Marriage should be for life. But stock ownership? Not so much. Yes, I understand that a long-term buy-and-hold strategy keeps fees and taxes low and has generally proven to be a solid plan. But not all stocks are keepers — even supposedly reliable blue-chip stocks. Sometimes you’re better off casually dating them for a while and then moving on.
This obviously applies to speculative plays like biotech companies, tech startups or oil and gas exploration companies. But it can just as easily apply to established blue chips — even ones you might have held for years or even decades.
So, when should you consider parting ways with a long-held blue-chip stock? I have a few general guidelines.
- To start, do an honest assessment of the company’s growth prospects. If its market is mature and not likely to see significant growth, it might be time to move on.
- Also, look for the possibility of technological obsolescence. If you’re not sure what I’m talking about here, look at what Apple Inc.’s (NASDAQ:AAPL) iPhone did to BlackBerry Ltd (NASDAQ:BBRY).
- Price is also a consideration. If a blue chip is simply too expensive, then your returns going forward likely will be disappointing.
- But more than anything, think of opportunity cost. Money you have invested in a given stock is money you can’t invest elsewhere. So make sure that stock is the best use of your limited funds.
Today, we’re going to look at seven blue-chip stocks that you probably shouldn’t hold anymore.
All had their day in the sun … but now it’s time to move on.
Blue-Chip Stocks You Shouldn’t Hold Anymore: IBM (IBM)
I’ll start with a blue chip better known as “Big Blue,” International Business Machines Corp. (NYSE:IBM).
It used to be said by corporate purchasing agents that “no one ever got fired for buying IBM equipment.” The same was true of money managers and IBM stock. The company was a respected blue chip and the undisputed leader in enterprise computing needs.
Then came Jeff Bezos and Amazon.com, Inc.’s (NASDAQ:AMZN) AWS cloud services, which have blown IBM’s business model out of the water. Amazon’s cloud-based computing is cheaper and more efficient than IBM’s traditional services, and the blue chip is losing serious ground to the upstart.
IBM has evolved over the decades and managed to stay relevant. But I’m not so sure it will this time. Revenues have fallen for a shocking 21 consecutive quarters. That’s more than five years in a row of declining growth in an economy that has, for the most part, been healthy for technology companies.
Even Warren Buffett — the champion of long-term buy-and-hold investing — threw in the towel and started dumping his shares earlier this year.
I’m not suggesting IBM will go out of business anytime soon. But it’s definitely not a company I’d want to depend on as a long-term holding.
Blue-Chip Stocks You Shouldn’t Hold Anymore: Altria (MO)
I’m not much of a believer in socially responsible investing. It’s not that I advocate being socially irresponsible, but more that I don’t want to arbitrarily limit my options. And over the past several decades, the fact is that because they are shunned by socially responsible investors and relegated to perpetual value stocks, sin stocks tend to outperform.
Unfortunately, this no longer holds true — at least for tobacco stocks like Marlboro maker Altria Group Inc (NYSE:MO).
A decade of extremely low interest rates has led to a global hunt for yield, and desperate investors have pushed the prices of traditional dividend stocks like Altria to unreasonably high levels. MO trades for more than 18 times forward earnings and yields just 3.7%. That’s simply not good enough for a company whose primary product becomes less popular with every passing year.
Making it worse, the U.S. Food and Drug Administration announced today that it was considering lowering the nicotine content of cigarettes to “nonaddictive” levels. Investors reacted predictably by dumping the stock.
If you own Altria for the dividend, you likely will do better buying a decent real estate investment trust (REIT) or even an oil and gas pipeline.
Blue-Chip Stocks You Shouldn’t Hold Anymore: Philip Morris (PM)
What is true of Altria is mostly true of its old international spinoff, Philip Morris International Inc. (NYSE:PM).
Because Philip Morris sells its wares outside of U.S. borders, it is not at risk of punitive regulation by the FDA. But that doesn’t mean the company’s prospects are much better.
For years, the argument for buying PM over MO was that European and emerging-market consumers still enjoyed smoking, and cigarettes were still a growth business overseas. Well, that might have been true a decade ago. But certainly not today. Even in China — long believed to be the last great growth market for tobacco — smoking rates are falling. They’re falling in Russia too, and even Turkey — a country whose names conjured images of smoke-filled cafes and strong Turkish coffee – has seen smoking rates fall in recent years.
Philip Morris isn’t going to fold tomorrow, obviously. But does it make sense to buy a stock that trades for 22 times forward earnings and yields just 3.5% in dividends when you can buy a decent REIT with a higher yield?
Blue-Chip Stocks You Shouldn’t Hold Anymore: Procter & Gamble (PG)
Consumer staple giant Procter & Gamble Co (NYSE:PG) isn’t a bad stock. Its brands — which include Crest toothpaste, Tide detergent, Pampers diapers and a host of other names too numerous for me to list here — can be found in virtually every house in America and, for that matter, the world.
