’.

General Mills has compounded shareholder wealth at 11% a year since 1995. The company is targeting continued shareholder growth around this number. Growth will come from share repurchases, operating income gains (7% to 9%), and dividends (~3%). General Mills shareholders should expect total returns of around 11% after 2015, in line with the company’s historical average.

Kimberly Clark Corp

Dividend Yield: 3.2%
Projected Growth Rate: 5% to 9%
Stock Price Standard Deviation: 17%

Kimberly Clark Corp (NYSE:KMB) manufactures and sells disposable consumer products. The company owns five brands that generate $1 billion or more per year in sales. These 5 brands are: Kleenex, Kotex, Huggies, Pull-Ups, and Scotts. Kimberly-Clark sells its products in over 175 countries. The company has grown to have a market cap of nearly $40 billion. Approximately 25% of the world’s population uses Kimberly-Clark products.

Kimberly-Clark is a Dividend Aristocrat. The company has increased its dividend payments for 43 consecutive years. Kimberly-Clark has also performed well during recessions. The company’s low-cost branded consumer goods products do not see demand fall sharply during recessions. The company only saw earnings-per-share dip slightly through the worst of the Great Recession. Kimberly-Clark’s earnings-per-share over this time are shown below:

  • 2007 earnings-per-share of $4.25
  • 2008 earnings-per-share of $4.06
  • 2009 earnings-per-share of $4.52
  • 2010 earnings-per-share of $4.45

Kimberly-Clark’s competitive advantage stems from its strong brand names and global distribution network. Kimberly-Clark’s brands are of the highest quality. The Kleenex brand in particular is so ubiquitous that many people call tissues by the brand name ‘Kleenex’ – even when they aren’t Kleenex brand. Kimberly-Clark has grown its share of the adult care market from 51% in 2009 to 59% due to strength in its Kotex, Poise, and Depend brands. In addition, Kimberly-Clark controls 39% of the baby and child care market through its Huggies, Pull-Ups, GoodNites, Little Swimmers brands.

Kimberly-Clark is a global business. The company sells its products in over 175 countries. Kimberly-Clark is currently restructuring its supply chain to more efficiently manufacture and distribute its products. A competitor would have to grow for decades to establish the same supply chain scale that Kimberly-Clark has.

Kimberly-Clark posted 5% constant-currency sales growth in its most recent quarter. Constant-currency sales growth in developing and emerging markets grew 11%. Constant-currency adjusted earnings-per-share grew 8% versus the same quarter a year ago.

Over the last decade Kimberly-Clark has grown its earrings-per-share at 5.2% a year. The company is expecting adjusted-earnings-per-share of 5% in fiscal 2015. Over the next several years, earnings-per-share are expected to grow at 5% to 9% a year. Kimberly-Clark shareholders can expect total returns of 8% to 12% a year from dividends (~3%) and earnings-per-share growth (5% to 9%).

Procter & Gamble Co

Dividend Yield: 3.3%
Projected Growth Rate: 6% to 10%
Stock Price Standard Deviation: 18%

Procter & Gamble Co (NYSE:PG) is the largest packaged goods company in the world. The company has a market cap of $216 billion. Procter & Gamble controls a total of 23 brands that generate $1 billion or more each year in sales. The infographic below from the company’s investor relations shows the longevity and scale of Procter & Gamble.

Procter & Gamble Infographic

Procter & Gamble is a Dividend King thanks to its 58 consecutive years of dividend increases. The company has been in business for 177 years. Procter & Gamble is among the longest lived publicly traded corporations. The company’s long history of success is due to its presence in the slow-changing packaged consumer goods industry.

Procter & Gamble’s success is not limited to times of global prosperity. The company performed well through the Great Recession. Procter & Gamble’s earnings-per-share each year through the Great Recession of 2007 to 2009 and the subsequent recovery are shown below:

  • 2007 earnings-per-share of $3.04 (high at the time)
  • 2008 earnings-per-share of $3.64 (high at the time)
  • 2009 earnings-per-share (modest decline from high)
  • 2010 earnings-per-share (recession low)
  • 2011 earnings-per-share (new high)

Procter & Gamble’s long-term success is evidence of a strong and durable competitive advantage. The company’s competitive advantage comes from its portfolio of high quality consumer brands. The company’s 23 billion dollar brands are listed below by category.

