They used to be stalwarts, but their lofty P-Es are no longer justified

There�s nothing better for a long-term diversified portfolio than allocating a portion of it to what I call a Dividend Stalwart. These companies are named for Peter Lynch�s concept of a �stalwart� company — one whose fast-growth days are behind it but is now a solid brand name that is still growing at 8% to 10%. I add the �dividend� modifier for those stalwarts that also pay a dividend that at least meets the rate of inflation.

There was a time when certain consumer staples fit this category — and as staples, these companies always grow because people always need to buy their products. But things have changed for a few companies in this category, to the point where I would sell them if you�ve got ‘em.

Campbell Soup Company (NYSE:CPB) used to be one of these go-to stocks. Yet after the brunt of the financial crisis in 2008 and 2009, net income dropped in FY 2011, is set to do so again in 2012 and then recover in 2013 to just a bit under 2011 levels. That�s a company going backwards and not deserving of the 14.5 P-E CPB currently carries, even including the 3.5% dividend. This is an overvalued operation at the moment, as well as for the near future. Why risk a capital loss to collect a 3.5% dividend when you can get a 5% dividend from a company that�s much more likely to hold its own, such as AT&T (NYSE:T).

The new J.M. Smucker Company (NYSE:SLM) was another of these stalwarts that kind of flew under the radar for a long time. It wasn�t an obvious choice. The same problem that plagues Campbell Soup is sticking in Smuckers� jam — net income is falling despite very aggressive share repurchases, which boosts net income. Earnings are expected to fall 2% this year, after falling 3% last year. Free cash flow is fine at $210 million except that all of that money is being used to pay the 2.6% dividend. This company trades at a lofty P-E of 16. That�s way too hi! gh consi dering the circumstances. Sell.

I�m on the fence about H.J. Heinz (NYSE:HNZ). It’s right on the cusp of being an acceptable holding, but I�d look closely at whether HNZ deserves a place in your portfolio. Earnings grew 15% in FY 2011 and are slated to grow at an 8% clip going forward. The dividend is at 3.5%. The P-E is 17, though, and I think that�s pricey. That suggests that the company is worth twice its growth rate. If it were throwing off billions in free cash flow, I�d agree to that premium, but there are other companies that do exactly that that trade for less.

As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.