Since March, the markets have been on a historic bull run. It certainly helps that interest rates are at rock-bottom levels. Let’s face it, there are not many alternatives right now for people’s investment dollars. But valuations have been stretched as well — and this could mean things get dicey. In such an environment, it may be a good idea to seek out blue-chip stocks.
But hey, these stocks are often good for any environment. And if you have a long-term perspective, blue-chip stocks often have competitive returns, especially when you account for the dividends.
Now, not all blue-chip stocks are created equal either. There are certainly ones that have shaky futures. Remember when GE (NYSE:GE) seemed like a surefire way to make money?
Well, the company was not able to adjust to the market realities.
So what are some of the blue-chip stocks that look good now? Let’s take a look at seven:
- McDonald’s (NYSE:MCD)
- Walt Disney (NYSE:DIS)
- Microsoft (NASDAQ:MSFT)
- Johnson & Johnson (NYSE:JNJ)
- Bank of America (NYSE:BAC)
- Exxon Mobil (NYSE:XOM)
- Nike (NYSE:NKE)
Blue-Chip Stocks: McDonald’s (MCD)
Despite being around since the 1950s, McDonald’s has always found a way to adapt to change. In fact, during the past few years, the company has been involved in a major restructuring — and the effort has been spot on. Some of the moves have also been key for dealing with the Covid-19 pandemic, such as installing automated kiosks, implementing digital technologies and improving drive-through service.
In the most recent quarter, the company reported adjusted earnings of $2.22 per share and revenues of $5.42 billion. This beat the Wall Street consensus of $1.91 per share and $5.4 billion in sales. There was also continued improvement in global comparable sales. They came to -2.2%, compared to -23.9% in the second quarter.
Part of the success came from promotional activities like the “Famous Orders” campaign, which featured orders of musical stars like Travis Scott and J Balvin. There was also the launch of the spicy chicken McNuggets as well as the McPlant, which is a meat alternative similar to Beyond Meat (NASDAQ:BYND).
It certainly helps that the company has a strong balance sheet. This has also allowed for a competitive yield. The dividend is 2.45% on MCD stock.
Walt Disney (DIS)
The Covid-19 pandemic has definitely hit Disney hard. The company recently announced that it plans to lay off 32,000 employees by the end of the first quarter of 2021. This was actually an increase of 4,000 since an announcement a couple months ago. Many of the layoffs will be for the theme parks.
But despite this, DIS stock has still done quite well this year. The shares have actually posted a marginal gain, even though the company has posted large losses.
Consider that Disney has doubled down on its streaming effort due to the pandemic. As a sign of its importance, the company has suspended the dividend payout so as to provide even more financial resources for Disney+.
As of early October, the service had over 73.7 million subscribers. This was up by more than 10 million since August. Disney also offers a bundle with other streaming services like ESPN+, which has 10.3 million subscribers, and Hulu, which has about 36.6 million.
But the success of Disney+ is a clear sign of the agility of the company’s organization. The service is also likely to be transformative, providing a rich source of recurring revenues and making it possible to have more direct relationships with customers. It will also have a big impact on the rest of the businesses when things start to improve next for the global economy.
Among blue-chip stocks, Microsoft is one of the younger ones. Bill Gates and Paul Allen founded the company in 1975. They were smart to focus on building operating systems for PCs, which quickly turned into a massive business.
Yet the growth would slowdown by 2000, as the company had to deal with a major antitrust case and emerging competition. Then there were the strategic misfires like missing out on the mobile revolution.
But the situation changed in a big way when Satya Nadella took the CEO post in 2014. He wasted little time unloading non-core businesses and focusing on the main strengths of Microsoft, like its loyal developer ecosystem. He was also smart to invest aggressively in the Azure cloud business as well as to acquire companies like LinkedIn and GitHub.
The result is that MSFT stock has been a big winner. From 2014 to 2020, the shares have gone from $40 to around $214. The market capitalization is $1.6 trillion.
The Covid-19 pandemic has also been a catalyst for growth. Companies have had to scramble to manage remote workforces and Microsoft’s Teams video conferencing platform has seen a surge in demand (there are 115 million daily active users). But there has also been growth in the Xbox division and PCs.
