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All Contents © 2017The Kiplinger Washington Editors
By Kathy Kristof, Contributing Editor
| December 2013
Gift-giving occasions are the perfect time to turn presents into economic lessons. So when Vita Nelson's 15-year-old grandson asked for athletic shoes, she gave him stock in shoe retailer Foot Locker instead. “I told him that if he continued to fund his account, it would keep him and his family in shoes for a long time,” she says.
Unlike toys and clothes, which kids will break or grow out of, gifts of wisely chosen stocks will appreciate in value and provide an appreciation of how both Wall Street and Main Street work. “I wanted him to think about not only making money by working on his own but also about using other people’s resources to make money, which is what you do when you invest,” says Nelson, editor of DirectInvesting.com. Two good places to keep kids’ shares are custodial accounts and Roth IRAs.
Here are 17 stocks in seven categories—from toys to entertainment—that should both appeal to kids’ interests and make for good long-term investments.
*All share prices and returns as of December 17, 2013
hubertk via Creative Commons
Buying toys for a youngster? Chances are good that you’ve got a bit of Mattel (MAT) in your basket. The El Segundo, Cal., toy company is best known for Barbie, but it also makes Polly Pocket, American Girl and Monster High dolls, and Matchbox and Hot Wheels cars, as well as all sorts of Disney-themed merchandise.
Analysts expect Mattel to increase profits at about a 9% pace over the next several years. At $45, the stock sells for 15 times estimated 2014 earnings, which isn’t too rich when taking the generous 3.2% dividend yield into account.
Hasbro (HAS), the maker of everything from Play-Doh and Playskool products to Nerf balls and Monopoly, is a bit more pricey, selling for 16 times estimated 2014 earnings with an expected 8% profit growth rate.
Shares of the Pawtucket, R.I, company yield a healthy 3.1%. Plus, Hasbro has a dividend reinvestment plan, or DRIP, which makes it one of Nelson’s favorite stocks for kids. (DRIPs automatically reinvest investors’ dividend payments in new shares, thus saving on brokerage commissions.)
If you’re trying to find a product connection with a small child, you might do best by focusing on his or her stomach, says Kate Warne, chief investment strategist at Edward Jones. “Younger children tend to be familiar with the things they actually consume,” she says.
That’s made McDonald’s (MCD) a perennial favorite among parents trying to interest their kids in stocks. The Oak Brook, Ill, company is richly priced, selling for 16 times projected earnings, which works out to about twice its long-term earnings growth rate. But McDonald’s pays a delicious dividend. The stock yields 3.4%, even at its recent $95 share price.
Kids might also get a kick out of Yum Brands (YUM), the Louisville, Ky.-based parent of the Taco Bell, KFC and Pizza Hut franchises. Yum stock is more expensive than McDonald’s. At $73, it sells for 20 times projected 2014 earnings, while yielding 2%. But the company is also expected to increase profits at a more rapid 11% clip over the next three to five years, versus the single-digit growth rate of McDonald’s.
Much to the chagrin of health-conscious parents everywhere, snacks and sodas constitute an essential food group for most kids, making PepsiCo (PEP) and Coca-Cola (KO) worth a look, Warne says.
Pepsi, headquartered in Purchase, N.Y., has a big business in snack foods, producing Cheetos, Tostitos and Lay’s potato chips, among others. Atlanta-based archrival Coca-Cola, famous for carbonated soft drinks, also offers teas and coffees, and sports and energy drinks, as well as Glaceau Vitaminwater and Dasani bottled water. Both companies are on the Edward Jones “buy” list.
Nelson says investors shouldn’t forget about Dr Pepper Snapple Group (DPS), the Plano, Tex., maker of Hawaiian Punch as well as its namesake drinks. It currently offers a slightly better yield of 3.2% versus Coca-Cola’s 2.9% and Pepsi’s 2.8%.
Warne is also a fan of Kellogg (K). The Battle Creek, Mich., company’s breakfast cereals—including Rice Krispies, Coco Pops, Froot Loops and Frosted Flakes—all have great resonance with kids, she says. So, too, do Eggo waffles, and Famous Amos and Mother’s Cookies. Edward Jones has a “buy” rating on the stock. At $60, it sells for 15 times projected 2014 earnings and yields 3%.
A counterintuitive choice for younger children is Johnson & Johnson (JNJ). What makes J&J a stock for kids? Primarily Band-Aids.