PG also is a stock that would seem to be “technology proof.” No matter what new breakthrough we see in the coming years, we’ll likely still need to brush our teeth, wash our clothes and put diapers on our babies.
That said, the company’s brands don’t quite have the cachet they used to. Cash-strapped Americans got used to using cheaper store brands during the Great Recession, and many millennials seem to be immune to traditional brand marketing.
And then there is the ever-present Amazon risk. As Amazon creeps ever deeper into our shopping routine, Americans are a lot more likely to defer to whatever brand Amazon recommends.
Were PG a cheap stock, I’d be willing to shrug off these risks. Alas, it’s not. It trades for 20 times forward earnings and 3 times sales, and it yields just 3%. For a stock that hasn’t had meaningful revenue growth in years, that’s just not cheap enough.
Your funds would be better invested elsewhere.
Blue-Chip Stocks You Shouldn’t Hold Anymore: Johnson & Johnson (JNJ)
Along the same lines, I’d recommend steering clear of pharmaceutical and consumer products company Johnson & Johnson (NYSE:JNJ).
JNJ’s consumer products have the same basic problems as Procter & Gamble’s. We live in an age in which consumers are skeptical of higher-priced branded products and generic store brands are “good enough” to get the job done. I don’t know about you, but I don’t feel it necessary to pay up for Band-Aid brand bandages.
Johnson & Johnson’s medical devices and pharmaceuticals are mostly immune from these competitive issues, but they have problems of their own in the form of government regulation. Valeant Pharmaceuticals Intl Inc (NYSE:VRX) became the poster child for all that is wrong with our health system by buying drug patents and then immediately jacking up the prices. This led Democrats and Republicans alike to accuse the entire industry of price gouging, which has helped to keep a lid on stock prices.
JNJ and Big Pharma in general will probably escape punishment from Washington. But you have to ask yourself the basic question: Is JNJ really the best place for my money right now?
No. You can find better.
Blue-Chip Stocks You Shouldn’t Hold Anymore: AT&T (T)
Moving on, I think you should give some serious thought to dumping AT&T Inc. (NYSE:T) if you own it.
I have to admit, I see AT&T’s dividend yield of 5%, and I get a little excited. Yields like that aren’t easy to come by these days. And historically, AT&T has been a consistent dividend raiser.
But looking at the company’s prospects going forward, you can’t realistically expect a lot of growth (of any kind) in the decade ahead.
Let’s focus first on the dividend, as this is what tends to attract investors to the stock. AT&T’s dividend growth slowed to just 2% this year, and it has been trending lower for quite some time. Given that AT&T pays out 95% of its profits as dividends, it’s not realistic to expect the dividend to rise unless you also expect earnings growth to accelerate. And there is no reason to expect that at this time.
AT&T has modest exposure to Latin America via its DirecTV brand. But it is primarily a U.S. company that depends on American consumers. Well, today virtually every American adult who is realistically ever going to own a smartphone already does. It’s a saturated market. And worse, it’s an increasingly commoditized market. AT&T might boast better coverage than, say, T-Mobile US Inc (NASDAQ:TMUS). But the difference is too small to matter for most consumers, who generally just want the lowest price possible.
The same is true of broadband internet. Consumers will generally choose the cheapest option because, for most consumers, even the basic package is fast enough to meet their basic needs of home browsing and Netflix, Inc. (NASDAQ:NFLX) binging. Phone and internet services require a lot of up-front investment by the providers, who in the past locked in their customers with contracts in order to recoup those costs. That’s getting harder to do with every passing day.
If the outlook is grim on mobile phone and home internet services, it’s downright awful on paid TV. The trend toward cord-cutting is real and isn’t going away.
If you own AT&T for the dividend, be warned. In another couple years, it might genuinely be at risk.
Blue-Chip Stocks You Shouldn’t Hold Anymore: Verizon (VZ)
If AT&T looks iffy, then it’s safe to assume that rival Verizon Communications Inc. (NYSE:VZ) faces a bleak outlook too. Smartphones and home internet are mature products with expensive ongoing investment needs and fickle consumers that view the services as interchangeable commodities.
Verizon and AT&T have essentially pursued the same basic business model of pushing consumers into bundled plans of mobile phone, home internet and paid TV services to build loyalty.
And for a long time, it worked. Cable TV prices have vastly outpaced inflation. From 1995 to 2013, the FCC found that cable TV prices grew at a ridiculous rate of 6.1% vs. 2.4% for broad CPI inflation. The average cable bill is now well over $100, which is frankly absurd.
Paid TV is not going away, but it’s definitely changing. Americans are choosing to buy channels or programs a la carte rather than in costly packages.
This means providers like Verizon will have a long period of adjustment. Do you want your retirement to depend on a company going through a transition like that? I didn’t think so.
If you own Verizon, you might want to consider selling it and moving on.
Charles Lewis Sizemore, CFA is the principal of Sizemore Capital Management, a registered investment adviser based in Dallas, Texas. As of this writing, he was long AAPL.