The equity markets witnessed a sharp correction at the onset of the novel coronavirus pandemic. However, expansionary monetary policies calmed the markets nerves and a strong rally followed.
Currently, the S&P 500 index is trading at a price-earnings-ratio of about 27.5.
As valuations look slightly expensive, it makes sense to diversify into safe stocks. Typically, these stocks have a low beta, strong fundamentals and robust cash flows. Further, these stocks offer a healthy dividend pay-out.
This column will discuss four safe stocks that are worth considering for the core portfolio.
Safe Stocks: Walmart (WMT)
With a beta of 0.3, WMT stock is probably the top pick among safe stocks. In addition to the low beta, Walmart has an attractive dividend payout of about $2.16 and I expect dividends to increase in the coming years.
Its important to note that Walmart caters to consumer necessity than luxury. Therefore, be it a pandemic or recession, the company’s earnings and cash flow are relatively immune. Even before the Covid-19 pandemic, the company was ramping-up e-commerce sales. With online shopping gaining further traction, the company is set to benefit.
I am also positive on the company’s earnings growth in future. Two years ago, Walmart acquired India e-commerce company Flipkart. India’s e-commerce market is still at an early stage of growth. The acquisition is likely to deliver results in the next five years. The company’s presence is China will also be a growth contributor.
From a cash flow perspective, Walmart reported free cash flow of $5.3 billion for the first quarter of 2020. Robust cash flows leave ample scope for shareholder value creation through dividend and share repurchase.
Overall, Walmart is a quality stock with strong fundamentals, low volatility and visibility for sustained value creation.
Pfizer (PFE)
The pharmaceutical industry is immune to economic shocks and pharma stocks generally have a low beta. Pfizer, with a beta of 0.68 and a bright outlook is worth considering. Its worth noting that the stock has declined by 10% in the last year. However, the stock has moved higher by 16.5% in the last month. I believe this rally will sustain and it’s a good time to accumulate PFE stock as you build up holdings of safe stocks.
In a recent news, Pfizer and partner BioNTech (NASDAQ:BNTX) have signed a deal with the U.S. Department of Health and Human Services. The deal is for 600 million doses of Covid-19 vaccine. This news has accelerated the stock momentum.
Of course, Covid-19 vaccine is not the only factor that makes PFE stock attractive. The company’s bio-pharma revenue has witnessed strong growth in the most recent quarter. Further, the company has a strong pipeline of drugs in various phases of clinical trial. This provides growth visibility.
From a shareholder returns perspective, the company has guided for operating cash flow of $10 billion to $11 billion for the current year. Given the cash flows, the current dividend pay-out of $1.52 is sustainable. Additionally, financial flexibility remains high to allow the company to make aggressive research and development expenses.
Apple (AAPL)
Considering a huge cash buffer, robust cash flows and a more diversified revenue stream, I would consider AAPL stock in my portfolio of safe stocks.
AAPL stock has surged by 88% in the last year in addition to a dividend of $3.28 per share. I believe more upside is due for the stock considering the following factors.
First, the company’s services revenue growth has been robust. For Q2 2020, services revenue was nearly 23% of the total revenue. I expect this segment to continue delivering strong growth.
Second, the company wearable, home and accessories business has also been growing at a healthy pace. With potential launch of products like Apple Watch 6 and augmented reality glasses, growth momentum is likely to accelerate.
Its worth noting that Apple still derives a large chunk of revenue from America and Europe. There is ample scope for growth in emerging markets like China and India.
Overall, AAPL stock is worth holding with its strong cash buffer, robust cash flows and dividend upside visibility.
Lockheed Martin Corp. (LMT)
For fiscal year 2019, global defense spending was $1.9 trillion. Spending growth increased by 3.6% as compared to fiscal year 2018. With geo-political tensions in several regions globally, defense spending is likely to remain robust.
This factor makes LMT stock attractive for the coming years. In terms of safety, the stock has a low beta of 0.96. Additionally, the dividend is very attractive at $9.60 per share.
From an earnings growth and cash flow perspective, the following point is worth noting: As of Q2 2020, the company reported an order backlog of $150.3 billion. This backlog provides clear revenue and cash flow visibility.
Looking at the cash flows, Lockheed Martin generated operating cash flow of $1.8 billion for Q2 2020. For the same period, the company returned $930 million to shareholders through dividends and share repurchase. This implies an annualized stockholder return of $4 billion.
I also like LMT stock from a valuation perspective. The stock currently trades at a P/E of 16.4. The stock is therefore trading at attractive levels compared to the index P/E.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock-specific articles with focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.
