The title “blue-chip stocks” is a dangerous one to bat around these days.
In my opinion, blue-chip stocks — which already have a pretty flimsy, subjective definition that changes depending on who’s describing them — have become synonymous with a misleading notion: That blue chips mean “for conservative investors.”
The problem is that many supposed “blue-chip stocks” not only present significant downside risk and are overvalued, but many of them simply aren’t the companies they used to be. Things have changed and their previously wide moats have dried up a great deal, making these blue-chip stocks susceptible to competition.
Today, I’d like to look at 10 blue-chip stocks that many people own, and that many people might be better off no longer owning. These are blue chips that I would sell, with the intention of deploying that capital in something a little more productive.
Blue-Chip Stocks to Dump Now: The Coca-Cola Co (KO)
Coke is no longer it. Despite a market that reaches into the furthest corners of earth, with beverage products of every variety, Coca-Cola (KO) faces a very real problem here in its home market:
Americans, in response to the obesity epidemic, are constantly on the hunt for healthier alternatives — and that means a move away from Coca-Cola’s namesake product.
KO stock generates plenty of free cash flow to pay its dividend, but its growth prospects have dried up — and in fact, current-year earnings are expected to decline year-over-year.
Why bother with a 3% dividend when Coca-Cola is overvalued and trading near all-time highs, but has little to propel it higher?
Blue-Chip Stocks to Dump Now: Merck & Co., Inc. (MRK)
Once the granddaddy of big pharma, Merck (MRK) is now dead and buried.
Merck doles out a decent dividend of 3.6%, and like KO — and like many other legacy pharma companies — Merck generates tons of free cash flow to pay it out.
However, that yield is partly a byproduct of a 20% decline since MRK’s highs in January 2015 — not a particularly robust dividend growth plan.
A close look at Merck’s financials shows that it hasn’t been organically growing earnings for ages. It makes acquisitions, has cut a lot of expenses and buys back a lot of stock, but actual organic bottom-line growth is difficult to find.
Paying 13 times future earnings for a low-growth stock is not a good way to invest your capital.
Blue-Chip Stocks to Dump Now: Kellogg Company (K)
Why is anybody holding Kellogg (K) stock?
Moreover, why is anybody holding K stock when it trades at 20 times earnings after years of declining earnings and expectations for only mid-single-digit growth in the future?
It isn’t even like K stock throws off the kind of cash flow that big pharma does. It generates about $1.2 billion a year and pays enough to yield 2.7%.
You have to be crazy to think that Kellogg has any growth prospects as long as it sells high-carb foods in a low-carb world, and as long as cereal sales are in decline.
Management is resting on its laurels and not aiming high, or at anything.
Blue-Chip Stocks to Dump Now: General Mills, Inc. (GIS)
Here’s a scary thought.
It’s bad enough that Kellogg is struggling with its cereals and snack foods. General Mills (GIS), however, is arguably even more diversified. It’s all over the frozen food aisle, has yogurt, ice cream, baking products, vegetables, granola bars, and a massive distribution network.
And even then, GIS is suffering the same fate as Kellogg, with no growth, with declining earnings and rising costs.
If you want a 3% dividend on a stock with scant growth prospects and a 21 earnings multiple, be my guest.
Blue-Chip Stocks to Dump Now: Wal-Mart Stores, Inc. (WMT)
The big name in discount retail is now the big name in down-and-out. The simple reason that Walmart’s (WMT) revenue is actually falling year-over-year is competition.
The dollar stores have moved into food, and created substantial competition for WMT in an area that it once had a big advantage in. Meanwhile, Amazon.com, Inc. (AMZN) is able to match or beat many prices found at WMT, and other retailers have been expanding and muscling in.
Walmart looks even worse now that earnings are expected to drop between 6% and 12% in fiscal 2017.
WMT is yesterday’s news, and owning it 16 times earnings — when profits are going to sink — is crazy.
Blue-Chip Stocks to Dump Now: Procter & Gamble Co (PG)
What’s worse than being one company with the same problems as others just like it? Being one company with the same problems as two companies.
Procter & Gamble (PG) has the same problems as most consumer retail as well as the same problems as discount retailer WMT. Despite PG having a massively diversified portfolio of consumer products, many of them staples, it is going nowhere. In FY15, revenue fell 5% but cost of revenue did not fall as much, and SG&A expenses rose.
Yes, PG makes money, and yes, it has plenty of free cash flow.
It also has negative growth and trades at 20 times next year’s estimated earnings.
Blue-Chip Stocks to Dump Now: General Electric Company (GE)
I never thought I’d say that General Electric (GE) is a stock to avoid, but things just haven’t been the same at GE since the financial crisis.
Yes, the stock has more than recovered off its lows, but earnings have been contracting as the company pushes off all of its financial businesses. Again, you have to be concerned when there’s a massively diversified global operation that is going nowhere from a growth perspective.
Like all the other companies mentioned, there’s plenty of free cash flow ($15 billion annually) to pay its ever-increasing dividend. And GE is expected to turn profit declines into profit increases here in the next couple of years. But those estimates in part rely on a hope that the U.S. and global economies will pick up steam — not the best bet.
A low-growth company trading at 20 times earnings and paying 3.1% makes no sense from a risk perspective.
Blue-Chip Stocks to Dump Now: AT&T Inc. (T)
There’s a reason AT&T (T) bought out DirecTV. The telephone company was loaded with debt, produced enough cash flow to pay its dividend but had no organic growth, and in fact, was looking at that same situation persisting for a long time.
The telephone business is now a commodity with thin margins. DirecTV also was slowing down in terms of growth, but it made the most synergistic sense.
Now T is a behemoth lumbering under $125 billion of debt.
If you think a 5.1% yield is worth it, remember that AT&T is trading around the top of its price range of the past six years. The DTV growth is baked in, and the path of least resistance is down.
Blue-Chip Stocks to Dump Now: Bank of America Corp (BAC)
It doesn’t seem like Bank of America (BAC) stock should be struggling this many years after the financial crisis, and yet it is. The stock crashed from the mid-$50s all the way down to 25 cents at its worst. Yes, it did recover into the high teens, but now it sits at around $12.
Meanwhile, stocks like Wells Fargo & Co (WFC) have soared on to new highs.
Bank of America cannot get its act together, and much of that has to do with too many moving parts, and an inability to satisfy regulators.
While BofA is arguably a value play at these levels, I would not stay in it for more than a trade.
Blue-Chip Stocks to Dump Now: International Business Machines Corp. (IBM)
If there were ever a candidate for a company that has lost its way, it would be International Business Machines (IBM). The company simply has no vision, and without a vision, it cannot execute. If it can’t execute, then it meanders.
All IBM seems to really do is buy back stock. Its stock is in a long-term downtrend, losing almost a third of its value over the past three years. And don’t let the recent rebound fool you — nothing is changing for the better here.
Earnings are expected to decline from $14.92 per share in fiscal 2015 to $13.50 per share this year, only to rebound to $14.16 next year — still lower than last year’s total.
Like so many other blue-chip stocks, it produces lots of free cash flow, yet only pays out about 25% of it as a dividend. But hey, IBM at least yields 4% thanks to the thrashing in its share price.
I see little reason to hold IBM now or ever.
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 [email protected].