As we start the latter half of the year, markets face uncertainty as to how the trade wars will develop, what the Federal Reserve will do next and whether the tensions with Iran will keep heating up. I am going to discuss three Dow Jones Industrial Average stocks that are appropriate for long-term portfolios: Pfizer (NYSE:PFE), Coca-Cola (NYSE:KO) and McDonald’s (NYSE:MCD).
Having a long-term focus enables investors to patiently get through the weekly noise of the markets while they relax with the knowledge that their portfolio stocks have the quality to weather short-term adverse developments. These investors do not need to make constant plans for the payment of capital gains taxes as they do not have to worry about selling their shares in the short-run.
Finally, all three stocks pay stable dividends, which adds up over the years. Income investors know that they can compound their returns through reinvesting dividends from high-yielding shares.
Pfizer is one of the world’s largest prescription drug companies. Its global portfolio includes medicines, vaccines, and consumer healthcare products.
PFE stock’s commercial operations fall under three segments:
- Pfizer Biopharmaceuticals Group (Biopharma), a science-based innovative medicines business
- Upjohn, a global, off-patent branded and generic established medicines business
- Consumer Healthcare, which includes Pfizer’s over-the-counter medicines
Pfizer’s robust clinical pipeline has provided the company with impressive returns over the past few years. The group owns two of the world’s best-selling drugs: the breast cancer treatment Ibrance and the blood thinner Eliquis (co-owned by Bristol-Meyers Squibb (NYSE:BMY)).
2019 has been a big year for pharma mergers and acquisitions (M&A). In June, Pfizer announced that it would be acquiring Array BioPharma (NASDAQ:ARRY), the cancer-fighting specialist biotech, in a deal worth $11.4 billion. ARRY’s two drugs, Braftovi and Mektovi, have already been approved for treating metastatic melanoma. In Array BioPharma’s last quarter results, the two drugs combined achieved $35.1 million in sales.
This acquisition is likely to strengthen Pfizer’s long-term position in oncology, which is regarded as one of the fastest-growing segments of the pharmaceutical industry. Although analysts regard this buyout as a good decision for Pfizer, it is likely to be several quarters before the positive financial effects appear in PFE’s balance sheet.
On April 30, the company reported Q1 2019 earnings that came to 85 cents. Total revenue stood at $13.1 billion, higher by 1.64% year-over-year (YoY). The next earnings report will be out in late July. Most investors don’t think of Pfizer as a high-growth biotech, but they do recognize it as a mature and defensive big pharma with stable revenues.
If you are interested in buying into PFE stock, you may want to study the next earnings release to decide whether you should own it for the long-term. With its robust balance sheet, low volatility, and strong AA S&P rating, the shares could be suitable for diversified portfolios.
PFE stock could also provide shareholders with a steady stream of income for decades to come. Pfizer’s dividend, which currently stands at about 3.3%, has increased for nine of the last 10 years. Pfizer’s cash flow is strong and should allow a dividend increase well into the future.
Coca Cola (KO)
Coca-Cola is the world’s largest beverage company with 20 different brands that generate more than $31 billion dollars in annual revenues. Many investors have regarded KO stock as a reliable investment over the years.
Coca-Cola stock tops the list of Warren Buffet’s longtime favorite holdings. The Oracle of Omaha’s Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) owns 400,000,000 shares of Coca-Cola, worth over $18 billion. In the last quarter of 2018 when many stocks suffered sizable losses, KO was the only green stock among the top 10 holdings of Berkshire Hathaway.
Yet most of this decade, KO has had its share of challenges and seen declining revenues. There has been a drop in soda sales as the U.S. consumer moves towards healthier beverages like flavored water. It is worth mentioning that despite the decline in soda sales, gross margins have remained stable at about 60%.
Management has steered the company toward offering a beverage portfolio that seizes on the public’s increased appetite for flavored drinks. In 2016, the company announced its “One Brand Strategy” and introduced a common visual identity and creative campaign for all brands.
This year, the company introduced a U.S.-wide ad campaign for its new flavor, Orange Vanilla Coke. As a result of the changes in product offerings, cherry and vanilla-flavored Cokes account for about 9% of the dollar volume but bring in 18% of the dollar growth.
KO also recently completed the acquisition of Costa Coffee, the biggest coffee chain in the U.K. Wall Street believes the purchase could lead to increased diversification away from soda and revenues, especially prompted by growth in the Chinese market, where Costa Coffee has almost 500 stores.
Offering hot beverages for the first time is yet another strategic step for the group as it addresses the shift in consumer taste and purchasing behavior.
As you decide what may be next for KO stock fundamentally, you may also want to think about whether the global economy or the U.S. is headed for a slowdown or recession.
During periods of market volatility or economic downturn, consumer staples tend to be among the last products removed from household budgets. In other words, defensive stocks like KO may help your portfolio when the going gets tough in the markets.
Despite the question marks regarding future growth at Coca-Cola, its dividends make the shares rather attractive. In February, the company increased its dividend and declared a new share buyback program.
The current dividend yield stands at 3.1% — another reason why I believe KO stock belongs to a capital-growth portfolio. The next dividend payment is scheduled for July 1, 2019 to shareholders who purchased Coca-Cola stock prior to the ex-dividend of June 13.
McDonald’s operates in the fragmented food service industry, which includes competitors like Yum Brands (NYSE:YUM), Restaurant Brands International (NYSE:QSR), and Starbucks (NASDAQ:SBUX). It has over 36,000 restaurants in over 100 countries.
McDonald’s latest earnings results came in better than expected. Group revenues of $4.95 billion topped analysts’ estimates of $4.94 billion. Management gave an upbeat outlook on long-term growth and profitability.
In addition to the acceleration of U.S. sales, McDonald’s stock has benefited from international growth. Comparable U.S. store sales rose 4.5%. Global comparable-store sales rose 5.4%, mostly thanks to promotional mixed-priced deals, as well as store renovations.
As one of the largest fast food chains around the globe, over 90% of the restaurants are currently franchised. The franchising business gives McDonald’s a competitive edge as the initial fees and ongoing royalties mean high margins. MCD’s operating margins now stand at almost 30%. As the franchisees carry the operating costs and business risks, McDonald’s does not have to worry about the expenses of running those operations.
The company owns most of the properties where their restaurants operate and collects rent from franchisees. MCD leases those out to the franchisees, often at significant markups. It may not be wrong to say that the company is in the real estate business as much as food services.
In 2015, management initiated a turnaround plan focused on making MCD more agile by slimming down the corporate structures, improving menu quality, and delivering better customer service. Almost five years later, the steps have been paying off.
As part of its efforts to improve shareholder value, McDonald’s has increased dividend payments since its first-ever dividend payment in 1976. The next dividend payment of $1.16 per share is expected to be paid out on Sep. 17. The current dividend yield stands at over 2.2%.
On June 25, MCD stock price saw an all-time high of $206.39. Year-to-date, the stock is up 18%. Although there might be some profit-taking in the MCD stock price in the coming weeks, I’d regard any dip as an opportunity to go long the shares. The company is a core consumer staples holding for a well-diversified portfolio.
As of this writing, the author did not hold a position in any of the aforementioned securities.