“Kids are entranced by Band-Aids,” says Warne. Although Johnson & Johnson has significant medical-device and pharmaceutical operations, too, the New Brunswick, N.J., manufacturer’s consumer products are familiar to anyone who has shampooed a baby’s hair or dealt with bad skin or a scraped knee. Some J&J brands: Neutrogena, Aveeno, Neosporin, Lubriderm, Listerine, Rembrandt, Tylenol and, of course, Band-Aid.
Target (TGT) also has a kid-friendly vibe, says Warne. With 1,797 stores in the U.S., there’s a good chance that even toddlers have accompanied their parents to a Target to buy everything from bassinets to bananas. The Minneapolis-based retailer is expected to increase profits at about an 11% pace in coming years, but its stock price has suffered lately because holiday sales weren’t quite as robust as analysts had expected.
That makes the shares, at $62, a relative bargain, selling for just 13 times earnings for the fiscal year that runs through January 2015, while yielding a tidy 2.8%.
Like Nelson’s grandson, sports enthusiasts might get a kick out of Foot Locker (FL).
The New York City retailer sells athletic shoes and apparel through more than 1,000 locations nationwide and offers franchises in the Middle East and South Korea.
Analysts expect the company to increase profits at a 10% pace over the next several years, which makes the current $39 share price reasonable at just 13 times estimated earnings for the fiscal year that runs through January 2015. The company also offers a direct investment plan, so kids can add to their holdings without opening a brokerage account and without paying additional fees, Nelson says.
Deckers Outdoor (DECK) is another viable choice. Like its shoes, the company’s stock sells for a premium price, at $83 or 18 times estimated 2014 earnings. But the ultra-cool Goleta, Cal.-based manufacturer has a visceral appeal to young athletes, making everything from Ugg boots and Teva sports sandals to Hoka One One running shoes and a yoga shoe line called Ahnu, named after the Celtic goddess of balance and well-being.
The company’s earnings are expected to expand by more than 18% in 2014 but then slow to about 10% for the long run.
It’s not its primary business, but David Brady, founder of Brady Investment Counsel, thinks teenagers could get behind Xbox maker Microsoft (MSFT).
The new Xbox One has been breaking sales records. And Microsoft is in the process of buying Nokia’s (NOK) devices and services unit, which makes smart phones with top-of-the-line cameras, a positive for both sales and the stock, says Brady. Even though the stock, at $37, gained 42% in 2013, the shares remain relatively cheap, selling for just 14 times earnings estimates for fiscal 2014, which ends in June. The yield is 3%. The Redmond, Wash. software maker is also in the throes of a management shake-up that could give the shares an additional boost.
Thanks to the new Xbox One and Sony’s PlayStation refresh, video game companies, such as Activision Blizzard (ATVI)—maker of the Call of Duty and Diablo franchises—and Electronic Arts (EA)—maker of FIFA 14 and the Sims games—are likely to see a sales surge, too. Analysts expect Redwood City, Cal.-based Electronic Arts’ profits to soar 54% for fiscal 2014, which ends in March. Profits for Activision, in Santa Monica, Cal., were down in 2013 but are expected to gain more than 40% in 2014.
Scott Smith (SRisonS) via Creative Commons
Whether you’re young or old, it’s hard not to love Walt Disney (DIS). Little ones can appreciate the company’s animated films, such as the newly released “Frozen,” while teens and adults remain big fans of the company’s theme parks and sports network ESPN.
At $71, shares in the Burbank, Cal., entertainment conglomerate sell for 18 times estimated earnings for fiscal 2014, which ends in September. But that’s not bad for a company that’s expected to increase profits at a 15% pace for the next several years.
Analysts are also high on Santa Monica, Cal.-based Lions Gate Entertainment (LGF), a film and television development and distribution company that caught fire when it decided to produce movies based on the blockbuster “Hunger Games” novels.
Although Lions Gate’s profits are expected to be flat in the current fiscal year, which ends in March, they’re projected to soar by 53% in fiscal 2015, thanks to both the Hunger Games series and a fledgling partnership with CBS that will help Lions Gate finance development of more movies and TV programs.
At $29, the stock is selling for 19 times estimated fiscal 2015 earnings, a bit richer than the company’s 15% long-term projected earnings growth rate.
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