What is the Value of a Brand Name?

A couple of weeks ago in a post about Johnson & Johnson, I said the company’s brand name is a priceless asset. But maybe brand names can be objectively valued: A recently released article by Interbrand and Business Week attempts to do just that, and lists the top 100 global brand names for 2006 in order of value.

According to that article the Johnson & Johnson brand name is worth $3.193 billion. That works out to a little less than 2% of JNJ’s market capitalization; the brand name may be worth about $1.10 per share right now, less than I would have thought.

The value of the brand name is a concept which can be useful to blue chip value investors. Last January when I bought Coca Cola (KO) at 39.95, part of my reasoning was that I felt the price did not fully reflect the value of the brand name. It looks like that may have been correct. The article claims that Coca Cola is the world’s most valuable brand name – $67 billion, or 58% of the company’s current market capitalization! No wonder the stock has risen 23% this year, even though sales of their flagship product have been flat.

It may be useful to study this list and bookmark it for future reference, to pay attention to the companies which have a high brand name value in relation to their market capitalization, and to consider the companies that did not make it into the top 100 which you would have expected to be there.

Watching Brookdale Senior Living, Inc. (BKD)

Brookdale Senior Living is an operator of homes for old folks in the U.S., with over 380 facilities in 31 states. BKD was formed in 2005 through a merger of Brookdale Living Communities with Alterra Healthcare Corporation. There was an IPO of BKD stock in November 2005. In July 2006, BKD acquired American Retirement Corporation; in December 2006, Brookdale acquired 30 properties from Nationwide Health Properties Inc. The current market capitalization of this company is 4.8B. BKD claims in an online help-wanted ad that they have become the largest senior living provider in the U.S.

Brookdale wants to grow by acquiring additional senior living properties. If they succeed, cash flow and profits could rise significantly over time. BKD just increased the quarterly dividend from .40 to .45. The dividend has increased 80% since the IPO. The shares currently yield 3.37% and I estimate the beta of the stock is 1.00.

Now I am no accountant, but a quick scan of the key statistics at Yahoo! Finance shows that profitability is negative at present and cash flow appears inadequate to cover dividend payments. But the results of recent acquisitions may not be fully reflected in the data, and perhaps cash flow is increasing so rapidly that there will not be a problem.

The shares are up more than 50% in the year they have been trading, certainly a promising trend. But BKD hasn’t been around long enough to see how the stock may behave during a general market correction. Company insiders have made significant investments in their own stock, but not lately. I am interested in BKD but there are a couple of red flags here so I’m going to watch it a while before jumping in.

Dogs of the Dow Countdown – Week 3

Last week the Dow rose to new all-time highs on bullish news and all of the Dog candidates except GM rallied . GE and T raised their dividends. Other than higher prices and lower yields, the only change to the list of Dog candidates was that GE rose to ninth place in the yield ranking and JPM fell to tenth place. The yield on the 10-year Treasury rose to 4.59. Last week VZ was appealing because it was yielding more than the 10-year bond, but that edge is now gone. We still have two weeks until theofficial Dogs purchase date, and a lot can happen in two weeks, but unless something changes I may not be adding to mypositions in these stocks this year. GE was looking mildly interesting at 35, but not at 37.36.

Ticker Name Price Yield Beta
VZ Verizon 36.48 4.44% .92
MO Altria 85.21 4.04% .84
PFE Pfizer 25.64 3.74% 1.01
T AT&T 35.66 3.73% .86
C Citigroup 54.04 3.62% .86
MRK Merck 44.00 3.45% .46
GM General Motors 29.26 3.42% 1.49
DD Dupont 48.75 3.04% 1.12
GE General Electric 37.36 3.00% .83
JPM JP Morgan 48.30 2.82% 1.09

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Watching Artesian Resources Corp. (ARTNA)

Yesterday I came across an interesting article about the global water industry by John Dickerson. There is a table in the article which shows that U.S. water utilities had a surprisingly good investment record from 1995 to 2005 compared to the S&P 500. I was gratified to see that all of the best-performing water utilities mentioned in the article are components of PowerShares Water Resources (PHO), which I own. However, the list also contains several smaller and lesser known water companies. After doing a little checking, I think Artestian Resources (ARTNA) is perhaps the best of these and I am adding it to the watchlist.

