The 100 Best Stocks You Can Buy 2012 Part 6

The Consumer and Office segment (16 percent) serves markets that include retail, home improvement, building maintenance, and other markets. Products in this segment include office supply products such as the familiar tapes and Post-It notes, stationery products, construction and home improvement products, home care products, protective material products, and consumer health care products.

The Display and Graphics segment (14 percent) serves markets that include electronic display, traffic safety, and commercial graphics. This segment includes optical film solutions for electronic displays, computer screen filters, reflective sheeting for transportation safety, commercial graphics systems, and projection systems, including mobile display technology and visual systems products.

The Electro and Communications segment (9 percent) serves the electrical, electronics, and communications industries, including electric utilities. Products include electronic and interconnect solutions, microinterconnect systems, high-performance fluids, high-temperature and display tapes, telecommunications products, electrical products, and touchscreens and touch monitors.

Value Line recently recla.s.sified the company from "Diversified Chemical" to "Diversified Company," reflecting its broad range of products and businesses.

Financial Highlights, Fiscal Year 2010.

FY2010 sales came in at $26.7 billion, a healthy recovery relative to the 2009 figure of $23.1 billion, which had been a drop of 8.5 percent from 2008. The figures suggest a 57 percent organic growth rate excluding the recession dip, a healthy rate for a company of this size and stability. Earnings for 2011 are projected to come in between $5.65 and $5.80 per share.

Reasons to Buy.

3M manufactures a broad line of products for end user markets and for other manufacturing activities. We like the combination of manufacturing reach, innovation, and international presence (67 percent of sales are overseas). The company makes many products essential to the activities of other companies and organizations, and seemingly essential to most of us: e.g., Post-It notes and Scotch tape.

Aside from the attraction of the business itself, 3M offers a good combination of stability and innovation; financials are solid while adding a better-than-average growth prospect through its own innovations and expansion in overseas markets. While the company does dabble in acquisitions, we see 3M as less dependent on acquisitions to fuel growth than many of its "diversified company" compet.i.tors like GE or United Technologies. Dividends, earnings, and cash flow per share have all grown at healthy rates for a company of this size, and moderate but steady gains are likely for the future. With the exception of 2009, the company has stepped up dividend increases in recent years.

Reasons for Caution.

3M is somewhat exposed to business cycles, and slowdowns in global manufacturing activity have tended to lead to down cycles in the share price. For the most part, these dips have proven to be buying opportunities. There is a risk that 3M may jump more aggressively into acquisitions if internal growth stalls.

GROWTH AND INCOME.

Abbott Laboratories.

Ticker symbol: ABT (NYSE) S&P rating: AA Value Line financial strength rating: A++ Current yield: 3.7%.

Company Profile.

"A Promise for Life" is the slogan of Abbott Laboratories, founded in 1888 and one of the most diverse health care manufacturers in the world. Abbott is the third largest producer of pharmaceuticals in the United States, behind Johnson & Johnson and Pfizer and is the largest company in the nutritional products market. The company's products are sold in more than 130 countries, with about 40 percent of sales derived from international operations.

Abbott's major business segments include Pharmaceutical Products (particularly in immunology, cardiology, and infectious diseases), Diagnostic Products (laboratory and molecular diagnostics, diabetes, and vision care), Vascular Products (stents and closure devices), and Nutritional Products (infant, adult, and special needs). Pharmaceuticals accounted for just under 54 percent of FY2009 sales.

The company's leading brands include Freestyle (diabetes monitoring), Ensure (nutritional supplements for adults), Humira (rheumatoid arthritis), and Similac (infant formula).

The company has widespread respect among the medical and financial community as one of the most solid and diversified health-related names. In 2010, the company was named Fortune's most admired company in the pharmaceutical industry, up from number four in 2008.

Financial Highlights, Fiscal Year 2010.

Abbott turned in solid results for 2010 with double-digit growth for the year. The results included 20 percentplus growth in the important Pharmaceutical and Vascular segments, reflecting both economic recovery and the $6.2 billion acquisition of Solvay in early 2010, which gave considerable lift and exposure to international and especially developing markets. The economic downturn had definite impact on the business as treatments were delayed, but this company has proven relatively immune to recession compared to many others.

