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7 Dow Jones Stocks to Buy With Fortress-Like Balance Sheets

There's no guarantee a strong balance sheet will help fend off economic disaster, but it can't hurt

Dow Jones stocks - 7 Dow Jones Stocks to Buy With Fortress-Like Balance Sheets

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The markets popped May 18 on the news a vaccine for the novel coronavirus was getting closer to reality. After the Dow Jones Industrial Average’s 3.9% rise that day, investors looking for Dow Jones stocks to buy might want to consider those with fortress-like balance sheets. 

The reason is simple. The stock markets are still significantly overvalued. Year to date through May 18, the Dow Jones has a total return of 13.8%, while the S&P 500 is down 8.6%. 

Oaktree Capital Management co-founder Howard Marks told CNBC in April that once the Federal Reserve stops providing help for the economy, we’re in for a second correction

“We’re only down 15% from the all-time high of Feb. 19. It seems to me the world is more than 15% screwed up,” Marks told CNBC April 20. “People are traumatized, and not just because of the performance of their stocks … Everybody’s life is hugely changed.”

Billionaire investor David Tepper, who owns the NFL’s Carolina Panthers, believes this market is more expensive than every other time in history except for 1999.

That’s a bold statement. And something worthy of investor consideration. I too worry about the markets getting ahead of themselves. 

  • Visa (NYSE:V)
  • Nike (NYSE:NKE)
  • Johnson & Johnson (NYSE:JNJ)
  • Microsoft (NASDAQ:MSFT)
  • Apple (NASDAQ:AAPL)
  • McDonald’s (NYSE:MCD)
  • Coca-Cola (NYSE:KO)

For this reason, if you’re looking for Dow Jones stocks to buy, I would consider these seven because they all have great balance sheets.

Dow Jones Stocks to Buy: Visa (V)

Dow Jones Stocks to Buy: Visa (V)
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The world’s largest payment processor reported healthy earnings at the end of April that was very healthy, with 7% sales growth along with 6% earnings growth. Further, despite CEO Alfred Kelly admitting that the coronavirus is going to mess with its business for the next few quarters, its business model is alive and well and worth investing. 

Visa has net debt of $5.7 billion and trailing 12-month free cash flow of $11.9 billion. Based on an enterprise value of $431.5 billion, it has a free cash flow yield of 2.8%. 

That’s not cheap based on historical valuations, but as my InvestorPlace colleague Faisal Humayun said earlier in May, the company’s free cash flow should continue to grow. Add to this a beta of less than 1.0 and you’ve got a rock-solid Dow Jones component.     

If you’re looking for a stock that analysts like, Visa would be at the top of the list. Covered by 35 analysts, 26 rate its stock a buy, another four rate it as overweight, six have it as a hold and none rate it underweight or a sell.

Nike (NKE)

Nike (NKE)
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“Just do it” could be the theme for NKE stock. Of all 30 of the Dow Jones stocks, NKE has the seventh-best 5-year cumulative return through May 19 of 80%

People can’t seem to get enough of their Nike’s in good times and bad. People were lining up in Atlanta recently to get the latest stuff from the Portland company, amazingly, while we’re still in the middle of a pandemic. 

“Nike had a line of ~40 people on both Friday and Saturday,” Raymond James analysts wrote May 19. “The store was running at capacity (50 people it appeared) and more than 15 people were checking out on both days and at different times (equally registering footwear and apparel).”

While it’s great to see people back shopping, I’ve selected Nike because of its fortress-like balance sheet.

The company has net debt of $3.5 billion and trailing 12-month free cash flow of $3.4 billion. Based on an enterprise value of $145.8 billion, it has a free cash flow yield of 2.3%. More importantly, Nike’s total debt is just 25% of its assets, leaving it in good shape to fight the coronavirus. 

Johnson & Johnson (JNJ)

Johnson & Johnson (JNJ)
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Johnson & Johnson has had its fair share of public relations nightmares because of its talc-based baby powder. On May 19, the company announced that it was ending the sale of the product in the U.S. and Canada on weak demand. The company continues to defend the safety of its product.

“Johnson & Johnson remains steadfastly confident in the safety of talc-based Johnson’s Baby Powder. Decades of scientific studies by medical experts around the world support the safety of our product,” Johnson & Johnson’s press release stated. “We will continue to vigorously defend the product, its safety, and the unfounded allegations against it and the Company in the courtroom. All verdicts against the Company that have been through the appeals process have been overturned.”

The company continues to sell a cornstarch-based baby powder in North America. Both products are available outside North America. 

Regardless of where you stand on this issue, Johnson & Johnson remains a trusted producer of consumer brands that include Aveeno, Band-Aid, Listerine, Tylenol and many more. And even though the consumer health segment is likely the best known, it accounts for just 18% of overall sales.

As for the company’s balance sheet, Johnson & Johnson has net debt of $9.6 billion, trailing 12-month free cash flow of $17.8 billion and total debt is just 18% of its assets. Based on an enterprise value of $402.4 billion, it has a free cash flow yield of 4.4%. 

Microsoft (MSFT)

Microsoft (MSFT)
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A common theme among the business media right now is that big business is going to get even bigger post-pandemic. 

