At any point of time, it’s a good idea to have a portfolio that has aggressive stocks and safe stocks. The weight of safe stocks in your portfolio can be adjusted depending on economic news triggers or broad market valuations.
Recently, Treasury Secretary Janet Yellen “conceded that interest rates may have to rise to keep a lid on the burgeoning economic growth.” The job of policymakers is to keep gross domestic product (GDP) growth around potential GDP. When the economy is in a recessionary gap, expansionary policies are pursued.
On the other hand, when the economy has an inflationary gap, the central bank pursues contractionary monetary policy. Yellen is possibly hinting at an inflationary gap in the economy. There have already been concerns about inflation accelerating. It’s worth noting that industrial commodity and energy price has also trended higher.
Of course, Yellen later clarified remarks and said that there is no need for the Fed to hike rates. However, this clarification came with a disclaimer. Yellen said that “she didn’t anticipate a bout of persistently higher inflation, but that if one occurred the central bank has the tools to deal with it.”
With inflation being dynamic, it’s too early to say or predict that the bout of inflation is temporary. Therefore, investors need to consider some exposure to safe stocks that can remain resilient even if there is a rate hike.
Let’s talk about seven safe stocks that can be added to your portfolio.
- JPMorgan Chase (NYSE:JPM)
- Costco Wholesale (NASDAQ:COST)
- Lockheed Martin (NYSE:LMT)
- Equinor (NYSE:EQNR)
- Pfizer (NYSE:PFE)
- Amazon (NASDAQ:AMZN)
- McDonald’s (NYSE:MCD)
Safe Stocks to Buy: JPMorgan Chase (JPM)
With economic recovery on its way, JPM stock has been in an uptrend. The stock has delivered returns of 39% in the last six months. At a forward price-to-earnings (P/E) ratio of 13.6 and a dividend yield of 2.27%, the stock continues to look attractive.
From a business perspective, the company’s core business has remained relatively depressed. With low interest rates, the net interest income margin has been subdued. However, this can potentially change if interest rates trend higher. It’s worth noting that higher interest rates do imply accelerated economic activity. Therefore, even with a rise in interest rates, credit growth can be robust.
At the same time, the company’s non-interest income growth has been strong. This growth has been driven by asset- and wealth-management services. The investment banking division has also delivered strong results. With a bull market in various asset classes, this division is likely to support growth.
S&P Global Ratings also believes that “the recently passed $900 billion stimulus bill, continued economic growth and vaccine distribution” will curb credit losses. Therefore, JPMorgan will continue to have a robust balance sheet. Overall, JPM stock is among the top safe stocks to consider with talks on rate hikes.
Costco Wholesale (COST)
The consumption sector is a key growth driver for the U.S. economy. Retail spending is an important part of the broad sector. I believe that COST stock, with a beta of 0.64, is worth adding to your list of safe stocks. In addition, an annualized dividend of $3.16 makes the stock attractive.
For the second quarter of 2021, the company reported sales growth of 14.7% to $43.89 billion. Importantly, the company’s e-commerce sales growth remained robust at 75.8%. With expanding omni-channel presence, the company is well-positioned to benefit.
It’s also worth noting that for the first half of 2021, the company generated $1.7 billion in membership fee revenue. With an annualized membership fee visibility of $3.4 billion, cash flows are likely to remain robust. The company already has 59.7 million household members with a renewal rate of 91% in the U.S. and Canada. Expansion in China could be a potential trigger for sustained growth in membership fees.
COST stock is currently trading near 52-week highs. I believe that gradual exposure should be considered. However, the downside risk does not seem to be significant. In March 2021, the stock swiftly corrected to $300 levels. The bounce back was equally sharp.
Lockheed Martin (LMT)
The defense sector is unlikely to be impacted by any potential rate hike. LMT stock seems to be among the top names to consider from the sector.
From January lows of $321, the stock has trended higher to current levels near $390. However, if we look at a one-year period, the stock is still an underperformer with 3% returns.
At a forward P/E of 14.7, the stock is worth adding to your portfolio of safe stocks. Additionally, the company pays an annualized dividend of $10.40. With a beta of 0.98, the stock is also attractive for income investors.
For Q1 2021, the company reported an order backlog of $147 billion. Last month, the company received a flurry of contracts related to air force and launch rocket systems, among others. As the backlog remains healthy, the company will have clear cash-flow visibility.
Lockheed Martin is expecting annualized cash flow of $9 billion over the next three years. This will ensure that value creation sustains through dividends and share repurchase.
