Twelve Percent Return and GE, Cisco and BAC by Malcolm Berko on Creators.com

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Twelve Percent Return and GE, Cisco and BAC

Dear Mr. Berko: If you knew when the economy would turn around, which one stock would you recommend for a conservative growth and income portfolio? And would you please explain once again your description of how you generate a 9 percent to 12 percent total return in this market with minimum downside risk? — D.L., Bethlehem, Pa.

Dear D.L.: When the economy begins to turn around, one of the stocks I'd own in a Sioux City second is General Electric (GE-$12.68) even though it's dividend sucks. This $170 billion revenue company traded at $42 a share in 2007. This year, GE expects to earn $1 a share with net profit margins of 6.5 percent compared with 2007 earnings of $2.28 and net profit margins of 13 percent. That's quite a flop. GE is one of the largest, most diversified companies in the galaxy with 310,000 employees in 114 countries. It's in the water-treatment business, makes jet, turbine and electric engines, sub-sea drilling systems and floating rigs. GE is in insurance, aerospace products, commercial and military maintenance for aircraft, ships, helicopters, and health care products. GE is in NBC, TV, cable and satellite, lighting, electrical equipment, power generation, security technology, business and consumer finance, etc. GE positions itself as a world leader in every market it competes in. And GE's enormous global presence allows management access to more information about the direction of economic data than its competitors, giving management dibs in emerging economies. This is an impressive company and I'm comfortable suggesting a potential $30 stock price in the coming five years.

There's a trend among a few conservative and forward-thinking money managers that the quest for capital appreciation in quality equities, blue chips and the Fortune 500 Companies will be considerably more difficult to achieve in the new economy. They believe that revenue and earnings expectations will be lower in the coming decades and that metrics such as price to earnings, price to sales, price to book, price to cash flow, etc., won't return to the heady levels of the past 20 years.

Basically, the size of the inch has changed ... P/E ratios for companies like DuPont (DD-$30.13) with a current 5.2 percent dividend, have averaged 23 times earnings since 1998. Today's P/E ratio will likely average 14 to 15 times earnings for the foreseeable future. Since 1998, the average P/E for AT&T (T-$24.88), with a current 6.5 percent dividend, has been 17 times earnings, and future expectations place T's P/E ratio at 11. And there are perhaps a dozen score or more of companies with good dividends, the P/E ratios of which have fallen significantly and will remain low for a long time to come. Now, I can't tell you with a comfortable degree of certainty that the share price of DD or T will move to up 10 points in the coming five years even though most analysts feel both issues will double in price. However, with a good degree of certainty, I'm comfortable suggesting that the dividends of both DD and T will either remain the same or increase very modestly in the next five years and I'm comfortable telling you that DD's and T's share price could increase an average of 3 percent in that same time frame. While 3 percent a year is not worth a hambone in bragging rights, if you add that 3 percent to DD's 5.2 percent dividend yield, you can have an 8.2 percent average annual total return on the DDs in the next five years. Then add that 3 percent to its 6.5 percent dividend and you have a 9.5 percent average annual total return. And that's plenty good enough for me.

Now, doesn't this make a lot more sense for a conservative income/growth investor than buying GE at $12 and hoping to sell it at $30 in the coming five years, or Cisco at $21 and praying it can be sold at $42, or Bank of America at $17 and wondering if it can be sold at $33? Conservative investors prefer the safety of certainty vs. a reliance on risk for their portfolio income.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.