The Dow Jones Industrial Average is the oldest U.S. market index, created on May 26, 1896. Throughout history, its components have been large, established American businesses with competitive advantages. That tradition continues today with top Dow stocks to buy featuring some of the best global companies.
As stock markets hit all-time highs, it’s time to consider some top Dow stocks to buy. Because the market has rallied over 20% since November 2023, it might be due for a pullback. According to the Carson Group, since 1980, the market has experienced an average drawdown of 14.3% in any given year.
While a 14% correction is manageable, the more volatile growth stocks could decline materially. In contrast, the top Dow stocks to buy are stable large-cap stocks. Typically, they have a lower beta, hence, lower drawdowns during corrections. Moreover, in recent years, investors have treated these companies as defensive due to their robust balance sheets.
With the market due for a correction, playing some defense with the following top Dow stocks to buy is warranted. Besides their defensive qualities, they are also long-term compounders.
Amazon (AMZN)
Amazon (NASDAQ:AMZN) is the latest inclusion in the Dow. The company joined the index on February 26, replacing pharmacy chain Walgreens Boots Alliance (NYSE:WBA). There are several reasons why it’s one of the top Dow stocks to buy.
First, in its North American retail segment, the company is finally earning a return on its investments. Due to a massive fulfillment network expansion during 2020 and 2021, returns diminished. Results are improving now that capital expenditures are declining and the firm has shifted to a regional fulfillment network. Segment operating margins rose from -0.9% in Q4 2022 to 4.2% in Q4 2023.
Secondly, the company’s most profitable segment, Amazon Web Services (AWS), is reaccelerating. In 2022 and 2023, revenue growth decelerated due to customer cost optimization and macro fears stalling new deals. These trends are reversing, with the segment growing 13% in Q4 2023 compared to 12% in Q3 2023. Furthermore, the emergence of generative AI has only increased the demand for Amazon’s cloud computing infrastructure.
Thirdly, Amazon is rapidly growing its advertising business into a massive behemoth. Today, Amazon is the third largest advertising business globally. In 2023, advertising services revenue was $46.7 billion and grew 26% year over year (YOY) in Q4 2023.
Altogether, Amazon has an enviable position. It is the leader in online retail in North America, and AWS has the largest share of cloud computing globally. Additionally, the rapidly growing advertising business will boost overall profitability due to its higher margins. Considering these strengths, this technology and e-commerce giant is among the top Dow stocks to buy.
American Express (AXP)
American Express (NYSE:AXP) is a credit card provider that caters to higher-income consumers. It has always maintained a higher growth rate due to the propensity of this cohort to spend. Furthermore, due to the credit quality of this target market, delinquencies remain low even during poor economic environments.
The credit card company is a stable business that earns a high return on equity. That’s why even Warren Buffet appreciates its durability and economic moat. The company is one of the longest-held and the largest holdings in Berkshire Hathaway’s (NYSE:BRK-A, NYSE:BRK-B) equity portfolio.
In the current economic environment, the credit card provider continues to thrive. The economy is growing and unemployment is low, supporting discretionary spending. Furthermore, consumers are still prioritizing services over goods. International travel has been robust, which has boosted spending on American Express credit cards.
The company just delivered an outstanding 2023 with total revenues net of interest expenses increasing 14%. Additionally, diluted EPS grew 14%. For 2024, management expects revenue growth between 9% and 11% and EPS in the range of $12.65 to $13.15.
As of this writing, AXP stock remains one of the top Dow stocks to buy. At 17 times forward EPS, it is a bargain. Furthermore, the stock has a seal of approval from Warren Buffet, the world’s greatest investor.
Merck (MRK)
Although this pharmaceutical giant is up over 16% year to date (YTD), it is still a buy. First, it is a bargain at a forward price-to-earnings of 15. Secondly, its oncology and vaccines portfolio is well-positioned for growth.
The main growth driver for Merck is its blockbuster drug Keytruda. It is already one of the best-selling drugs and continues to be approved for multiple indications. In 2023, Keytruda sales rose by 21%, hitting $25 billion.
The blockbuster continues to enjoy robust global demand from metastatic indications. Furthermore, rising global uptake for new indications is driving growth. The drug is seeing increased usage in indications such as renal cell carcinoma and triple-negative breast cancer.
Keytruda continues to receive approvals for new indications. In February 2024, Canada approved the drug for gastric cancer, and in Europe, it was authorized for resectable non-small cell lung cancer. Since its launch in 2014, it has received over 40 approvals to treat various cancers.
The rest of the portfolio also has several blockbusters. For instance, Gardasil was a top earner in 2023, achieving $8.9 billion in sales in 2023. And, the company is investing heavily in its pipeline. In 2023, it spent $30 billion in research and development to discover the next generation of drugs.
Merck has an expansive portfolio of innovative medicines and vaccines experiencing growing demand worldwide. This, coupled with financial and operational strength, lands it among the top Dow stocks to buy.
On the date of publication, Charles Munyi did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