Beauty/Personal Care Grooming Health Care Home Care Family Care
Head & Shoulders Fusion Crest Ariel Always
Olay Gillette Oral-B Dawn Bounty
Pantene Mach 3 Vicks Downy Charmin
SK-II Prestobarba Duracell* Pampers
Wella Febreeze
Gain
Tide

*Duracell is being spun-off to Berkshire-Hathaway

Procter & Gamble supports its diversified brand portfolio with large advertising spending. The company spent $9.2 billion on marketing in full fiscal 2014. This comes to 11% of revenues. Procter & Gamble has invested in brands in slow changing industries. Toothpaste, shampoo, razors, toilet paper, and paper towels are simply not products that are going to undergo revolutionary changes. Change in these industries is incremental, not sudden and abrupt. This makes Procter & Gamble’s brand based competitive advantage highly durable.

Procter & Gamble’s earnings-per-share grew at 5.8% a year over the last decade. The company’s growth was slower than it could have been. Procter & Gamble over-diversified in the last decade and spent too much time and money on non-core brands.

Procter & Gamble is refocusing on its core brands to increase its growth rate. The company plans to divest over 100 brands. Notable recent divestitures include Durcaell to Berkshire Hathaway and the Camay and Zest soap brands to Unliverer. Procter & Gamble has divested about 35 of its 100 non-core brands to date. Divestitures have freed up cash to be used for share repurchases. Procter & Gamble is expecting to repurchase about $5 billion worth of shares in fiscal 2015.

Management is targeting 10%+ constant currency earnings-per-share growth in fiscal 2015. The company is realizing solid growth from share repurchase, efficiency gains, and organic growth. Investors can expect total returns of between 9% and 13% a year from Procter & Gamble from earnings-per-share growth (6% to 10%) and dividend payments (~3%).

Kellogg Company

Dividend Yield: 3.1%
Projected Growth Rate: 5% to 8%
Stock Price Standard Deviation: 18%

Kellogg Company (NYSE:K) sells branded food products. Kellogg generates about 55% of its revenue in the United States and 45% internationally. The image below from Kellogg’s investor relations shows the company’s brand portfolio:

Kellogg Brands

Kellogg has paid steady or increasing dividends since 1959. The company showed excellent performance through the Great Recession as well. Kellogg saw earnings-per-share rise every year through the Great Recession – a feat few businesses can claim. The company’s branded packaged food products are in demand regardless of the overall economic climate.

Kellogg’s long history of success and excellent performance during recessions is evidence of a strong and durable competitive advantage. The company’s well-known brands form its competitive advantage. Kellogg supports its brands with massive advertising spending. The company has spent more than $1 billion each year on advertising since 2010. The cumulative effect of this advertising is growing consumer awareness which ultimately leads to increased sales.

Many of Kellogg’s unhealthy brands are suffering. Consumer preferences are trending away from unhealthy ‘junk food’ and toward healthy alternatives. Kellogg has taken note and is heavily promoting the health benefits of its brands. Kellogg’s most well known health brands are Kashi and Bear Naked. Kashi is the market leader in natural/organic cereal with a 37% market share. Kellogg is converting more of its brands to non-GMO and organic to match consumer preferences. Kellogg has correctly identified the trend in packaged food products and making the necessary adjustments to drive future growth.

Kellogg has grown earnings-per-share by 5.6% a year over the last decade. From 2000 to 2009, the company grew earnings-per-share at 7.8% a year. Growth has slowed as consumer tastes have slowly trended away from many of Kellogg’s products. As mentioned above, the company is back on track to deliver growth after 2015. Kellogg shareholders can expect earnings-per-share growth of 5% to 8% a year over the long-run, in line with historical numbers. This growth combined with Kellogg’s current 3%+ dividend yield gives investors an expected total return of 8% to 11% a year going forward.

The Coca-Cola Company

Dividend Yield: 3.2%
Projected Growth Rate: 7% to 9%
Stock Price Standard Deviation: 19%

The Coca-Cola Company (NYSE:KO) is the largest beverage company in the world. The company’s flagship Coca-Cola brand is by far the most popular soda in the world. Coca-Cola has a market cap of $181 billion.

