Investors seeking safety, value, and income are running out of choices. The mounting volatility in the stock market is hurting the stock’s safety. Stock markets are assessing January’s 7.5% consumer price index. This is raising volatility and creating the illusion of low safety. Fortunately, stock price gyrations create better prices for investors who buy the dip, especially with blue-chip stocks.
Values improve when a share price falls. Companies with a proven history of positive cash flow will pay dividends. High-yield blue-chip stocks are very attractive, especially in higher interest rate environments. The U.S. Federal Reserve projected its interest rate tightening schedule for 2022. At each hike, investors will feel pressured to chase high-yielding stocks. This approach could prove damaging for a portfolio. Instead, investors should choose companies that have a strong balance sheet, consistent cash flow, and manageable debt. Today, I present seven companies that are suitable for any retiree. The firms range from information technology, pharmaceuticals, and consumer goods.
Here are seven picks for blue-chip stocks that will give any conservative investor a healthy level of diversification:
- AbbVie (NYSE:ABBV)
- BP p.l.c. (NYSE:BP)
- Cigna Corporation (NYSE:CI)
- IBM (NYSE:IBM)
- PepsiCo (NASDAQ:PEP)
- Prudential Financial (NYSE:PRU)
- W.P. Carey (NYSE:WPC)
In the table to the right, the selected firms have varying quality scores. For all but PepsiCo, the value score is at least 70/100 or higher, according to Stockrover research.
Unlike technology stock selections, those companies do not trade off low value (and high price) for high-quality. They all have a good balance of the two metrics.
Blue-Chip Stocks: AbbVie (ABBV)
In the fourth quarter (Q4) for 2021, AbbVie posted diluted earnings per share (EPS) of $2.26, up by 100% year-over-year (YOY). Net revenue grew by 7.4% to $14.89 billion. The drug firm issued an EPS guidance range of $9.26 to $9.46.
AbbVie benefited from Skyrizi net revenue rising by an incredible 70.5% YOY. Rinvoq net revenue grew by 84.4% YOY to $517 million. Impruvica net revenue fell by 2.7% YOY to $1.39 billion. From its Allergan acquisition, Botox Therapeutic global net revenue grew by 18.3% YOY to $671 million.
AbbVie’s solid quarter and impressive guidance are becoming a regular occurrence. This sets the company up well in adjusting for the loss of exclusivity for Humira.
Investors who took a risk and bought ABBV stock years ago when it dipped in the $70 range are being rewarded today. Retirees may buy a small position to start. Even though the stock is unlikely to dip, investors may build a position over time.
AbbVie still has to prove its worth in the long-run. Rinvoq and Skyrizi sales need to sustain their revenue growth momentum. When that happens, shareholders do not need to worry about the patent expiry of its blockbuster Humira drug.
BP p.l.c. (BP)
In the energy sector, BP p.l.c., an oil company based in the United Kingdom, is underperforming. American oil integrated firms are performing better.
In Q4, BP posted revenue growing by 73.1% YOY to $52.24 billion. For the year, it generated a surplus cash flow of $6.1 billion. For Q1 2022, the firm expects flat refining margins. Upstream production will fall sequentially due to a base decline and higher maintenance.
By 2022, BP will spend up to $15 billion in capital expenditures.
At first glance, the high costs might deter retirees from investing in BP. Fortunately, BP’s fundamentals are catching up to higher oil prices. Management never forecasted oil in the $90 – $100 per barrel range. If the energy shortage continues, oil prices will not fall in 2022.
BP reduced its debt from $51 billion to $30.6 billion in Q4 2021. It is taking advantage of the strong energy prices to improve its balance sheet. S&P Global Ratings upgraded BP’s outlook from negative to stable. BP may accelerate shareholder returns by buying back shares aggressively.
Blue-Chip Stocks: Cigna Corporation (CI)
In the managed healthcare and insurance sector, Cigna is a suitable choice. In the last decade, Cigna has a track record of average annual adjusted EPS growth of 15%. This is greater than its 10% to 13% target.
Last year, Cigna returned over $9 billion in capital to shareholders. It paid $1.3 billion worth of dividends and bought back $7.7 billion in shares. Business is thriving. For example, its Evernorth segment’s adjusted earnings grew by 8% over 2020. This greatly exceeded its 4% to 6% growth rate target.
