The Ultimate Low-Noise Investments

NEW YORK (TheStreet) -- A recent study by Marc Gerstein has found that "low noise" stocks such as Kraft Foods (KRFT), The Clorox Company (CLX) and Dr Pepper Snapple Group (DPS) perform better over time. These companies have superior profit margins and return on equity. Each of these stocks also has an above average dividend yield, so the long term total return should be even more rewarding for the shareholders.

Gerstein has separated equities with high levels of "value" from those having high levels of "noise." This was accomplished utilizing profit and equity measures.

He defined "value" as after-tax operating profit divided by an estimated cost of capital; what remained (growth expectation, stories, dreams, predictions and sentiment) as noise. Low-noise stocks returned 16.3% annually over the ten-year test period, with those with a low value registering a return of 8.9%.

Established consumers stocks like Clorox, Kraft Foods and Dr Pepper are the ultimate low-noise investments for a variety of factors.

There is no need for predictions and sentiment in the consumer goods sector. That is especially true for high-noise equities like Amazon (AMZN), which is barely profitable with a price-to-earnings ratio of over 600 and a return-on-equity of under 4%. But  Amazon's continuing double-digit growth is so compelling that the share price is up more than 40% for the last year without paying a dividend.


While growth for Kraft, Clorox and Dr Pepper Snapple Group is steady in the single digits, the profits, return-on-equity and dividends yields are high. The average profit margin for a member of the S&P 500 Index is 8.8%, according to Yarden Research. Amazon has a profit margin of 0.5%. It is 10% for Clorox, 10.30% for Kraft and 10.6% for Dr Pepper Snapple Group.

It is the same story with the return-on-equity for these stocks.

Amazon's return-on-equity is 3.6%. The average for an S&P 500 member is just over 19%. For Dr Pepper Snapple Group, it is 27.9%. It is 45.3% for Kraft.

The dividend yields increase the total returns for these high-value stocks.

Amazon does not pay a dividend. The average dividend yield for a member of the S&P 500 is almost 2%. Dr Pepper Snapple Group has a dividend yield of 3.1%; Clorox, 3.28%; and Kraft 3.95%, approximately double the S&P 500 average.

It is difficult to beat earnings and profits as the foundation for buying stocks (or any asset, for that matter). Gerstein's research certainly confirms that approach. Consumer stocks do not need "dreams" or "sentiment" to be appealing as the growth comes from making money and generating better earnings for what has been invested.

Why not keep it simple? The superior high dividend yields for Clorox, Kraft Foods and Dr Pepper Snapple Group are low-noise stocks providing a high total return for long-term investors.

At the time of publication the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

Jonathan Yates has written for numerous publications including Newsweek and The Washington Post. He is a former general counsel for a publicly traded corporation. Much of his career was spent working on Capitol Hill for Members of Congress in both the House and Senate. He has degrees from Harvard University, Georgetown University Law Center and The Johns Hopkins University.

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