ARTNA produces and sells water and offers wastewater treatment services in the state of Delaware. This small company has dramatically outperformed the S&P over the last ten years, but with much less volatility and a higher dividend yield. The shares have a beta of .26 and a current yield of 3.32%.

Recent price performance has not been impressive, though. The shares made an all-time high of 21.80 last April and since then they have been backing and filling with an ominous looking volume pattern. This is a stock that looks like it could head south with vigor when a market correction occurs. And if that does happen, it might be a good time to pick up a few shares of ARTNA.

Watching Pulaski Financial Corp. (PULB)

The slope of the inverted yield curve has flattened slightly this week. This may be an early sign that it will become easier to make money in banking next year, and in fact some banking stocks are starting to show a little pep. I have been looking into the bottom of the barrel of the banking industry for possible turnaround candidates. Most of what I have seen on the list of new 52-week lows has been trash, but I think Pulaski Financial Corp. (PULB) may be an exception. I am not going to run out and buy this because it is in a downtrend, but I will keep an eye on PULB.

Pulaski is a very small company which operates eight full-service banking offices in the St. Louis and Kansas City metropolitan areas. PULB was founded in 1922 by a group of Polish-American citizens who were having difficulties working with the St. Louis banks, and decided to form their own bank. Pulaski has been a public company for some time now. The shares currently yield 2.18% and they have a low .40 beta. The company has a good dividend history, and the payout ratio is only 33%. There was a 2-for-1 split in 2003 and a 3-for-2 split in 2005. The average daily volume is only 5500, but I think small blocks of these shares could be traded cautiously with limit orders.

The company issued a very encouraging earnings report in October and the shares do appear quite cheap, however, the stock is still languishing near 52-week lows, and I wouldn’t touch it with a ten foot pole until there is convincing proof that a new uptrend is under way.

Holding Hershey Co. (HSY)

As a long-time holder of Hershey shares, I have enjoyed the company’s outstanding long-term growth, but I have become concerned about the correction which has caused HSY to underperform the S&P for almost two years now. Recent earnings announcements have been disappointing. The stock price is near 52-week lows, threatening the trendline on the long-term chart. Is it time to sell HSY and invest the money elsewhere? After mulling this over for several months, I’ve decided to continue holding the shares.

I believe one of two scenarios will develop: earnings will turn out to be better than expected due to a surge in candy buying during the holiday season, and the stock price will recover; or if the sag in earnings and the share price continues, Hershey is likely to become a takeover candidate. I view Kraft Foods (KFT) as a likely suitor and I would expect a bid for HSY in the range of $60 to $65 per share next year. (I own KFT as well as HSY.)

The following quotations from Kraft’s website reveal their interest in expanding their position in the global chocolate business: “When you talk about Kraft Foods’ international confectionery business, you are talking first and foremost about chocolate. With a powerful portfolio of world famous brands, we are the third largest seller of chocolates globally –leading the way in Latin America and a strong number two in Europe. . . . Although our chocolates already enjoy market-leading positions in 15 countries, we continue to develop new products that will grow to be tomorrow’s global favorites. Chocolate products introduced in the past two years now represent approximately 11% of our total confectionery sales volume, triple the level of only a few years ago.”

Buying Alliance Resource Partners LP (ARLP)

I bought ARLP yesterday afternoon at what I hope will turn out to be a good entry point. This stock was first discussed in the blog on November 24. I was pleased to see that Michael Kaye of Standard & Poors Equity Research agrees that Alliance offers a good value. After running a screen to find stocks with a PEG ratio below 1, a dividend yield above 2.6%, and return on equity exceeding 25%, Kaye came up with ARLP and four other energy stocks: BP PLC (BP), Global Partners (GLP), Precision Drilling (PDS), and Suburban Propane (SPH).