Coca-Cola was founded in 1892 in Atlanta Georgia. The company has paid increasing dividends for 52 consecutive years. The company performs well during prosperous times and during recessions. Coca-Cola’s earnings-per-share through the Great Recession are shown below to illustrate this point:

  • 2007 earnings-per-share of $1.29
  • 2008 earnings-per-share of $1.51
  • 2009 earnings-per-share of $1.47
  • 2010 earnings-per-share of $1.75

Coca-Cola’s success over the last century is evidence of an extremely durable competitive advantage. The company sells beverages – one of the slowest changing industries imaginable. Technology will continue to cause obsolescence in many industries. We will always drink beverages. It is hard to imagine a technological shift that would undermine Coca-Cola’s competitive advantage.

Consumer tastes are slowly shifting toward healthier beverage options. Sodas loaded with high fructose corn syrup or aspartame are slowly losing popularity in developed markets. Fortunately for Coca-Cola shareholders, the company owns a portfolio of 20 billion dollar brands. Fourteen of the company’s 20 billion dollar brands are non-carbonated. The company’s billion dollar non-carbonated brands are listed below. Brands rarely sold in the United States include the country or region where the beverage is popular.

  • Fuze Tea
  • I LOHAS (Japan)
  • Gold Peak tea
  • Ayataka (Japan)
  • BonAqua (International)
  • Vitamin Water
  • Simply juices
  • Dasani
  • Minute Maid Pulpy (China)
  • Aquarius (Japan)
  • Del Valle (Latin America)
  • Powerade
  • Georgia Coffee (Japan)
  • Minute Maid

Coca-Cola has long fueled its growth by using its global distribution network. The company develops or acquires drink brands and markets them on a global level. Over the last decade, Coca-Cola grew earnings-per-share at about 7% a year. The company showed 7% constant-currency operating income growth in fiscal 2014.

The company has plans to enhance bottom-line growth. Coca-Cola’s 5 step growth plan is listed below:

  1. Simplify operating model
  2. Expand productivity program
  3. Focus on great brands & strong bottling partners
  4. Target investments that leverage global strengths
  5. Provide local operations with clear goals

The 5 step growth plan will propel Coca-Cola’s growth over the next several years. Shareholders should expect earnings-per-share growth of 7% to 9% a year from Coca-Cola. In addition, the company has a dividend yield over 3%. Expected total returns for Coca-Cola shareholders are between 10% and 12% a year from dividends (3%+) and earnings-per-share growth (7% to 9%).

Altria Group Inc

Dividend Yield: 4.0%
Projected Growth Rate: 7% to 9%
Stock Price Standard Deviation: 19%

Altria Group Inc (NYSE:MO) has the largest market share in the United States tobacco industry. The company owns the following cigarette brands: Marlboro, Benson & Hedges, and Virginia Slims (among others). Altria sells e-vapor products as well. The company’s e-vapor brands are Mark Ten and Green Smoke. In the smokeless tobacco category, Altria owns both the Skoal and Copenhagen brands. In the cigar industry, Altria owns Black & Mild. Altria also owns 27% of Miller beer company SAB Miller. Finally, Altria owns the St. Michelle’s Winery brand of wine.

Altria has paid increasing dividends for 45 consecutive years (not counting the effects of spin-offs). Altria only sells its tobacco products in the United States. The company spun-off its international operations several years ago. Altria sells highly addictive products with well-known brands. The company’s long history of dividend increases shows how profitable this strategy has been for the company.

Altria’s competitive advantage comes from its industry leading brands. The Marlboro brand in particular dominates the United States cigarette industry. Marlboro has a greater market share in the United States cigarette industry than the next 10 cigarette brands combined. The cigarette industry in the United States is heavily regulated. This provides significant barriers to entry for potential new competitors. Restrictive advertising rules make it unlikely that rival ‘big tobacco’ companies will be able to steal significant market share from Altria.

Many investors think Altria’s earnings-per-share must be in decline. Cigarette volume continues to decline in the United States thanks to widespread knowledge of the negative health consequences associated with smoking. Despite these negative headwinds Altria has compounded earnings-per-share at 7.7% a year over the last 5 years. The company’s management expects earnings-per-share to continue growing at 7% to 9% a year.

Altria will very likely achieve this growth. The company will continue to grow by incrementally raising prices on cigarettes to boost margins and increase the bottom line. Altria also repurchases a substantial amount of its shares which boosts earnings-per-share.

Going forward, Altria has other growth prospects. The e-vapor industry is still in its infancy. If it continues to grow, it could provide a meaningful boost to the company’s sales. Interestingly, many people smoke both traditional cigarettes and e-vapor products. Rather than being a cigarette replacement, e-vapor products are opening up an additional revenue stream for Altria from current customers. Altria shareholders should expect total returns of between 11% and 13% a year from dividends (4%) and earnings-per-share growth (7% to 9%).

