On the first day of trading for the year, the S&P 500 index was trading sharply lower. I am not surprised, and I believe that some correction will be healthy for the markets. A potential 5% to 10% correction will give investors another opportunity to consider exposure to some attractive stocks. For now, capital preservation is important, and it makes sense to go overweight on defensive or low-beta stocks. It’s therefore a good time to discuss the safe stocks to buy at the start of 2021.
The stocks discussed in this article are attractive for the near term. These stocks are also worth considering for a diversified portfolio of high-beta and low-beta stocks. In very simple terms, high-beta stocks will ensure that returns are maximized when markets trend higher. On the other hand, low-beta stocks will ensure that capital is protected when markets trend lower.
With this overview, let’s talk about seven safe stocks to buy at the beginning of this year:
- Apple (NASDAQ:AAPL)
- Procter & Gamble (NYSE:PG)
- Costco Wholesale (NASDAQ:COST)
- Visa (NYSE:V)
- Ford (NYSE:F)
- AbbVie (NYSE:ABBV)
- Mondelez International (NASDAQ:MDLZ)
Safe Stocks to Buy: Apple (AAPL)
AAPL stock tops my list of safe stocks to buy at the start of the year. The stock has been in a consolidation zone and trades at the same level as it did in September 2020. Therefore, besides being a fundamentally strong name, Apple stock can trend higher in the next few quarters.
Apple car developments have also created some excitement, but I believe the core segments will continue to deliver value in the current year. An important point to note is that for fiscal year (FY) 2020, Apple reported a decline in iPhone revenue. However, it was more than offset by growth in wearable, services and Mac revenue. Therefore, diversification has helped Apple maintain growth. Given the company’s financial flexibility, innovation-driven growth is likely to sustain.
In terms of the financial strength, Apple reported operating cash flow of $80.7 billion for FY2020. In addition, the company has $190 billion in cash and marketable securities. It’s not surprising that Apple returned $22 billion to shareholders in the fourth quarter of 2020.
I believe that dividends will continue to increase, coupled with an increase in share repurchase. AAPL stock is therefore attractively valued at a price-to-earnings (P/E) ratio of 31.5. Importantly, as markets trade near all-time highs, it makes sense to go overweight on some defensive stocks. Considering the fundamental strength, AAPL stock deserves a place among defensive stocks.
Procter & Gamble (PG)
PG stock is another quality name among this list of safe stocks to buy. With a beta of 0.38 and a dividend yield of 2.26%, PG stock is worth holding in your core portfolio.
Last month, Wells Fargo opined that “there is an underestimation of flexibility in PG’s financial algorithm, esp. related to top line momentum and operating leverage.” In the last few months, the company’s stock has been sideways. If earnings do beat analyst estimates, I expect a breakout on the upside.
It’s worth noting that for the first quarter of 2021, the company’s organic sales growth was 9%. This was the highest quarterly growth in the last few years. The company also reported growth in nine of the ten product categories.
Another point from a sustained growth perspective is geographic diversification. As of FY2020, the company reported 9% sales from Greater China, 10% from Asia Pacific and 6% from Latin America. In the next decade, these regions are likely to contribute to robust growth.
Overall, the company is positioned for earnings-per-share (EPS) growth in the coming years. This is likely to translate into higher cash flows and higher dividends. In addition, PG stock is trading at a P/E of 25.15 and worth buying at current levels.
Costco Wholesale (COST)
Costco stock has been trending higher for the last six months. Even if the stock is moving relatively sideways, it’s worth considering exposure for dividends and for building a defensive portfolio. Currently, COST stock offers an annual dividend payout of $2.80, with visibility for dividend growth. With its low beta of 0.66, this stock was an obvious choice for this list of safe stocks to buy.
RBC Capital analyst Scot Ciccareli believes that Costco will continue “delivering strong sales growth and good margin performance quarter after quarter.” The company also “has the lowest markup in the industry which creates an ‘extremely compelling value’ for members.” Therefore, as strong quarterly numbers flow, COST stock is likely to remain firm.
Another factor that makes Costco attractive is robust e-commerce growth. For Q1 2021, the company reported e-commerce sales growth of 86.2%. The pandemic has accelerated online shopping, and Costco is well positioned on that front.