The space segment has generated significant interest in the recent past. For Q1 2021, the company’s revenue from the space segment was $3 billion. This already implies an annualized revenue of $12 billion. Growth in this segment can help in accelerating revenue.
In general, stocks from the energy sector have a high beta. However, EQNR stock is an exception. The stock has a beta of 0.79. With low volatility, the stock is worth including in your portfolio of safe stocks.
Another reason to talk about Equinor is the positive outlook for the energy industry. According to Goldman Sachs, oil is likely to touch $80 per barrel over the next six months. EQNR stock has trended higher by 47% in the last six months. If the positive momentum sustains for oil, the stock has further upside.
Another reason to like Equinor is the quality of assets. The company has six billion BOE of resources. Importantly, the break-even oil price is less than $35 per barrel. For the current year, the company guided for free cash flow of $6 billion if oil price averaged $50 per barrel. Given the current energy price outlook, the company is positioned to deliver free cash flow (FCF) in excess of $10 billion. It’s therefore not surprising that the stock has surged.
Further, the company has guided for an annual production growth of 3% over the next six years. Therefore, Equinor stands to benefit from higher oil prices and incremental production. Currently, the company has an annualized dividend of $0.48. It’s very likely that dividend growth will be significant in FY2021.
I believe that there are several reasons to include PFE stock in your list of safe stocks. First and foremost, the stock has a beta of 0.67. Furthermore, the stock trades at a forward P/E of 12.2. At current levels, the downside risk seems low, and the upside potential could be significant. Pfizer also has an attractive dividend yield of 3.96%.
It’s worth noting that for Q1 2021, the company reported revenue growth of 42%. The key trigger was growth from the sale of the Covid-19 vaccine. Excluding the vaccine, revenue growth was 8%. For the current year, the company expects revenue of $26 billion from delivery of 1.6 billion doses of the vaccine.
Further, the company expects to increase manufacturing capacity of three billion doses in FY2022. With Pfizer negotiating contracts with multiple governments, it’s likely that the vaccine against Covid-19 will remain a growth driver. At least for the next few years.
Excluding the vaccine, Pfizer has also reaffirmed revenue guidance at a compound annual growth rate (CAGR) of 6% through FY2025. This growth will be driven by a strong pipeline of products across oncology, rare diseases, immunology and inflammation.
PFE stock is therefore attractively valued and as growth sustains, its dividend is likely to increase in the coming years.
The business of Amazon is also immune to any negative impact of rate hikes. Further, AMZN stock has been in a tight range in the last six months. A breakout on the upside seems probable as business growth remains strong.
For Q1 2021, the company reported net sales growth of 44% to $108.5 billion. For the coming quarter, the company has guided for revenue growth of 24% to 30%.
An important point to note is that for Q1 2021, Amazon Web Services reported net sales of $13.5 billion. On a year-over-year basis, sales growth was 32%. The company’s cloud business is still 11% of the total sales. It’s very likely that the segment will continue to grow at a healthy pace and contribute to earnings before interest, taxes, depreciation and amortization (EBITDA) margin expansion.
Further, Amazon still derives 61% of sales from North America. International sales as a percentage of total sales were 28% for the trailing twelve months. With presence in high-growth emerging markets, international sales will also support growth.
It’s also worth noting that for the TTM period, the company generated $67.2 billion in operating cash flow and $26.4 billion in FCF. This gives the company ample headroom to continue aggressive growth.
MCD stock is another quality name among safe stocks to consider. The stock trades at an attractive forward P/E of 27.3 and has a healthy dividend yield of 2.2%. The company’s business is also immune to rate hikes, and McDonald’s has been reporting strong quarterly numbers.
For Q1 2021, the company reported global comparable sales growth of 7.5%. Comparable restaurant sales in the U.S. surged by 13.6%. A key contributor to U.S. sales was growth in digital and delivery platforms.
Another reason for the company’s success in the recent past has been maximizing marketing in a culturally relevant way. At the same time, the company has expanded its menu and focused on local taste preferences.
In the international developmental licensed market, growth was driven by strong comparable sales in China and Japan. If countries like India and China continue to deliver growth, MCD stock is positioned for sustained value creation.
In terms of dividend and share repurchase, McDonald’s reported operating cash flow (OCF) of $6.3 billion in FY2020 and FCF of $4.8 billion. I expect FCF to accelerate as comparable store sales growth remains healthy. This positions the company for dividend growth in the coming years.
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.