3 Blue Chips That Could Cramp Your Retirement

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The prevailing wisdom regarding retirement investing is that exposure to equities should be limited to large-cap blue chips that pay some kind of dividend. The theory is that these blue chips are the safest stocks money can buy and that the dividend will cushion any blow to the stock and provide much-needed additional income.

ukraine portugalWrong.

That may have been true a long time ago, but the market has changed, and so has retirement investing. The problem is that this market is overvalued in general, but is extremely overvalued when it comes to certain blue chips.

I’m comfortable paying up to a PEG ratio of 1.25 or so for true blue chips, especially those with world-class brand names, extraordinary free cash flow, and big war chests of cash. However, such companies are rare compared to the overly expensive “blue chips” crowding the market.

Here are three blue chips that are outrageously overvalued, to the point where retirement investors risk significant capital losses.

Bad Blue Chips: Procter & Gamble (PG)

procter & gamble pg stock dividend stock dow blue chipTake a look at some metrics from Procter & Gamble’s (PG) last quarterly earnings. Total sales volume fell 1%. Net sales grew 1% in currency-neutral dollars. Operating income fell 20%. EPS fell 21% … and that’s even with share repurchases.

Even if we give P&G the benefit of the doubt and consider expected EPS exclude share repurchases, EPS are expected to fall in FY15. Analysts project EPS growth of 7.28% annualized over the next five years; adding the 3.8% dividend yield gives us annualized expected returns of 11.1%.

For the fiscal year ending June of 2017, EPS are expected to be $4.34 per share. With the stock at $69, it is trading at a 16x forward multiple.

I think a retirement investor is making a mistake buying P&G here, or even holding it.

Bad Blue Chips: Kellogg (K)

kellogg-k-stockThe same applies to Kellogg (K). In the old days, Kellogg might have seem like a safe play when it came to blue chips. But the world has changed, and cereals and snack foods are in a downtrend. People want healthier foods, healthier breakfasts and healthier snacks. Kellogg seems to be totally oblivious to this trend.

Sure, Kellogg has a nice business with reliable free cash flow of $1.2 billion, and pays out a little more than half of it as a dividend. Yet the stock itself is significantly overvalued, and a 2.93% dividend isn’t going to cushion a large selloff.

EPS are expected to fall about 7% this year before recovering next year. Yet long-term projected growth is a mere 5.4% annually. If we add in the dividend yield, the total return is expected to be 8.33%. I might be willing to pay 9.5x or even 10x for a company like Kellogg, but with the stock at $67, and FY16 earnings of $3.77, K stock trades at 18x estimates! That’s just crazy. Do you want, as a retirement investor, to expose yourself to 45% downside?

No, of course you don’t. Avoid K stock in your retirement portfolio.

Bad Blue Chips: Pfizer (PFE)

pfe-stockAnother seemingly safe stock as far as blue chips are concerned is Pfizer (PFE). What’s surprising about Pfizer is that it’s a huge provider of pharmaceuticals and consumer healthcare products. I’m talking about a company that has such huge brand names as Advil, ThermaCare, Nexium, and ChapStick in its portfolio.

Yet Pfizer is going nowhere fast, and it has been in this pickle for quite some time. FY15 earnings are expected to fall from $2.26 per share to $2.06 this year. Next year, earnings should recover to $2.35, and that includes share buybacks, which give a distorted view of the situation.

Analysts expect five-year annualized growth rates of 5.63%. Add in the dividend yield of 3.5%, and we see total return expectations of 9.1%. I’m willing to grant Pfizer an 11x multiple because of its brands and cash flow, yet on FY15 earnings of $2.06, and the stock trading around $32, it trades at a multiple of 15.5.

All of these companies are at risk of falling 45% or more, and calling them blue chips doesn’t change the fact that they represent big risks.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he did not hold a position in any of the aforementioned securities. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/09/blue-chips-cramp-retirement/.

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