On June 11, markets, including the Dow Jones Industrial Average, had a big down day. Market volatility is now pressuring broader indices. And many retail investors are understandably becoming nervous about which stocks to invest in. Therefore today, I’d like to discuss three Dow Jones companies to buy in long-term portfolios. I believe all three stocks would provide diversification and provide some stability as market participants navigate the choppy waters.
Over the past two months plus, markets have been riding on optimism regarding the less-than-feared health and economic effects of the coronavirus pandemic. A good number of investors had become quite complacent. Yet, at the same time, many economists have been debating how Wall Street could be surging while so many people on Main Street are economically hurting.
For example, according to the NBER Business Cycle Dating Committee (BCDC), the U.S. economy was in a recession as early as Feb. 2020.
There are things that can be done to ease the problems — but many may need to be done at a federal level.
When asked about the impact on the economy, Clinical Professor of Finance David Kass at the University of Maryland’s Robert H. Smith School of Business said in an email to InvestorPlace, “To prevent the recession from becoming a depression, the Federal Government will have to plug the hole in the U.S economy, created by the substantial drop in consumer spending, with trillions of dollars of additional spending by the Federal Reserve, Treasury and Congress. … The Federal Reserve can provide trillions of dollars in loans to support the economy. This funding would assist households and employers of all sizes and bolster the ability of state and local governments to deliver critical services until there is a widely available vaccine.”
At this point, it is still to early tell how far the economic contraction will last and how severe it will be. And we do not yet know if there will be another wave of increased cases of Covid-19 along with hospitalizations. So blue-chip shares with proven business models, earnings, and cash flows may recession-proof many portfolios at this point. For such companies, the possibility of economic recovery before too long would also mean even brighter days ahead.
With that in mind, here are three Dow Jones companies to buy now:
Dow Jones Companies to Buy: Home Depot (HD)
Earlier in May, the world’s largest home improvement retailer announced first-quarter results. It reported revenue of $28.3 billion for the first quarter of fiscal 2020, a 7.1% increase from the first quarter of fiscal 2019.
The group operates close to 2,300 retail stores in all 50 states, the District of Columbia, Puerto Rico, U.S. Virgin Islands, Guam, 10 Canadian provinces and Mexico. Unlike many other retailers, Home Depot is an essential retailer. Thus amid the lockdown, its stores have remained open, albeit with decreased business hours. So sales have benefited from the lockdown during the novel coronavirus.
However, net income fell 10.7% to $2.25 billion, or $2.08 per share, compared with $2.51 billion, or $2.27 per share, a year earlier. Management attributed the decline in net income to extra costs incurred due to extra measures, especially regarding store safety and increased wages. Home Depot said these measures cost the group $640 million after tax, or about 60 cents a share.
Management also suspended the previously communicated fiscal 2020 guidance. But the board declared a first-quarter cash dividend of $1.50 per share. The current price of $247.50 means a dividend yield of 2.4%. The shares are expected to go ex-dividend next in early September.
In recent years, the group has been spending heavily to integrate its stores and online business. I expect the business to benefit increasingly from “order online, pick up at a local Home Depot store” trend.
Year-to-date (YTD), HD stock is up over 15%. The shares may come under further pressure in the near term. Yet such a decline would give long-term investors a better entry point. You may consider HD stock as one of the Dow Jones companies to buy, especially if the price goes toward $240.
In late April, McDonald’s announced results for the first quarter, ended March 31. Quarterly revenue and EPS came $4.71 billion and $1.47 respectively. Earnings fell 15% during the first quarter. And global comparable sales declined 3.4%.
The group has about 38,000 restaurants across more than 100 countries. The coronavirus pandemic led to restaurant closures worldwide and contributed to decreasing sales.
In order to preserve cash, in March management suspended its share buyback program. The company also withdrew its 2020 outlook.
According to the earnings release, “Approximately 93% of McDonald’s restaurants worldwide are owned and operated by independent local business owners.” This 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, management does not have to worry about the expenses of running those operations.
McDonald’s owns most of the properties where their restaurants operate and collects rent from franchisees. It leases those out to the franchisees, often at significant markups. Put another way, the company is in the real estate business as much as food services.
On May 21, the board declared a quarterly cash dividend of $1.25. MCD stock’s current dividend yield is 2.7%.
So far in the year, the shares are down around 3%. Amid the current volatility in the markets, the shares may trade even lower in the coming days. However, if your time horizons is two or three years or longer, then you may want regard MCD stock as one of the Dow Jones companies to buy. The Golden Arches would be a tasty investment on the global fast food market.
Pfizer is one of the world’s largest prescription drug companies. Its global portfolio includes medicines, vaccines and consumer healthcare products.
In late April, the group released stronger-than-expected first-quarter earnings. Adjusted earnings were 80 cents per share, down 5 cents from the same period last year but 7 cents ahead of the consensus estimate.
It reported revenue under three segments:
- Pfizer Biopharmaceuticals Group (Biopharma), a science-based innovative medicines business;
- Upjohn, a global, off-patent branded and generic established medicines business; and
- Consumer Healthcare, which reported $0 in revenue after being combined with GlaxoSmithKline’s (NYSE:GSK) consumer healthcare business in 2019.
Q1 metrics showed that branded drugs within the Biopharma division helped drive a robust first quarter.
The company confirmed its 2020 financial guidance. It now sees revenues in the region of $40.7 billion to $42.3 billion, and adjusted earnings in the range of $2.25 to $2.35 per share.
CEO Albert Bourla said “Our strong performance in the first quarter highlights the resiliency of our business even during the most challenging times.”
In recent weeks, the healthcare giant has been in the news as one of the companies working on a vaccine against the Covid-19 pandemic. Management is hopeful that Pfizer will be able to expand human trials of the experimental coronavirus vaccine to test patients in early fall.
Over the past several quarters, Pfizer’s robust clinical pipeline has provided the company with impressive returns. 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)). Its branded drugs provide the company with reliable earnings and cash flow.
YTD, PFE stock is down about 12%. The current price of $34.3 supports a dividend yield of 4.4%. The shares are expected to go ex-dividend next in early August.
If you are an investor who is interested in passive income from a leader in a defensive sector, then Pfizer should be on your watch list of Dow Jones stocks to buy.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil holds covered calls on PFE (June 19 expiry).