Furthermore, Costco Wholesale has 558 warehouses in the U.S. and just one in China. In the coming years, I expect strong membership growth from emerging markets. This is likely to ensure that cash flow visibility remains robust.
Visa is another safe stock to buy with potential for upside in the current year. Visa stock has been relatively subdued in the last year, having trended higher by about 14%. In terms of peer valuation, Mastercard (NYSE:MA) trades at a P/E of 52.71. On the other hand, Visa trades at a P/E of 43.96. Clearly, V stock has upside potential in the coming quarters, in addition to being a low-beta stock.
For the last 12 months, the company has also reported free cash flow of $9.7 billion. This has allowed it to pursue aggressive stock repurchase. In addition, Visa stock also has a healthy annual dividend payout of $1.28.
From an earnings growth perspective, the company’s FY2020 earnings was impacted by a loss in international transaction revenue. Once the Covid-19 headwind is navigated (by mass vaccination), earnings growth is likely to be at 10% on an annual basis over the next five years.
Visa has also been pursuing inorganic growth. In Q4 2020, Visa acquired YellowPepper, which is a “fintech pioneer with proprietary technology and partnerships supporting leading financial institutions and startups in Latin America and the Caribbean.” The acquisition will help Visa make inroads in these regions.
Overall, Visa has upside potential in the coming quarters. Being a low-beta stock with an attractive dividend, the stock is worth considering when looking at safe stocks to buy.
IHS Markit (NYSE:INFO) believes that global auto sales are expected to gain momentum in 2021. In fact, it expects that 83.4 million light vehicles will be sold during the year. Ford stock trades at attractive valuations and is an easy pick on my list of safe stocks to buy. The downside risk is minimal, and the upside potential is significant.
From a financial perspective, Ford reported $30 billion in cash and $45 billion in total liquidity as of Q3 2020. The company is therefore going into FY2021 with a strong cash buffer for growth to be delivered by new product launches.
In Q4 2020, Ford has already launched its F-150, Mustang Mach-E and Bronco Sport vehicles. The pipeline is attractive, and the Bronco is likely to be a cash machine in the coming years. Ford also has ambitious plans in the electric-vehicle (EV) segment. The company has several new models to be launched in China in the next few years. This is another major growth trigger for the company.
I therefore believe that the worst was over for F stock when it bottomed out at $4.01 in March 2020. The stock has already more than doubled from those levels. I will not be surprised if the stock doubles again in 2021.
AbbVie stock currently trades at a forward P/E of 8.84. In addition, the stock offers an annual dividend of $5.20, which translates into a healthy dividend yield of 4.93%. It also has a beta of 0.82. I believe that these are big reasons to consider ABBV stock among the top safe stocks to buy.
For AbbVie, Humira has been the cash cow, with global sales in FY2020 likely at $20 billion. The top-ranked immunology drug has 16 indications globally. However, beyond FY2023, the loss of patents can translate into a decline in revenue. This is one reason for the stock being relatively subdued.
However, it’s worth noting that AbbVie has a deep pipeline of drugs. The Phase 3 pipeline of oncology and immunology drugs is attractive. The company believes that the global immunology market still has significant potential with an estimated size of $80 billion. It’s very likely that the new drug pipeline will offset the revenue decline from drugs going off-patent.
Overall, even if ABBV stock remains sideways, it’s worth considering for a defensive portfolio and for robust dividends.
Mondelez International (MDLZ)
Mondelez International is another stock that has a low beta, a healthy dividend payout and an attractive valuation. With a forward P/E of 20.79 and a dividend yield of 2.18%, the stock is worth buying at current levels.
Further, MDLZ stock has moved higher by just 6.67% in the last year. I will not be surprised if there is a breakout on the upside. As an overview, the company is a global provider of snacking products.
For Q3 2020, the company reported 4.4% organic revenue growth and 5.9% adjusted EPS growth. With the company having an innovative pipeline of SKUs (stock-keeping units), topline and EPS growth can accelerate. In addition, the company is targeting an increase in media investments to accelerate growth.
I also like the fact that the company’s free cash flow has continued to expand in the last few years. For FY2018, the company’s FCF was $1.1 billion. For FY2020, the company is on track to deliver FCF in excess of $2.0 billion.
Therefore, besides the stock’s upside potential, dividends will continue to increase. This makes MDLZ stock attractive at current valuations.
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 modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.