All investors have heard of so-called blue-chip stocks at one time or another. Readers likely remember learning of them as one of the first terms in their stock market education. Blue-chips are well regarded for their stability and financially sound operations.
They are also large, well-established businesses with household names — the makers of the items in your kitchen cabinet and the retailer where you bought them. These stocks also tend to weather the economic conditions and operate well in the toughest of times, i.e., now.
Yet there is no hard and fast definition of what makes a blue-chip stock. Large cap and able to pay a dividend is a reasonable start, but they are also high quality and high value.
Investors, in short, expect these stocks to be big, strong, stable companies that are the best of the best. Prices tend to be stable and dividends are a big part of their appeal. These stocks can prove a bulwark against turbulence and usually provide dividend income by and large.
Those looking to buy should try and get them on a discount if at all possible. Price appreciation is not these stocks’ strong point, so any price dip helps. Here is a list of such stocks to consider buying on a discount.
- Walmart (NYSE:WMT)
- Pfizer (NYSE:PFE)
- JPMorgan Chase (NYSE:JPM)
- Coca-Cola (NYSE:KO)
- Johnson & Johnson (NYSE:JNJ)
Blue-chip stocks: Walmart (WMT)
Walmart is a blue-chip stock that Wall Street generally feels bullish about. Main Street has a lot to like in WMT stock as well. The company has performed very well this year, due in part to it being the leader in brick-and-mortar retail. Yet, Walmart hasn’t succeeded due only to Americans needing affordable staples that are locally available.
The company may not be among the names that pop into your head when you consider U.S. reshoring efforts and increasing reliance on American manufacturing. Of course Walmart will be integral to that process as America’s largest retailer. Nevertheless, it isn’t top of mind. And investors who view it more as an intermediary in that process are probably the mainstream. But perhaps the public should consider that Walmart recently its first virtual open call for U.S. manufactured products.
So investors looking for blue-chip stability perhaps have another reason to consider a purchase of Walmart shares. Walmart’s increasing commitment to U.S. manufactured products.
Investors would also be wise to consider watching for a dip in price given that WMT is near 10-year highs. Further, Walmart’s dividend is trending down in comparison to its historical levels. The current dividend yield is 1.57% but has been above 3% in the past five years. The company’s payout ratio is a low 0.34, so there is room to increase that healthily.
Pfizer is top of mind for investors currently based on its novel coronavirus vaccine development. BNT162b2, the vaccine candidate in development with German partner BioNTech (NASDAQ:BNTX) is in Phase 2-3 clinical trials currently. The two firms have a reasonable shot at gaining a windfall from the vaccine race. However, Pfizer is much more than just this development, which is why the company’s shares won’t be mad or broken by the vaccine.
As a blue-chip stock, Pfizer is very stable and reliable. Its pipeline of developmental drugs is deep. A recent press release indicates the depth and potential of that pipeline which includes 89 projects, 23 of which are in Phase 3 now. Investors know that Pfizer has a lot of ways to win. They also know that a single blockbuster drug can skyrocket prices and provide revenues that lead to more development.
That virtuous cycle of development is precisely what Pfizer offers. Pfizer’s pipeline also spans six therapeutic areas. PFE stock diversification bolsters the company’s confidence in stating that it expects a 6% CAGR over the coming five years.
And dividend investors could do a lot worse than Pfizer. Its yield is above 4% and has been in that range for a long time. Investors won’t be blown away by that return, but it is reasonable and attractive. If Pfizer can hit the 6% compound annual growth rate mentioned before, price appreciation should materialize nicely.
JPMorgan Chase (JPM)
JPMorgan Chase stock looks like it has plenty of upside and analysts currently favor the shares. Investors could consider an investment based on the average analyst target price which is above $115. That represents more than 15% in price appreciation over current $98 share prices.
Investors should also consider the momentum that JPM stock has behind it. Three months ago analysts were evenly split on it being a buy or a hold. Now, 17 analysts rate it a buy, and only eight rate it a hold. Clearly, a bullish case is building. Shares haven’t risen much yet from pandemic lows and are still far off their year start prices.
Dividends are steady as might be expected from a blue-chip of JPMorgan’s stature. Dividend investors and current owners who were hoping that the company might engage in a buyback soon will be disappointed. The Fed recently announced that it will be extending restrictions on share buybacks for the biggest banks for another quarter.
Of course this means that earnings will be distributed across the same number of owners, and not fewer. The company traditionally has a buyback ratio of 4.37%. Regardless, the dividend will remain close to 4% moving forward and at a payout ratio of 0.48, it could be increased.
The next blue-chip stock to consider buying on a discount is Coca-Cola. The world’s most famous investor is a big proponent of KO stock. Warren Buffett owns 400,000,000 KO shares, representing 8.83% of Berkshire Hathaway’s (NYSE:BRK.A) portfolio.
Coca-Cola is a strong investment from many perspectives. Traditional fundamental metrics like return on invested capital favor KO stock. The company returns over 10% on invested capital which only costs it a low 3.8%. Analysts are very bullish on the drinks maker’s shares as well.
Coca-Cola is a very stable company and most of the news regarding its financial condition is good. However, I would point out that the company does have an issue regarding its dividend payout. It has continuously increased its dividend since 1963. While that is a laudable feat, it also sets a precedent that the company must continue to fulfill.
Should the company fail to increase its dividend on an annual basis, investors will likely punish KO stock. Coca-Cola’s current dividend payout ratio of 0.76 is slightly high. This means a greater percentage of earnings are directed toward service of the dividend rather than toward investment in growth. Nevertheless, the company remains very profitable and boasts a return on equity that exceeds 97.8% of industry peers.
Johnson & Johnson (JNJ)
Johnson & Johnson is a consumer health giant with a highly diversified business. Just as diversification helps smooth individual investment portfolios, so too does it help JNJ stock.
Investors are likely to recognize JNJ products across a broad spectrum of the healthcare field. Like Pfizer, Johnson & Johnson is also central in the race for a coronavirus vaccine. On Sept. 23 the company initiated Phase 3 clinical trials which will enroll up to 60,000 patients. Whether its vaccine ultimately receives approval and what that will mean for JNJ stock is anyone’s guess. Regardless, the results won’t make or break the company.
Investors might worry that JNJ shares are near a 10-year high. However, viewed differently, shares have continued their march upward and have shown a strong trendline. Fundamentally the company is very strong and shares a lot of similarities with Coca-Cola. Both companies have a similar ability to turn capital into investment returns as measured by WACC vs. ROIC. Both companies roughly take a dollar of capital and invest it returning between $3 and $4.
Both companies are also among the so-called dividend kings, having increased their dividends for 50+ years. However, JNJ has a payout ratio which, at 0.68, is lower than KO’s 0.76. Thus, JNJ’s dividend doesn’t quite trigger warning alarms although neither is anywhere near 1.00, which is truly unsustainable.
More to the point, investors should consider buying JNJ shares on a discount as markets are bullish on them and recent earnings have been strong. Second-quarter earnings beat consensus expectations of $1.49 by 18 cents. Q3 earnings will be reported on Oct. 13 and analyst estimates have been on the decline. So, if earnings disappoint in Q3, there will likely be a dip which constitutes an opportunity to pick up shares. That’s certainly something to consider.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.”