Investors could buy Teledoc (NYSE:TDOC) for virtual care growth. But Cigna is a better alternative. It is promoting preventative care by targeting the use of virtual care through its MDLIVE subsidiary. Margins will expand as Cigna increases access to such services. This will also lead to lower operating costs. Customers will benefit by lowering their medical costs in the long-term.
Cigna ended Q4 2021 with healthy $7.2 billion of cash flow from operations. In 2022, it will have at least $8.25 billion in cash flow from operations. This is due to strong capital efficiency from the business.
IBM’s separation of Kyndryl will remove a distraction for management. While Q4 2021 results are on the light side, its prospects may improve.
IBM posted non-generally accepted accounting principles (GAAP) EPS of $3.35 per share. Revenue is up by 6.5% YOY to $16.7 billion. Consulting revenue is up 13% YOY and software revenue is up by 8% YOY. Including Kyndryl results, these are two areas of strength. The technology giant has a major segment — Infrastructure — that has the potential to report accelerating growth.
Infrastructure revenue growth is unchanged from last year. Still, clients will take advantage of an extended hybrid cloud environment. This will result in future accelerated growth.
Hybrid cloud revenue topped $6.2 billion, up by 16% YOY. IBM expanded its partnership with EY Global in 2020. The pair is helping organizations leverage the hybrid cloud, artificial intelligence, and automation capabilities. Customers will transform human resource operations. This momentum suggests that revenue in this segment will increase in the year ahead.
Information Technology (IT) spending may slow in the post-pandemic scenario. Still, IBM did not experience a negative impact from the near-term cycle. Even if the economy slows, clients cannot cut IT spending.
Blue-Chip Stocks: PepsiCo (PEP)
On Feb. 10, 2022, beverage supplier Pepsi posted revenue of $25.25 billion, up by 12.4% YOY. Non-GAAP EPS was $1.53. Retirees will not want to miss the dividend hike. Pepsi raised its dividend by 7% to an annualized $4.60, up from $4.30 a share.
The company also announced a new stock buyback. It will buy up to $10 billion of PEP stock through Feb. 28, 2026. Pepsi’s organic sales growth of 6% re-affirms the company’s strong branding and operational excellence. For example, its categories are healthy for 2022. It expects a strong convenient foods and beverages demand. Its investments in the last three years in brands are resonating with customers.
Pepsi is achieving market share gains across many developing markets in the snack and drink market. As a big firm in those two categories, income investors will be rewarded with continuously growing dividends.
Investors will grow to love the stock and the brand. Its expansion beyond the Pepsi drink paid off. In good times, Pepsi’s business expands. And in bad times, PEP stock still rises.
Prudential Financial (PRU)
After posting Q4 2021 results, Prudential also announced a dividend increase of 4%. It will pay $1.20 a share quarterly.
Prudential is executing a plan to reposition the business. It will achieve $750 million in cost savings, balanced with a conservative deployment of capital. It pivoted the business in high-growth areas, reducing its market sensitivity. It achieved this by divesting Prudential of Korea, Prudential of Taiwan, and removing its full-service retirement business.
In Q4, earnings from the U.S. business still grew despite higher expenses. It also faced less favorable underwriting driven by the Covid-19 pandemic. As the pandemic becomes an endemic, Prudential’s overall business growth will accelerate.
Prudential’s Head of U.S. Businesses, Andrew Sullivan, said that the company is progressing with de-risking its annuities business. In addition, it wrote down its Assurance IQ business. This is a young and innovative company that aligns with Prudential’s strategy. For example, it will help the company expand its addressable market by reaching a wider customer base that the industry underserved up until now.
Blue-Chip Stocks: W.P. Carey (WPC)
In the real estate investment trust (REIT) segment, W.P. Carey posted revenue growing by 22% YOY to $374.88 million. For 2022, it issued an adjusted funds from operations (AFFO) range of between $5.18 and $5.30 per share.
Income investors will like WPC’s quarterly dividend increase to $1.055 a share.
WPC is confident that investment volumes will rise this year. It closed around $166 million in investments so far this year. It has a large pipeline of capital investment projects coming up that will total $450 million in investment volume.
AFFO will rise steadily because of contractual rent growth between 2.5% and 3%. The cost of debt may rise in a higher consumer price index environment. Still, it has a few leases that it will not renew at the end of the year. This will allow W.P. Carey to redevelop properties. It may also wind up with assets through vacant sales.
Investors may wait for the company to update its capitalization rate assumptions. WPC stock will likely trade in a narrow range as investors collect a healthy dividend.
On the date of publication, Chris Lau held a LONG position in BP. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.