3 ‘Triple Threat’ Blue Chips to Snap Up
by Jeff Reeves | February 29, 2012 11:58 am
March is upon us, and that means the most exciting part of the sports year to many: college basketball’s Final Four tournament.
One of the clearest lessons illustrated by championship teams is that you can’t be a one-trick pony. Defense is crucial, but it’s hard to win titles without scoring. Raining down 3-pointers is great, but rebounding can be just as vital. And then there’s the importance of depth and teamwork to ensure that you don’t live and die on the performance of one superstar.
Those same guidelines are useful to investors. In this challenging market, it’s important to build a balanced portfolio that both protects you from downside risks and allows you room to run.
Some investors pick role players for their portfolio — say, a hot small-cap momentum stock to tap into growth and A-rated bonds for slow and steady returns. But with a little scouting, you can find some superstar blue chips that have it all.
Here are three such “triple threat” blue chips to consider adding to your investing team that have stability via a great dividend and strong cash horde, momentum based on both short-term and long-term performance, and growth that signals future gains:
Don’t think Intel (NASDAQ:INTC) is just inside desktop computers. The company has been making a big move into mobile, including a recent announcement that a new European telecom partner will begin offering a smartphone designed and powered by Intel chips.
The company admittedly has some catching up to do with compared with companies like ARM Holdings (NASDAQ:ARMH), which designed the chips that now power many sexy consumer gadgets including the Apple (NASDAQ:AAPL) iPhone. But with a roughly 16% share of the entire semiconductor market — the largest in the world, blowing away the 9% held by No. 2 Samsung (PINK:SSNLF) — it’s hardly like Intel is a tech dinosaur.
Here’s the scouting report:
- Dividend and cash: The fact that INTC pays a 3.1% dividend might surprise you. But this chipmaker raised its dividend 15% in 2011 and has $15 billion in cash and short-term investments to back up reliable payouts. The fact that Intel is the largest semiconductor foundry in the world provides this consistent revenue — and thus, consistent and growing dividends.
- Performance: Intel stock has outperformed significantly in both the short term and the long term. Looking back five years, INTC is up around 31% — that’s 10 times the 3% added by the Dow Jones Industrial Average in the same period. Even if you want to compare Intel to the better performance of the Nasdaq — an 18% gain in the past five years — INTC still is up by almost double. In the short term, Intel is equally impressive. Across the past year, INTC is up 24% vs. roughly 7% for both the Dow and the Nasdaq. The stock is up an impressive 12% so far in 2012, too, keeping pace with the outperformance of tech and easily beating the broader stock market. And despite this standout performance, INTC stock still boasts a relatively cheap price-to-earnings ratio of about 10.8 based on 2012 earnings projections of $2.53 per share.
- Growth: On the revenue side, Intel has seen its sales increase year-over-year in eight out of the past nine quarters, dating back to 2009. Profits are even more dramatic, with 16 straight quarters of year-over-year growth. The company is predicting roughly 14% EPS growth across 2012, after 14% growth in 2010 and 15% in 2009.
Financial journalist Dan Burrows recently picked Caterpillar (NYSE:CAT) as one of the 10 best stocks to buy for 2012. His thesis was that the company has more growth ahead, especially if a more stable recovery takes shape in the next several months.
I agree with that upside potential — but I’d add that Caterpillar also has remarkable stability that will serve it well, even if the broader economy does backslide. The growth of Caterpillar is impressive, but its size and balance sheet also make it a fairly attractive defensive play, too. CAT doesn’t just cash in on construction equipment, but also supplies miners in South America and China. This emerging-market growth evens out Caterpillar, so don’t fall into the trap of thinking it’s a cyclical stock that lives and dies with housing.
Here’s the breakdown:
- Dividend and cash: At just 1.6%, Caterpillar isn’t burning down the house with its yield. But an attractive spin to that yield is that the payout ratio is only about 24% of company profits. S&P dividend payout ratios are at a record low of just 27% — and simply must go up. CAT is even less than its peers, so a significant hike could be in store. What’s more, Caterpillar has a stockpile of $3 billion in cash and operating cash flow of more than $7 billion by recent estimates — up about 40% from OCF of $5 billion as of Dec. 31, 2010.
- Performance: In the short term, CAT stock has been phenomenal. It’s up against a 52-week high and has logged a stunning 27% return year-to-date in 2012 vs. just 6% for the Dow and 9% for the S&P 500. But in the long term, Caterpillar is equally impressive. Five-year returns top 72%, vs. just 7% for the Dow Jones and a loss of 1% for the S&P 500! And after all that, the forward P/E of Caterpillar is about 11.9 based on fiscal 2012 EPS forecasts of $9.65.