The company's flags.h.i.+p product, Humira, remains a key growth driver with a 22 percent increase year-over-year in 2010 sales. Aside from a handful of new drugs, international growth is outpacing U.S. growth and is a key growth driver for the future. Operating margins have been on the increase in recent years, and the 3.7 percent dividend yield is safe and solid.

Reasons to Buy.

This company continues to be a solid performer, and is well diversified both in product line and in geography. The company invests about 9 percent of sales in R&D and appears to get good results from those investments. The dividend yield is healthy and growing and gives good downside protection; overall financials are rock-solid. The company offers an attractive combination of income and long-term growth potential. ABT has paid consecutive quarterly dividends since 1924.

Humira continues to look like a blockbuster, and the company continues to believe that Humira is a platform for a number of future products addressing other autoimmune diseases, which if true, could mean several more years of a very strong product pipeline for Abbott. Humira itself remains under patent protection until 2016.

Reasons for Caution.

While the long-term effects of the U.S. health care reform legislation pa.s.sed in early 2010 are unknown, the early returns appear to be fairly neutral to the large pharmaceuticals. Earlier reform of Medicare drug policy under the Bush administration has settled out and seems to be carried forward under the new plan.

CONSERVATIVE GROWTH.

Aetna Inc.

Ticker symbol: AET (NYSE) S&P rating: A Value Line financial strength rating: A Current yield: 1.5%.

Company Profile.

Founded in 1853, Aetna is one of the nation's longest-lived insurers. However, that by itself doesn't qualify the company for our 100 Best Stocks list. Today's Aetna, a product of a 1996 merger between Aetna Life and Casualty and U.S. Healthcare, is one of the largest and most important diversified health care, insurance, and benefits companies in the United States.

Today, the company has three businesses operated in three divisions. Health Care provides a full a.s.sortment of health benefit plans for corporate, small business, and individual customers, including PPO, HMO, point of service, vision care, dental, behavioral health, Medicare/Medicaid, and pharmacy benefits plans. The Group Insurance business provides group term life, disability, and accidental death and dismembers.h.i.+p insurance products primarily to the same sort of businesses that might sign up for its health plans. The Large Case Pensions business administers pension plans for certain existing customers.

The health care business is by far the largest segment and the focal point of our selection of this company. The business insures some 36 million individuals. Now with impending health care reforms, many of which are targeted at the insurance side of the industry, it would normally be hard to recommend such a company because of the uncertainty going forward and the general public dislike of health insurers. However, Aetna has proven itself to be a pacesetter among insurance providers, mainly through its support and innovations in the area of consumer directed health care.

For example, with Aetna's consumer-directed HealthFund plans, subscribers become responsible for a portion of their own health care costs, and are given the tools to shop health care alternatives and maximize preventive care. Aetna originally led the way with some of the first Health Savings Account compatible products in 2001. Since then the company has led the industry in developing tools, such as the Aetna Navigator price transparency tool, designed to help patients evaluate the cost and outcomes of procedures in different geographies. The company also has championed patient- and doctor-accessible medical records and other techniques for making health care delivery more efficient. These initiatives are meant not only to save money for end users, but also the businesses purchasing insurance plans; the company estimates a savings of $21.5 million per 10,000 customers over five years.

Financial Highlights, Fiscal Year 2010.

Aetna's high-flying earnings growth subsided considerably in FY2009 as Medicare reimburs.e.m.e.nts dropped and the mix of business s.h.i.+fted unfavorably with the contraction of business and the loss of more profitable subscribers. Earnings dropped from $3.93 per share in 2008 to $2.75 a share in FY2009. While revenue growth has flattened as business recovers slowly and the effects of the new health care legislation gradually unfold, the company has redirected its efforts to streamlining and improved pricing and underwriting and to reducing administrative costs. Those efforts delivered a healthier $3.68 per share in earnings for FY2010, and Aetna has guided for $3.80$3.90 per share in FY2011. The company also announced a $.60 per year dividend, a dramatic increase from its previous $.04-cent annual payout and more in line with its earnings and cash flow generation capacity. The company has also repurchased a substantial number of shares, reducing share count from 610 million in 2003 to about 400 million currently.