McDonald’s Corporation

Dividend Yield: 3.5%
Projected Growth Rate: 6% to 9%
Stock Price Standard Deviation: 20%

McDonald’s Corporation (NYSE:MCD) is the largest restaurant in the world by a wide margin. The company has a market cap of $94 billion. The nearest competitor (Yum! Brands) has a market cap of $39 billion – less than half the size of McDonald’s. McDonald’s has over 35,000 locations around the world. The company is truly global and generates more revenue in Europe than it does in the United States.

McDonald’s is a Dividend Aristocrat. The company has increased its dividend payments for 39 consecutive years. McDonald’s low priced fast-food offerings tend to do as well (or better) during recessions. The company managed to grow earnings-per-share, dividends-per-share, and revenues-per-share each year of the Great Recession

McDonald’s long history of success shows evidence of a durable competitive advantage. McDonald’s competitive advantage comes from its strong brand and franchising business model. The golden arches are recognizable throughout the world. McDonald’s franchising model allows it to grow quickly and realize higher returns on assets than a store-owned business model. McDonald’s recently announced it will push to have 90% of its stores franchised within the next 3 years versus about 80% currently.

Over the last decade McDonald’s has grown earnings-per-share at over 10% a year. The company’s double-digit compound growth rate comes from several factors. Large share repurchases, innovation in coffee and store layout, and new stores all drove growth over the last decade.

McDonald’s has struggled recently. The company is fighting through negative publicity. Examples include:

  • A human tooth (!) in an order of fries found in January 2015 in Osaka
  • 2 customers found plastic in Chicken Nuggets in January in Japan
  • The ‘living wage’ debate in the United States
  • Tainted meat scandal in China

This conflagration of negative events have lead to declining comparable store sales for McDonald’s in 2014 and 2015. The company has responded by replacing CEO Donald Thompson with new CEO Steve Easterbrook. McDonald’s plans to return to growth by simplifying its menu, focusing on the positive aspects of its brand, and increasing the amount of franchised stores the company has. McDonald’s management expects comparable store sales to become positive by the second half of 2015.

Investors in McDonald’s should not expect 10% earnings-per-share growth going forward. The company will likely generate earnings-per-share growth of 6% to 9% going forward. Earnings-per-share growth will come from:

  • Share repurchases (~3%)
  • New store openings (~2%)
  • Margin improvement (1% to 2%)
  • Comparable store sales growth (0% to 2%)

McDonald’s expected total return is 9.5% to 12.5%. Total returns will come from earnings-per-share growth (6% to 9%) and dividends (~3.5%).

Verizon Communications Inc.

Dividend Yield: 4.4%
Projected Growth Rate: 7% to 8%
Stock Price Standard Deviation: 22%

Verizon Communications Inc. (NYSE:VZ) is the leader in the United States telecommunications industry based on both market share and market cap. Verizon has a market cap of $204 billion versus $178 billion for its largest competitor (AT&T – analyzed later in this article).

Verizon has paid steady or increasing dividends for 30 consecutive years. The company is partially protected during recessions as well. Verizon locks its customers into long contracts that have substantial cancellation fees. As a result, the company generates stable cash flows regardless of the economic climate.   Verizon saw earnings-per-share fall just 5.5% during the worst of the Great Recession in 2009.

Verizon has a 34% market share of the US wireless market. AT&T controls another 31%.  Over 90% of the US wireless market is controlled by Verizon, AT&T , T-Mobile, and Sprint. The wireless market in the United States (as it is in most countries) is oligopolistic. A few mega-corporations control virtually the entire market. This is excellent for shareholders – and bad for consumers. The wireless market is protected from competition by high barriers to entry. Wireless spectrum auctions run by the United States government generate billions of dollars. Building the infrastructure required for wireless is also very expensive. These extremely high barriers to entry limit competition in the market. This advantage comprises Verizon’s competitive advantage.

Verizon is slowly divesting its wireline assets to focus on wireless growth. The company recently announced it plans to sell its wireline assets in California, Florida, and Texas to Frontier Communications for $10.54 billion. Verizon will also lease the rights to over 11,300 of its company owned towers to American Tower Corporation. In the deal, Verizon will also sell American Tower Corporation 130 towers for an upfront payment of $5 billion. Verizon is using $5 billion of this cash to repurchase shares. This comes to a 4% reduction at current prices. Verizon also recently announced it will acquire AOL for $4.4 billion. I believe this acquisition is a misstep for Verizon as it takes focus away from wireless growth.