I might add that in addition to being a cheap stock with good earnings, Alliance has an above average rate of dividend growth with a reasonable payout ratio. The fundamentals look good to me as well. Coal prices have been firming, demand from utilities has been high, and railroads have been struggling to keep up.

I am already overweight in the energy sector and Alliance, a coal stock, has a little more beta (1.04) than I want to take on at this point in the market cycle. I equalized these factors by selling twice as much XOM from the portfolio. I am not bearish on XOM but it does appear overbought on a short-term basis. Since ARLP is yielding 5.6% and XOM 1.7%, portfolio income will actually increase as a result of this adjustment.

The on-balance volume plot suggests that this stock is under accumulation. There has been some insider buying this fall. The risk-reward ratio looks attractive here, and I expect ARLP to do very well over time.

Seven Blue Chips I Always Wanted But Never Got Around to Buying

Abbott Laboratories (ABT)
Bank of America (BAC)
General Mills (GIS)
Kimberly-Clark (KMB)
PepsiCo (PEP)
Procter & Gamble (PG)
Wrigley (WWY)

Over the years I have admired these seven companies, but for some reason I never got around to buying any of them. As a consequence of this oversight I have missed out on a great deal of profit. These large companies may not be glamorous, but they are true blue chips. Each has an admirable growth record, a secure market niche, a history of raising their dividend annually for many years, and a current dividend yield at least equal to the S&P 500. However, each of these stocks is less volatile than the index; they weather bear markets relatively well, so they are suitable for “widows-and-orphans” portfolios. I am adding these choice low-risk dividend aristocrats to the Watchlist so I will see their charts regularly and become aware of buying opportunities.

As a matter of fact, BAC is on sale now and may be of interest to conservative income investors. The large-cap banks have not been keeping up with the torrid pace of this year’s rally and they have become relatively cheap. But BAC is even cheaper, thanks to recent arbitrage activity related to rumors that BAC will buy Barclays.

Dogs of the Dow Countdown – Week 2

Symbol Company Price Yield Beta
VZ Verizon 35.31 4.59% .92
MO Altria 84.83 4.06% .86
PFE Pfizer 25.17 3.81% 1.04
T AT&T 34.97 3.80% .87
C Citigroup 51.85 3.78% .86
MRK Merck 43.93 3.46% .48
GM Gen Motors 29.58 3.38% 1.50
DD DuPont 46.90 3.16% 1.12
JPM JP Morgan 46.76 2.91% 1.08
GE Gen. Elec. 35.27 2.84% .84

Components of the list remain the same as last week. VZ and MO went up in price but retained their position as yield leaders for the Dogs. PFE went down quite a bit, increasing the yield enough to move them into third place. The 10-year Treasury Bond ended the week with a yield of 4.55%.

I think VZ is an attractive alternative to 10-year Treasuries. VZ’s yield is a little better. It seems to me that bonds have nowhere to go but down, but VZ could go up quite a bit. As always, MO is likely to reward patient investors. PFE is mildly interesting at the current price, and so is GE. The rest of the list seems uninspiring, but we still have three weeks to go until December 29 and a lot could happen in that time.

GlaxoSmithKline PLC ADR (GSK)

Glaxo is a pharmaceutical stock which has outperformed the S&P with less volatility, and which may also benefit if the U.S. Dollar continues to weaken against European currencies. And as a kicker, Glaxo may be less affected by political developments and regulatory issues in America than some of its competitors. Less than half of GSK’s sales of pharmaceuticals occur in the U.S.A.

GSK has a diversified array of proprietary pharmaceuticals including several blockbusters such as Betnovate, Relafen, and Zantac, and they also have a substantial stable of popular over-the-counter consumer products. They are big on vaccines and oncology products, and it seems likely they are less threatened by competition from generic pharmaceuticals than certain other pharmaceutical concerns.

The shares currently yield 3.4% and the company has quite a good history of increasing the dividend regularly.

In the aftermath of the U.S. elections, the ADRs sank into the middle of their 52-week trading range, then gapped higher when the dollar began to fall sharply against the British Pound and the Euro. The shares have pulled back this week, but I think that once the gap is filled, the next big move is likely to be up.