Most investors know what the S&P 500 is, but few are familiar with what it does. Standard and Poor's is well known as a debt rating agency, but it actually provides a great variety of services in the market intelligence arena, including research on the safety of earnings and dividends, like its so-called "Stock Quality" rating. S&P provides this service on the full array of common stocks that trade on the major markets.
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The stocks that we highlight below have an S&P Quality rating of at least A- and valuation metrics that are superior to the broad market. (To learn more about credit ratings, see A Brief History Of Credit Rating Agencies.)
A+ Rating
ADP (NYSE:ADP) is an outsourcing company that provides payroll and other administrative services to over 540,000 businesses globally. The company's stock pays 3.40% annually, better than the S&P 500's average yield of just 1.47%, and is rated A+ by the S&P. ADP's ROE beats the S&P 500 average handily at 25.5% vs. the S&P's 8.26%.
Colgate Palmolive (NYSE:CL) is another heavyweight with great valuations and S&P's highest A+ rating. The company pays an annual dividend of 2.26% and boasts an unbelievably strong ROE of 80.95%.
Colgate Palmolive is a consumer products manufacturer whose wares are marketed in over 200 countries and territories globally.
Investing in Potatoes
Conagra Foods Inc., (NYSE:CAG) is a supplier of predominantly potato-related food products to restaurants and other commercial food service operators. The stock yields 3.75% annually and rates an A- from S&P. ROE is 14.75% and debt/equity is 0.72, both superior to the broad market average.
Conagra shares also trade with a very low price-to-sales ratio of 0.75.
Health and Manufacturing
Cardinal Health (NYSE:CAH) is a manufacturer of health care and pharmaceutical products whose stock is also rated A- by S&P. The shares yield 2.62% annually and management recorded a 13.9% ROE last year. Debt is also well under wraps; the company's debt/equity ratio is a mere 0.42.
Dover Corporation (NYSE:DOV) stock yields 2.74% and trades at 1.09-times last year's sales. Management's ROE was 13.28% and the company's debt/equity ratio is 0.50. Dover is a manufacturer of a wide array of industrial products. It has grown its earnings per share at a 22.5% rate for the last five years.
Dover rates an A- from S&P's analysts.
The Wrap
S&P rates common stocks primarily on their growth and the stability of their earnings and dividends over a 10-year period. To achieve an A ranking, therefore, is not something you ignore. As well, the companies discussed above have the additional advantage of solid all-round fundamentals and dividends. (Check out our Financial Ratios Tutorial for an overview of 30 metrics used in the investing process.)
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