The primary growth driver for Verizon is the continued adoption of smart phones and tablets. Investors in Verizon should see double-digit total returns going forward. Earnings-per-share are expected to grow by 7% to 8% a year. This growth combined with the company’s 4.4% dividend yield gives investors total return expectations of 11.4% to 12.4% a year going forward.

SYSCO Corporation

Dividend Yield: 3.2%
Projected Growth Rate: 4% to 7%
Stock Price Standard Deviation: 22%

SYSCO Corporation (NYSE:SYY) is the largest publicly traded food distribution business. The Houston, Texas based company currently has a market cap of $22 billion. For comparison, the second largest publicly traded food distributor has a market cap of $6 billion.

Sysco distributes food products to restaurants and stores in the United States, Canada, Ireland, and Puerto Rico. The company has over 400,000 customers and delivers over 1 billion cases of food each year. Sysco currently controls about 18% of the highly fragmented food distribution market in the US. The top 5 companies in the food distribution industry make up less than 40% of the total market.

Sysco has increased its dividend payments for 44 consecutive years. Sysco is a Dividend Aristocrat thanks to its long history of dividend increases. The company has shown it can be profitable in both recession and times of economic prosperity. During the Great Recession of 2007 to 2009, Sysco Foods saw earnings-per-share fall just 2.2%.

Sysco Food’s competitive advantage comes from its scale. The company is the largest food distributor by a large margin. This gives the company access to economies of scale that its smaller competitors cannot match. Sysco Foods has the most extensive distribution network of any food distributor in the United States.

Sysco Foods has managed to grow through acquiring smaller competitors. The company is currently in a legal battle with the Federal Trade Commission regarding Sysco’s planned acquisition of U.S. Foods. The Federal Trade Commission rejected the acquisition on grounds that Sysco would become too large and have pricing power over small restaurants. Sysco is currently fighting this ruling arguing that the combined company would close several distribution centers and not gain pricing control.

Sysco Foods should see decent bottom-line growth over the next several years. Low oil prices will reduce operating costs. The company has been hurt by food price inflation. If this trend reverses, Sysco Foods will benefit. Over the last decade, Sysco has managed to grow earnings-per-share at just 0.8% a year. The company will likely experience faster growth over the next several years. The company should manage 4% to 7% earnings-per-share growth a year from revenue growth (~4%) and margin improvements (0% to 3%). Investors in Sysco can expect total returns of around 7% to 10% a year from the company from dividends (~3%) and earnings-per-share growth (4% to 7%).

AT&T Inc.

Dividend Yield: 5.5%
Projected Growth Rate: 3% to 6%
Stock Price Standard Deviation: 22%

AT&T Inc. (NYSE:T) is the second largest telecommunications company in the United States – behind only Verizon (analyzed above). AT&T has a market cap of $178 billion versus a market cap of $204 billion for Verizon. Both companies are about the same size.

AT&T is a Dividend Aristocrat. The company has increased its dividend payments for 30 consecutive years. AT&T has successfully transitioned from a wireline business to a wireless business. The company now generates about 55% of revenues from its wireless segment versus 45% from its slower growing wireline segment.

The wireless segment provides consumers and businesses with pre-paid and post-paid cell phone/smart phone/tablet plans. The wireline segment offers internet, voice over IP, and television services.

AT&T saw earnings-per-share decline by 23% from 2007 to 2009 during the worst of the Great Recession. The company did remain profitable throughout, however. AT&T’s multi-year contracts with cancellation fees give it stable revenue and earnings.

AT&T’s competitive advantage comes from a mix of the unique economics of the wireless industry reduce competition and its multi-billion dollar infrastructure network. The economics of the wireless industry have been discussed in detail in the Verizon analysis above. AT&T works hard to promote legislation that will keep its competitive advantage strong. AT&T spent over $60 million on lobbying since 2002 – the second most of any publicly traded corporation (casino owner Las Vegas Sands spent the most at $69 million in the same period). The wireless industries mix of high regulations and significant upfront costs will keep the industry in the hands of a few dominant players for the foreseeable future.

