S&P's latest list rounds up companies with top marks for long-term earnings and dividend performance—and 5-STARS rankings from analysts
From Standard & Poor's Equity ResearchIn addition to the well-known STARS system intended to forecast stock price movements, Standard & Poor's Equity Research has a number of other proprietary measures, including the Quality Ranking, which assesses the growth and stability of earnings and dividends over the past 10 years. While this is a backward-looking measure not intended to forecast stock price movements, studies have shown that stocks with above-average Quality Rankings tend to outperform over longer-term periods. Of course, what's worked in the past may not work in the future.
"In his book, The Intelligent Investor, Ben Graham outlines the characteristics that a 'defensive investor' should look for in the stocks in which he or she invests," explains Richard Tortoriello, an S&P equity analyst. "Graham suggested such an investor look for large, well-known, soundly capitalized companies, with long histories of paying dividends, purchased at attractive prices."
Generally, stocks that do not pay a dividend won't get higher than a B+ ranking in the S&P Quality Ranking system. Companies with high Quality Rankings tend to be large and well-known—although this is not a requirement of the rankings—and also tend to have a long history of paying dividends. Capitalization also plays a role in the rankings, as companies with a lot of debt will tend to have more volatile earnings.
"With regard to valuation, S&P's view is that the current market offers long-term investors the opportunity to purchase some of the best companies in corporate America at prices that often represent low multiples of their average earnings over the past several years," says Tortoriello.
A Quality Ranking of B+ is considered average; any A score (A+, A, or A-) is above average. Only 432 stocks have an A- or better, and only 63 stocks garner the top score of A+. Of those, only seven also have the top ranking in STARS (five-STARS, or strong buy), and they are presented below.
Family Dollar Stores FDO
J.M. Smucker SJM
Procter & Gamble PG