While building a portfolio, investors can make their selections based on the beta of a stock. In simple terms, beta measures the volatility of a stock in relation to the overall markets or index. A higher beta indicates higher volatility in the stock. Likewise, low-beta stocks have low volatility.
A stock that moves more than the overall market will have a beta higher than 1, and a stock that moves less will have a beta lower than 1. This number indicates how much it will move compared to the market. For example, if a stock has a beta of 1.5, the stock will move higher by 15% if the index moves by 10%. If the index moves lower by 10%, the stock will decline by 15%.
Going overweight on high-beta stocks makes sense when the market sentiment is bullish. On the other hand, when markets seem overvalued, it’s a good idea to go overweight on low-beta stocks.
Low-beta stocks can protect a portfolio during a correction. With the S&P 500 Index trading at a cyclically adjusted price-to-earnings-ratio of 38.2, valuations seem stretched.
I am not expecting a reversal to a bear market. However, a 15% to 20% correction would not come as a surprise. If this happens, low-beta stocks will protect investors from capital erosion.
Let’s talk about low-beta stocks that are worth holding in the current market scenario. These four stocks have low volatility and offer a robust dividend yield:
Low-Beta Stocks: Walmart (WMT)
WMT stock, which has a beta of 0.47, is one of the best low-beta stocks to consider for your portfolio. Besides providing protection against capital erosion, Walmart also offers a dividend yield of 1.55%.
In terms of its price, WMT stock has trended higher by 8.3% in the last 12 months. At a forward price-to-earnings (P/E) ratio of 24.75, the stock seems attractive for upside.
For the first quarter of 2022, Walmart reported net U.S. sales of $93.2 billion. Comparable sales witnessed a healthy growth of 6%. Furthermore, the company’s e-commerce net sales in the U.S. increased by 37%.
With Walmart building strong omnichannel capabilities, sales growth is likely to sustain. Currently, the company has pick-up options at approximately 3,800 store locations and same-day delivery from 3,200 stores.
It’s worth noting that Walmart’s international sales declined by 8.3% in Q1 2022 to $27.3 billion. However, divestitures contributed to the sales decline.
E-commerce sales growth in international markets was robust at 49%. At the same time, the company is investing in potentially big markets like India. Recently, Walmart-owned Flipkart raised $3.6 billion to accelerate e-commerce growth in India.
Overall, WMT stock looks attractive, as the company is likely to deliver steady growth and cash flows.
MCD stock also has low volatility with a beta of 0.62. Additionally, the stock offers an attractive dividend yield of 2.11%.
It’s worth noting that MCD stock has trended higher by 13.8% year-to-date (YTD). A key reason is the company’s strong financial performance. In Q1 2021, McDonald’s reported a 7.5% increase in global comparable sales. Revenue growth for the same period was 9% to $5.1 billion.
One factor that has increased McDonald’s growth is its focus on digital, delivery and drive-thru services. In the last four years, the number of restaurants offering delivery has increased from 3,000 to 30,000. The company also has 40 million active app users in its top six markets.
Additionally, menu innovations drove strong comparable store sales growth. McDonald’s also opened nearly 1,000 new restaurants globally in 2020 and modernized 900 restaurants in the U.S. Aggressive restaurant opening like this can support growth throughout the rest of the year.
From a financial perspective, the company reported operating cash flow of $2.1 billion in Q1 2021. With an annualized cash flow visibility of $8.4 billion, the company is well-positioned to sustain dividends.
Low-Beta Stocks: AstraZeneca (AZN)
AZN stock has a beta of just 0.24. I would not think twice before adding it to a portfolio of defensive stocks. Like most low-beta stocks, AstraZeneca has a healthy dividend yield of 2.46%.
For Q1 2021, the company reported healthy top-line growth of 11% — 7% when excluding the impact of its Covid-19 vaccine. The rise was largely driven by growth in its oncology and new cardiovascular, renal and metabolism (CVRM) divisions.
It’s worth noting that AstraZeneca has a robust deep-stage pipeline of drugs. This includes next-generation medicines for cardiovascular, heart, renal and liver diseases. Overall, the company has 22 phase-three candidates. The pipeline can ensure that healthy top-line growth sustains in the coming years.
AstraZeneca also has a strong global presence. For Q1 2021, the company derived $2.3 billion in revenue from the U.S. and $2.6 billion from emerging markets. The company is increasing its presence in Europe with 18% year-over-year (YOY) revenue growth for Q1 2021.
From a financial perspective, the company reported operating cash flow of $1.9 billion for the last quarter. This healthy cash flow can support investment in research and development. Additionally, dividends are sustainable as a pipeline of new drugs continue to boost growth.
Technology major Microsoft has witnessed strong momentum recently. MSFT stock has trended higher by 28.7% YTD in 2021.
It’s worth noting that MSFT stock trades at a forward P/E of 33.9. However, valuation is not a concern considering the company’s robust growth. In Q3 2021, the company’s revenue increased 19% and diluted EPS rose a stellar 45%.
Microsoft reported revenue of $15.1 billion for its Intelligent Cloud segment. Revenue growth was higher by 23% on a YOY basis. I believe the segment is likely to deliver sustained growth with Azure, its quantum computing cloud service.
The company is also using acquisitions to expand its product offerings, and has strong financial flexibility to continue buying innovative companies. For example, Microsoft recently acquired Nuance Communications, an AI and cloud player in the healthcare segment, for $19.7 billion.
As of March 2021, the company reported $125 billion in cash and equivalents. Furthermore, for the first nine months of fiscal year 2021, the company’s operating cash flow was $54 billion.
Clearly, Microsoft is a cash flow machine. This can help it maintain increasing dividends and create value through share repurchases. Importantly, the company has ample financial headroom to pursue aggressive growth organically and through acquisitions.
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. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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.