- Growth: Revenue has almost doubled since recession-era lows, from $32.4 billion in 2009 to $60.1 billion last year. Caterpillar has tallied seven straight quarters of revenue growth and eight straight quarters of profit growth. Most impressive is that EPS numbers have been simply off the chart as CAT has come roaring back. Earnings went from $1.43 in fiscal 2009 to $4.15 in 2010 — almost tripling. Then they went to $7.40 last year for another 80% gain. This year? Well the forecast has cooled to “only” 30% growth based on that $9.65 forecast. Most encouraging of all is that while revenue and profits are soaring, inventories are not swelling — meaning the more Caterpillar makes, the more it is selling. That’s a great sign.
You probably don’t need to be sold on the defensive nature of McDonald’s (NYSE:MCD). The company has gotten really aggressive with recent dividend increases, and is the 900-pound gorilla of the fast-food industry. McDonald’s isn’t going anywhere.
However, this company continues to crank out great growth, too. Thanks to a push into emerging markets and constant innovation with new menu items — from premium coffees to healthy kids options — McDonald’s revenue and earnings still have some pretty good upside.
Here’s the rundown:
- Dividend and cash: Perhaps no company has been more aggressive in repaying its shareholders across the past few years. In 2007, it paid 50 cents. Now it pays $2.80 annually. Name another stock that has increased dividends across the recession like this — I dare you! That dividend is soundly sustainable, too, with $2.4 billion in cash and short-term investments. To top it off, total cash flow from operating activities is a cool $6.3 billion as of the end of 2011 — up 10% from the previous year.
- Performance: Most investors should be very acquainted with the blowout gains of McDonald’s stock. MCD was the top performer in the Dow for 2011 with returns of roughly 29% vs. a flat S&P and a 5% gain for the Dow. Year-to-date in 2012, MCD has lost a little steam … but the long-term performance is pretty dramatic. McDonald’s shares have more than doubled in five years vs. a loss for the the S&P 500! The P/E is a little on the high side at 17 or so based on 2012 earnings, however, so keep that in mind.
- Growth: McDonald’s has posted nine straight quarters of revenue growth and 10 straight quarters of EPS growth on a year-over-year basis. Full-year earnings for 2012 are projected to be more than 50% higher than fiscal 2008 numbers, and the company has gotten earnings down to a science. Like clockwork, McDonald’s beats expectations and tallies 7%-10% profit growth in each quarterly report. On a raw-number basis, the growth might not be as impressive as Intel or Caterpillar, but the sustained growth in sales and profits for this blue chip can’t be discounted.
Jeff Reeves is the editor of InvestorPlace.com. Write him at firstname.lastname@example.org, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. Jeff Reeves holds a position in Alcoa, but no other publicly traded stocks.
- INTC: http://studio-5.financialcontent.com/investplace/quote?Symbol=INTC
- smartphone designed and powered by Intel chips: http://investorplace.com/2012/02/intel-makes-a-bold-smartphone-statement/
- ARMH: http://studio-5.financialcontent.com/investplace/quote?Symbol=ARMH
- AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
- SSNLF: http://studio-5.financialcontent.com/investplace/quote?Symbol=SSNLF
- Dan Burrows: http://investorplace.com/2012/01/caterpillar-cat-fourth-quarter-earnings-top-stocks-to-buy-2012/
- CAT: http://studio-5.financialcontent.com/investplace/quote?Symbol=CAT
- 10 best stocks to buy for 2012: http://investorplace.com/best-stocks-for-2012/
- S&P dividend payout ratios are at a record low of just 27%: http://investorplace.com/2012/02/7-blue-chips-owe-shareholders-a-dividend-hike/
- MCD: http://studio-5.financialcontent.com/investplace/quote?Symbol=MCD
- top performer in the Dow for 2011: http://investorplace.com/2011/12/best-worst-dow-stocks-201/
- Jeff Reeves: http://investorplace.com/2012/02/2012/01/2012/01/2012/01/2012/01/2011/12/alcoa-aa-stock-limited-downside-high-upside-stocks-to-buy-in-2012/2011/12/2011/12/investors-can-learn-from-denver-broncos-tim-tebow/2011/12/gold-prices-new-record-2012-buy-gold/2011/12/2011/12/2011/11/2011/11/2011/11/market-rally-bank-stocks-financial-sector/2011/11/3-dividend-commodity-stocks-vale-scco-si/2011/11/2011/10/optimism-about-europe-debt-resolution-a-risk-to-market-rally/2011/10/2011/10/2011/10/no-bear-market-for-5-funds-etfs-slv-gld-thd-xrt-fdn/2011/10/author/jeff-reeves/
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