“The pandemic is playing to the strengths of the biggest digital players, as seen in their earnings results for the quarter ending in March. Amazon.com Inc. has gone on a hiring spree to keep up with a surge in demand from millions of homebound consumers,” Bloomberg Quint contributor David McLaughlin stated in early May. “What is normally a slow quarter, sales jumped 26% to a record $75.5 billion, though earnings fell 29% compared with the same period in 2019.”

Another major theme during Covid-19 is that cloud-based companies like Amazon (NASDAQ:AMZN) and Microsoft will continue to do well as more people permanently work from home. 

InvestorPlace’s Tom Taulli recently argued that Microsoft is the right play post-pandemic. He based this argument on the fact the coronavirus has had little effect on its business during one of the bleakest economic periods in U.S. history. 

Taulli points out that Microsoft Teams’ daily active users have more than doubled since March to 75 million. Large organizations are jumping on boards. This product is a big reason I suggested in October 2019 that Slack (NYSE:WORK) should be worried about Microsoft focusing on team collaboration. 

As for the company’s balance sheet, Microsoft has net cash of $63.8 billion, trailing 12-month free cash flow of $43.4 billion, and total debt is just 26% of its assets. Based on an enterprise value of $1.3 billion, it has a free cash flow yield of 3.3%. 

It’s a treasure trove of riches. 

Apple (AAPL)

Dow Jones stocks to buy Apple (AAPL)
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Speaking of a treasure trove of riches, Apple shareholders have it pretty good. Here are some of the numbers to back this up. 

Apple has net debt of $15.5 billion, trailing 12-month free cash flow of $66.6 billion and total debt is 34% of its assets. Based on an enterprise value of $1.37 trillion, it has a free cash flow yield of 4.9%. 

InvestorPlace advisor Louis Navellier recently suggested that Apple will continue to confound expectations by making money during a global recession. With an assist from Bank of America analyst Wamsi Mohan, Navellier suggests Apple could actually grow revenues in fiscal 2020, despite the fact the world is being massively disrupted. 

“Part of it is Apple’s diversified nature. While it made its bones on smartphones and computers, Apple has successfully grown its Services revenue in recent quarters to the point that it can help sustain the company even when a pandemic shuts down its factories and grinds supply lines to a halt,” Navellier wrote May 19. 

The rise of services in the Apple ecosystem does not surprise me. Back in February 2017, I was extolling their virtues, suggesting that the gross margins of this segment of its business, given their recurring nature, would push its stock to $200.

At the time, it was trading around $129. It has more than doubled in the three years since.

McDonald’s (MCD)

McDonald’s (MCD)
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I don’t know if this will surprise you, but of the 30 Dow Jones stocks, McDonald’s has the fifth-best cumulative return over the past five years at 87.2%. Microsoft takes top honors, up 291.9% over the same period. 

On April 30, McDonald’s reported Q1 2020 earnings fell 17% to $1.47 a share. Analysts were expecting $1.57 a share. On the top line, its sales were $4.71 billion, $60 million higher than the consensus estimate, but 6% lower than a year earlier. 

That’s about what you’d expect during a global pandemic and stay-at-home orders throughout most of the country. McDonald’s CEO Chris Kempczinski said in the company’s conference call that it doesn’t expect business to snap right back as its various markets reopen. It expects that its breakfast daypart, which has become an anchor of its business, has a big challenge ahead of it. 

However, the familiarity of the Golden Arches will get it through its latest struggle.

McDonald’s has net debt of $46.9 billion, trailing 12-month free cash flow of $5.3 billion and total debt is 103% of its assets. While that might appear high, it includes almost $13 billion in short-term and long-term operating lease liabilities (rent). It won’t have any trouble paying those.

Based on an enterprise value of $180.5 billion, it has a free cash flow yield of 2.9%. While I wouldn’t classify MCD stock as cheap, over the long haul, it’s proven it can deliver the goods.

Coca-Cola (KO)

Dow Jones Stocks to Buy Coca-Cola (KO)
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Year to date, Coca-Cola has a total return of -18.8%. Meanwhile, its biggest rival, PepsiCo (NASDAQ:PEP), has a total return of -2.9%, significantly better. A big reason has to do with the fact Pepsi has a food business (Frito-Lay, Quaker Oats) that has been able to generate more business while everyone’s working from home, gorging on snacks and oatmeal. 

However, if you’re interested in a fortress-like balance sheet to get you through this pandemic relatively intact, Coke is it. 

Coca-Cola has net debt of $32.7 billion, trailing 12-month free cash flow of $8.3 billion and total debt is 54% of its assets. Based on an enterprise value of $224 billion, it has a free cash flow yield of 3.7%.

Something interesting happened to Coca-Cola over the past five years. 

While its sales fell 16% between 2015 and 2019, its net margins increased from 17% to almost 24%, a 700-basis-point increase. It did this by going to an asset-light business model, where others owned its bottling plants. In 2015, it made $7.4 billion on $44.3 billion in sales. Fast forward to 2019. It made $9.0 billion on $37.3 billion in sales. It made $1.6 billion more on $7 billion less in sales.

That’s quite a feat. 

While the company continues to generate growth from the Coca-Cola brand, it is also making acquisitions to diversify its revenues, such as the 2019 purchase of Costa Coffee. The combination of smart growth with robust expense control will ensure KO stock rewards shareholders, like Warren Buffett, for years to come. 

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/05/7-dow-jones-stocks-to-buy-with-fortress-like-balance-sheets/.

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