In the meantime, Microsoft continues to be a cash machine. During the past year, the cash from operations went from $52.2 billion to $60.7 billion.
Johnson & Johnson (JNJ)
Johnson & Johnson has long been a blue-chip stock. The roots of the company go back to 1886.
Over the years, the company has greatly expanded its platform. The result is that there are three major businesses. First, there are the consumer products like Aveeno, Sudafed, Nicorette, Pepcid and so on. Second, JNJ has a broad set of pharmaceuticals for areas like immunology, oncology and infectious diseases. And third, the company is a leader in medical devices. Its machines help with procedures like eye health and complex surgeries.
What about the Covid-19 vaccine? JNJ has one in a Phase-3 clinical trial that includes 60,000 patients. The advantage for the company’s vaccine is that it only requires one dose. The company also has a global infrastructure to provide scaled distribution.
As for JNJ stock, the shares have a reasonable valuation, with the forward price-to-earnings ratio of 16.6. The dividend stands at 2.7%. Furthermore, consider that the company has increased the payout for 58 consecutive years.
Bank of America (BAC)
Rock-bottom interest rates and the Covid-19 pandemic have weighed on the banking sector this year. But the mega operators have been able to weather the storm because of their economies of scale and diverse businesses.
And one of the blue-chip stocks of the sector is Bank of America. Even with the headwinds, the company continues to be highly profitable. In the latest quarter, the profits came to $4.88 billion, up from $3.53 billion in the previous quarter. One of the nice growth spots has been investment banking, which was up 15% on a year-over-year basis. The main driver has been the IPO (initial public offering) market.
Bank of America has been investing heavily in its digital platforms. The company’s AI virtual assistant “Erica” has 15.9 million users and the Zelle payments app has 12.2 million. Keep in mind, also, that the company has applied for nearly 4,400 patents on its technologies, and about 275 have been granted this year. The digital systems will not only help to lower costs but also provide much better consumer experiences.
As for BAC stock, it is trading at only 14.5 times earnings, and the dividend is roughly 2.5%. And in a sign of confidence, Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A, NYSE:BKR.B) recently acquired $2.1 billion of the shares.
Exxon Mobil (XOM)
The past few years have been particularly tough for Exxon Mobil as the oil industry has had to deal with oversupply. But the Covid-19 pandemic has definitely been the most devastating. Since the start of the year, XOM stock has gone from $70 to $41. The market cap is currently about $179 billion. In fact, the company’s shares were delisted from the Dow Jones Industrial Average. It had been a part of the index since 1928.
But investors should not be fearful. If anything, XOM stock looks like a great long-term opportunity.
The company has a myriad of advantages. There are the global economies of scale, which are crucial in a commodity business. Exxon Mobil also has a diverse set of businesses. They include upstream, downstream, LNG (liquified natural gas) and chemicals.
The company has been engaged in a major restructuring. The plan is to reduce up to 15% of the global workforce. There will also be unloading of various assets and deep cuts in the capital budget. By doing all this, Exxon Mobil will be in a strong position when the oil market gets back on track.
There is something else to consider: XOM stock has a dividend yield of 8.5%. True, with such a high level, there is often a cut. But the company has a long history of holding the line on the payout.
The apparel industry is brutally competitive. But one of the few ways to stand out is to have a premium brand. And this is certainly the case with Nike. It’s iconic “swoosh” is nearly universal and remains as fresh as ever. In Nike’s core market of athletic shoes, the company is the clear dominant player.
In January, the company announced that it brought on John Donahoe as a CEO. It was a recognition that the future would require a strong digital strategy. Before Nike, Donahoe had served as the CEO of ServiceNow (NYSE:NOW) and PayPal (NASDAQ:PYPL).
His skillsets were critical for the Covid-19 pandemic. He was able to quickly bolster Nike’s ecommerce efforts to help alleviate some of the pressure on the top line. In the latest quarter, the sales came to $10.6 billion, down only 1% on a year-over-year basis. The digital sales soared by 82%.
On the earnings call, Donahoe said: “In fact, we can thrive in this environment, thanks to our digital advantage and the full breadth of our global portfolio.”
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.