The U.S. is doing better. So we’ve shifted our focus from U.S. companies that earn most of their sales abroad to those that also do lots of business at home. We expect the three U.S. Key stocks below to profit in 2014. They remain buys for gains and rising dividends.
In recent years, we focused on U.S. companies that generated most of their sales abroad. The BRICs (Brazil, Russia, India and China) were forecast to leave the U.S. behind. But in 2013, India’s currency, the rupee, plunged. Brazil’s economy recently shrank. And Russia is more dependent on oil exports while new technology makes the world less dependent on Russia. Only China is doing well with economic growth at a world-beating 7.7 per cent.
The U.S. economy is recovering and is expected do even better in 2014. It needs to create 100,000 jobs a month to keep up with the growth in its working-age population. From August to November, the U.S. created an average of 204,000 jobs a month. U.S. unemployment fell by a full percentage point, to 7.0 per cent. We expect unemployment to drop in 2014.
As a result, we’ve shifted our focus this year to U.S. companies that also rely on the U.S. economy.
In the apparel manufacturing companies / consumer goods sector: GAP (THE) $89.41 (Quality rating: Conservative; NYSE—GPS; T: 650-952-4400; www.gap.com) sells clothes through 990 stores in the U.S. and 389 stores outside the U.S..
In the year to late January, The Gap is expected to earn $2.71 a share. That’s up by a healthy 19.3 per cent from $2.33 a share last year. In fiscal 2015 (which starts in late January or early February), the company’s earnings are expected to grow by 11.4 per cent, to $3.02 a share.
The Gap has raised its dividend each year since fiscal 2010, when it maintained its dividend at 34 cents a share. During the financial crisis and the recession, many companies temporarily stopped raising their dividends to conserve cash. We expect The Gap to keep raising its dividends in the years ahead.
The Gap has also rewarded its shareholders by buying back its shares. In fiscal 2003, it had a peak of 887 million shares outstanding. It has bought back its shares ever since. At the end of fiscal 2014, the share count is expected to fall to 461 million.
The Gap remains a buy for long-term price gains and rising dividends. Its MGI (Marpep Growth Index) of 1.1 suggests that the shares are undervalued relative to the growth in its earnings per share.
In tech news, INTERNATIONAL BUSINESS MACHINES $177.67 (Quality rating: Conservative; NYSE—IBM; Sector: Mixed; T: 914-499-1900; www.ibm.com) supplies advanced information processing technology, communication systems, services and computer programs. Its share price has declined. That’s because of doubts that the company can continue to grow as fast as it has in the past. We’ll look at IBM’s forecast for 2014.
In 2014, IBM is expected to earn $18.01 a share, up by 6.7 per cent. Looking back 19 years, the company’s earnings per share have risen each year except for three. Since earning $1.23 a share in 1994, IBM’s earnings per share have risen at an average yearly compound growth rate of 14.7 per cent. That’s partly because the company has bought back its own shares for many years. Its MGI (Marpep Growth Index) of 1.3 means that it’s undervalued relative to the growth of its earnings grow per share.
IBM has raised its dividend each year since 1995, when it paid 25 cents a share. It now pays $3.80 a share—a 15.2-fold increase. IBM remains a buy for long-term share price gains and rising dividends.
In the area of manufactured goods, PPG INDUSTRIES $187.84 (Quality rating: Average; NYSE—PPG; Sector: Manufacturing; T: 412-434-3131; www.ppg.com) is a global manufacturer of performance and industrial coatings, optical and specialty materials and auto glass. Even though it operates 153 manufacturing facilities and affiliates in 64 countries. it generates over half its sales in the U.S.
In 2014, PPG is expected to earn $9.46 a share, up by 15.4 per cent from $8.20 a share this year. That beats this year’s gain of only 3.3 per cent from earnings of $7.94 a share last year.
Thanks to PPG’s strong earnings growth, it has raised its dividend for 42 years in a row. Due to the strong rise in the company’s share price, however, the dividend of $2.44 a share yields only 1.3 per cent.
PPG Industries remains a buy for long-term share price gains and increasing dividends. Its MGI (Marpep Growth Index) of 1.2 suggests that the stock is undervalued relative to the growth of its earnings per share.