Reasons to Buy.

We feel that Aetna is ahead of the pack in terms of both business and technology innovation. Not only has this edge started to pay off in terms of increased profitability, it will also serve the company well going forward as it aligns the business to upcoming health care reforms. Many of the innovations the company has championed will also get a favorable ruling in the court of public opinion, which should help. The company has a solid brand and financials, and the new commitment to a reasonable dividend and ongoing share repurchases shows that it has shareholders' interests in mind as well.

Reasons for Caution.

Public and governmental scrutiny of health insurers has never been higher, and burgeoning health care costs makes it difficult for even a company of Aetna's caliber to manage. It may become more difficult to pa.s.s cost increases on, and the cost of health insurance is simply knocking many potentially lucrative subscribers out of the market. Aetna investors will have to pay attention to ongoing and occasionally disruptive industry change.

AGGRESSIVE GROWTH.

Air Products, Inc.

Ticker symbol: APD (NYSE) S&P rating: A Value Line financial strength rating: A+ Current yield: 2.2%.

Company Profile.

Air Products and Chemicals produces and sells gases such as hydrogen, helium, nitrogen, and oxygen to industrial manufacturers and commercial end users worldwide. Gases are vital inputs to many manufacturing processes, and APD is one of the largest global bulk gas sellers. The company operates in more than forty countries and now derives about 54 percent of its sales from outside the United States.

After the Q1 2008 divest.i.ture of the Chemicals business, APD reports revenues in four segments: Merchant GasesIndustrial and medical customers throughout the world use oxygen, nitrogen, argon, helium, hydrogen, and medical and specialty gases for a wide array of applications. APD supplies most merchant gas in liquid form to small and larger customers delivered via tanker trucks and rail cars. APD provides smaller quant.i.ties of packaged gases for customers who require smaller quant.i.ties for their processes.

Tonnage GasesAir Products supplies gases via large on-site facilities or pipeline systems to meet the needs of large-volume, or "tonnage" industrial gas users. AP either constructs a gas plant near the customer's facility or delivers product through a pipeline from an existing nearby facility. They also design and manufacture cryogenic and gas-processing equipment for air separation, hydrocarbon recovery and purification, natural gas liquefaction (LNG), and helium distribution equipment.

Electronics and Performance MaterialsThis segment specializes in delivery of products relevant to the electronics industry for the production of silicon, semiconductors, displays, and photovoltaic devices. They also provide performance chemical solutions for the coatings, inks, adhesives, civil engineering, personal care, inst.i.tutional and industrial cleaning, mining, oil field, polyurethane, and other industries.

Equipment and EnergyThis segment designs and sells equipment for energy production and partially owns and operates several small energy plants around the world. Equipment is sold worldwide to customers in a variety of industries, including chemical and petrochemical manufacturing, oil and gas recovery and processing, and steel and primary metals processing.

Financial Highlights, Fiscal Year 2010.

APD's customer base is heavily weighted to industrial uses, more specifically manufacturing environments. This resulted in a not-unexpected softening of demand for APD's core products in 2009, but the emerging recovery in 2010 brought earnings up 24 percent from that dismal year. On February 5, 2010, APD announced a tender offer for the outstanding shares of Airgas, Inc. (ARG: NYSE), a producer and distributor of industrial, medical, and specialty gases based in Radnor, Pennsylvania. The offer of $60 per share was a 38 percent premium over ARG's share price on the day of the offer (valuing the deal at about $7 billion). The offer was rejected by Airgas but was extended several times, then sweetened twice at the end of 2010 to an amount equivalent to $70 per ARG share. After a vigorous campaign by Airgas to maintain its position against the offer, and some court battles, APD withdrew the offer in February 2011.

Reasons to Buy.

The Airgas acquisition would have filled some market niches not currently served by APD and would have provided some useful cost-reduction leverage. But even without the acquisition, APD's operating and net profit margins had been improving. Cost-reduction measures combined well with the recovering economy and growing overseas business. The company has delivered double-digit average compounded growth in earnings, dividends, and cash flow per share over the past five years. The company is a solid performer and good player in the global economic recovery.