Within the equity portfolio, it’s important to remain diversified across aggressive stocks (high beta stocks) and safe stocks.
In general, defensive or safe stocks are from mature industries. Companies therefore have robust cash flows, an attractive dividend yield and stability in earnings. These stocks provide regular cash flows through dividends and also help in capital preservation.
In a recent podcast, Itay Goldstein, a professor at the Wharton School at the University of Pennsylvania, elaborated on the reasons for the stock market remaining strong when the economy is weak.
A key factor outlined was expansionary monetary policy, which provided ample liquidity to the financial system and stocks moved higher.
Another reason: stocks like Alphabet (NASDAQ:GOOGL;NASDAQ:GOOG), Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), Netflix (NASDAQ:NFLX) “haven’t been hurt that much by the current economic conditions.”
However, Goldstein concluded with a warning that “the current bull market will not last forever, especially if hopes of an economic revival don’t materialize as early as expected.”
With the S&P 500 index trading at a price-earnings of 34.8, I am inclined to take this warning seriously. In addition, with presidential elections round the corner, markets can exhibit higher volatility.
Considering these factors, it makes sense to go overweight on safe stocks. In the coming weeks, capital preservation is a priority over wealth creation.
Let’s discuss four safe stocks that are worth considering. I believe that these names are also worth holding in the long-term portfolio.
- Starbucks (NASDAQ:SBUX)
- Procter & Gamble (NYSE:PG)
- AstraZeneca (NASDAQ:AZN)
- JPMorgan Chase (NYSE:JPM)
Safe Stocks to Buy: Starbucks (SBUX)
SBUX stock has been an underperformer for year-to-date fiscal year 2020. The stock has gained just 1.6%. However, I believe that it’s a good time to invest in SBUX stock.
The stock has a low beta of 0.81 and will help in capital preservation if markets decline. In addition, the company has an annual dividend of $1.80, which implies an attractive yield of 2%. Even amidst challenging times, the company increased quarterly dividends by 10%.
Towards the end of September, Cowen upgraded Starbucks. The Wall Street firm believes that the company is “implementing strategies that will pay off after pandemic.” As recovery gains traction in the coming quarters, SBUX stock is likely to trend higher.
Starbucks is already testing a fully plant-based breakfast sandwich at one location in Washington. This might just be the beginning of a bigger shift towards plant-based food. The plant-based food market is expected to grow at a compound annual growth rate of 11.9% in the next seven years. Further diversification in the menu is likely to help the company grow.
The broad market valuations are stretched and investors will look for value stocks. I believe that Starbucks is interesting as a sales turnaround is seen in the coming quarters.
Procter & Gamble (PG)
A defensive portfolio will be incomplete without PG stock. The stock has a low beta of 0.41 in addition to an attractive dividend yield of 2.2%.
Analyst Sean King of UBS recently assigned a price target of $148 for the stock. Sean King believes that the company is “driving category growth, launching innovation, and accessing new opportunities within its portfolio categories.”
The company has already delivered strong organic sales growth in the first quarter of 2021. Organic sales and volumes growth in the health care segment was 12% and 9% respectively. The pandemic is likely to trigger sustained growth for this segment. The acquisition of Merck consumer health business is also delivering results.
From a long-term perspective, North America and Europe contributed to 68% of revenue for last year. The company has ample scope for growth in markets like China, India, Middle East and Africa. These markets will help in sustaining top-line and earnings growth.
The company currently has an annual operating cash flow visibility of $18.8 billion. This is likely to increase in the coming years. I expect dividend growth to continue in addition to value creation through share repurchases.
AZN stock has been in a tight range in the last six months with an upside of 3.2%. However, the stock has a beta of just 0.22 and is a perfect stock to consider when markets are likely to be volatile. A dividend yield of 2.7% adds to the attractiveness.
AstraZeneca has also been in focus with the company being the front-runner in the race for a Covid-19 vaccine. It’s likely that the company’s vaccine trial will resume soon. If there are positive developments on that front, the stock can trend higher.
Besides the vaccine trigger, the company reported robust revenue growth of 17% for its fiscal first quarter. Growth was driven by new medicines. With a strong late-stage pipeline (17 Phase III medicines), new medicines will continue to drive growth in the coming years.
Emerging market growth has also been strong for AstraZeneca. For the first quarter, the company reported total EM sales of $8.2 billion. On a year-on-year basis, sales increased by 24%. With strong growth in oncology, respiratory and immunology business, these markets will continue to drive growth.
Overall, AZN stock is attractive from a growth and dividend perspective. In addition, a low beta makes the stock worth holding as broad market valuations look stretched.
JPMorgan Chase (JPM)
JPM stock has a relatively high beta of 1.13 as compared to other safe stocks discussed in the column. However, I like JPM stock for several reasons.
JPM stock offers an annual dividend of $3.60 and has an attractive dividend yield of 3.5%.
The banking sector has been an underperformer. JPM stock has declined by 17.5% in the last year. However, the stock has been in a consolidation zone and it’s likely that the stock trends higher from current levels.
My point is underscored by the fact that JPM stock currently trades at a forward P/E of 13.8. As compared to the index P/E, JPM stock is attractively valued. Even if markets trend lower, the stock is likely to remain resilient.
In terms of financial performance, JPMorgan Chase reported net interest income of $13.1 billion for the third quarter. Non-interest revenue was at $16.8 billion for the same period. I expect non-interest revenue to remain strong through trading and asset management income. With U.S. GDP growth expected to bounce back in the coming year, the banking sector will be back in limelight.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.