Like Verizon, AT&T’s growth is being driven by increasing wireless data usage. The company is benefitting from increased acceptance and usage of smart phones and tablets.

Despite favorable trends in wireless data usage, AT&T has not seen rapid growth over the last decade. AT&T’s earnings-per-share have grown at just 4.2% a year over the last decade. From 2001 through 2014 AT&T’s earnings-per-share have grown at an anemic 0.9% a year. AT&T has struggled to grow consistently as its wireless growth has largely replaced declines in its wireline segment. AT&T had higher earnings-per-share in 2007 than it did in 2014.

The company may be able to grow slightly faster than it has historically with the DirecTV acquisition. DirecTV has managed rapid revenue per share growth of over 20% a year over the last decade, though the company is expected to grow revenue per share at a about 10% a year going forward. AT&T may be able to deliver additional growth through bundling synergies in the US.

AT&T is using acquisitions to spur growth outside the United States. AT&T recently acquired Nextel Mexico for $1.875 billion. Earlier this year AT&T acquired Mexican wireless provider Lusacell for $2.5 billion. AT&T will combine these two companies to get a foothold in Mexico. The company’s focus on expansion into Mexico makes sense given AT&T’s deep knowledge of the industry. These acquisitions could increase growth for the company going forward – if AT&T finds a way to successfully compete with the Carlos Slim’s (the 2nd richest man in the world) Mexican telecommunications empire which has a 90% market share.

AT&T plans to acquire DirecTV for $49 billion. The deal is largely expected to pass regulatory scrutiny (maybe the $60 million in lobbying is paying off?). The DirecTV acquisition will give AT&T 25% of the pay TV market in the United States which will help the company better negotiate with content providers. DirecTV is the leader in pay TV in many South American countries. The deal will give AT&T a foothold in Latin America which will set it up for further growth in the region.

AT&T has an exceptionally high dividend yield of 5.5%. Shareholders can expect total returns of 8.5% to 11.5% from dividends (5.5%) and earnings-per-share growth (3% to 6%). If AT&T’s Latin American expansion plans go well, the company may see earnings-per-share rise even quicker.

Exxon Mobil Corporation

Dividend Yield: 3.2%
Projected Growth Rate: 3% to 9%
Stock Price Standard Deviation: 25%

Exxon Mobil Corporation (NYSE:XOM) is the largest oil corporation in the world based on its market cap of $365 billion. ExxonMobil is the 4th largest publicly traded corporation in the United States, and generates the second most profits of any corporation publicly traded in the United States (behind only Apple).

ExxonMobil is a Dividend Aristocrat thanks to its 32 consecutive years of dividend increases. The company’s corporate history dates back even further. ExxonMobil is the successor to Rockefeller’s standard oil. At his peak wealth, John Rockefeller was personally worth over $300 billion in today’s dollars – about twice Warren Buffett and Bill Gates wealth combined. Standard Oil was eventually split into several companies. Over the decades, ExxonMobil re-emerged as the leader in the oil industry. The company’s ability to steadily raise dividends despite fluctuating oil prices shows the excellent earnings power of the company.

As one of the largest and most profitable corporations in the world, ExxonMobil clearly has a competitive advantage. The company generates over 80% of its earnings from its highly profitable upstream business. The company’s massive size and excellent connections around the world give it global access to profitable exploration opportunities. ExxonMobil’s competitive advantage comes from its connections, size, and experience in the oil and gas industry.

ExxonMobil’s profits in the short-run are determined in large part by the price of oil. When oil prices hit lows near $30 a barrel in 2009, ExxonMobil still made over $19 billion in profits on the year. Low oil prices reduce earnings, but ExxonMobil still generates significant earnings even during periods of low oil prices.

In the long-run, ExxonMobil’s profits will be determined by energy demand. Energy demand is expected to increase over the next several decades. Demand growth will come primarily from emerging markets like India and China.

ExxonMobil has compounded earnings-per-share at 4% a year over the last decade. The company will see weak earnings in 2015 and possibly 2016 due to low oil prices. When oil prices recover, the company’s profits will rise. Earnings per share will likely average double-digit growth every year for several years when oil prices recover – similar to what happened after 2009. ExxonMobil shareholders have to live with yearly uncertainty regarding earnings, but the company’s long-term prospects remain bright. In total, shareholders can expect total returns of 6% to 12% a year from earnings-per-share growth (3% to 9%) and dividends ~3%.