Blue-chip stocks are the backbone of any portfolio. These stocks protect investor capital in volatile markets and also create value through dividends and share repurchase.
Even in the recent market correction, there continues to be blue-chip stocks that trade at premium valuations. The reason is the flow of funds from growth stocks to low-beta blue-chip stocks. However, there are several blue-chip stocks trading at a discount due to near-term challenges.
When market sentiments improve, these stocks are positioned to trend higher. These blue-chip stocks trading at a discount also provide investors with a robust dividend yield. This would magnify total return for investors when sentiments change.
Importantly, it makes sense to be overweight blue-chip stocks in current market conditions. The focus is on capital preservation and returns that beat inflation. I believe that these seven stocks can be considered for exposure at current levels to achieve the key objectives.
|MO||Altria Group, Inc.||$41.81|
|JPM||JPMorgan Chase & Co.||$112.44|
|XOM||Exxon Mobil Corporation||$84.04|
Blue-Chip Stocks: Altria Group (MO)
Altria Group (NYSE:MO) stock has corrected by 21% in the last month. The key reason is that the U.S. Food and Drug Administration (FDA) ordered JUUL products off the shelves. Subsequently, the FDA has allowed selling of JUUL products as the company appeals against the order.
Irrespective of the outcome, MO stock seems to be among the attractive blue-chip stocks to buy. At a forward price-to-earnings (P/E) ratio of 8.5 and a dividend yield of 8.75%, the stock is too cheap to ignore.
One reason to like Altria is the fact that Marlboro remains the cash flow machine. Even with stable revenue or marginal decline in the top-line, cash flows are likely to remain robust. This allows Altria to sustain dividends at current levels.
At the same time, Altria has been focused on expanding its non-combustible product portfolio. The company’s share of the oral tobacco category in the U.S. has been increasing. In the next few years, the non-combustible segment will increasingly contribute to cash flows.
With secured dividends and attractive valuations, MO stock is worth buying among blue-chip stocks trading at a discount.
Year-to-date, Pfizer (NYSE:PFE) stock has remained sideways. I believe this is a good accumulation opportunity for a stock that provides a dividend yield of 3%. Also, PFE stock trades at a forward P/E of 7.7, which indicates undervaluation.
On a relative basis, it’s likely that the company’s revenue from Covid-19 vaccine sales will decline even as countries mandate booster doses. However, the growth story for Pfizer is beyond the pandemic vaccine.
For the current year, Pfizer expects to invest $11.5 billion in research and development. With a strong pipeline of drug candidates, the company is positioned to deliver steady growth in the coming years.
Pfizer has also been on an acquisition spree in the last few quarters. With strong cash flows from Covid-19 vaccine sales, the company’s financial flexibility has improved. Acquisitions will allow the company to diversify and deepen the product pipeline.
As an example, the company believes that the acquisition of ReViral can add $25 billion of risk-adjusted revenue to the top-line by 2030. With visibility for sustained growth and cash flow upside, PFE stock looks deeply undervalued.
Blue-Chip Stocks: AT&T (T)
After the spin-off of the media division, AT&T (NYSE:T) stock looks attractively valued among blue-chip stocks. The stock looks good at a forward P/E of 8.2 and offers a dividend yield of 5.26%.
It’s worth noting that T stock has witnessed a marginal upside of 6.5% in the last six months. The uptrend in challenging market conditions is an indication of the undervaluation.
It’s worth noting that for first-quarter (Q1) 2022, AT&T reported revenue growth of 2.5% to $29.7 billion. Further, free cash flow for the quarter was $2.9 billion. This implies an annualized FCF potential in excess of $10 billion. Therefore, AT&T is well positioned to sustain dividends and deleverage.
AT&T has also witnessed sustained growth in post-paid phone and fiber subscribers. With strong capital investments and a robust 5G network, the company is positioned to benefit. For 2022, the company is also targeting to achieve $4 billion to $6 billion in cost savings. This is likely to have a positive impact on key margins.
Target Corporation (TGT)
Retail stocks have been under pressure due to inflation and its impact on margins. A possible recession in 2023 has also added to the concerns. However, these near-term headwinds provide a good entry opportunity in blue-chip stocks.
Target Corporation (NYSE:TGT) stock has slipped by 35% in the last six months. Gradual accumulation can be considered. A forward P/E of 16.8 looks attractive. Costco (NASDAQ:COST) stock trades at a forward P/E of 37.7. This is an indication of relative undervaluation.
For Q1 2022, Target reported 3.3% growth in comparable sales on top of 22.9% growth last year. Digital sales have also remained strong as Target builds omni-channel sales presence.
Back in March 2021, Target had committed to spend $4 billion annually. This investment is targeted toward store re-modelling, building new stores and improving online sales capability. These investments, over the next few years, will ensure that the company sustains healthy growth.
Blue Chip Stocks: Intel (INTC)
Intel (NASDAQ:INTC) is another name among blue-chip stocks to buy that looks deeply undervalued. After a correction of almost 30% in the last six months, INTC stock trades at a forward P/E of 10.7. The correction clearly seems to be overdone for this 3.95% dividend yield stock.
A key reason to like Intel is some big planned investments. For the current year, Intel has guided for net capital expenditure of $27 billion. Recently, the company also acquired land to build a manufacturing plant in Ohio with a planned investment of $20 billion. If the CHIPS Act is passed in the United States, Intel will be a major beneficiary of semi-conductor subsidies.
In March 2022, Intel announced that the company will invest 80 billion euros in the European Union over the next decade. The initial investment of 17 billion euros is targeted toward a semiconductor fab mega-site in Germany.
With healthy cash flows, Intel is positioned to make big investments. This will translate into accelerated top-line growth in the coming years along with cash flow upside.
JPMorgan Chase (JPM)
The banking sector has been an under-performer and there seems to be value in high-quality banking stocks. JPMorgan Chase (NYSE:JPM) stock has declined by 31% in the last six months and trades at a forward P/E of 9.9. The blue-chip stock also offers a dividend yield of 3.6% and looks significantly undervalued.
The banking sector has some near-term concerns. Inflation is likely to impact purchasing power. Aggressive rate hikes will also impact credit growth. At the same time, JPMorgan is likely to see some net interest income margin expansion.
JPMorgan Chase also has a strong balance sheet. A recession can be navigated with relative ease. On the flip-side, the bank is likely to see a loss in the wealth management and investment banking division. Weak equity markets will impact these segments. However, considering the valuation, this factor seems to be discounted in the stock.
Overall, JPM stock is worth considering at current levels for sustained dividends and potential upside when macro-economic headwinds wane.
Blue-Chip Stocks: Exxon Mobil (XOM)
Exxon Mobil (NYSE:XOM) is another quality name among blue-chip stocks trading at a discount. At a forward P/E of 7.4, the stock is worth considering and a dividend yield of 4% is attractive.
In the near term, a reason to be bullish on Exxon Mobil is strong growth in refining margins. For Q2 2022, refining profit is expected to surge by $5.5 billion. For Q1 2022, Exxon generated $14.8 billion in operating cash flow. With visibility for cash flow acceleration, dividends are secured.
Exxon also has some high-quality oil and gas assets. In particular, the company’s Guyana project is likely to be a game-changer in the next few years. The company’s Permian production is also on track for a 25% increase in 2022. If oil sustains above $80 per barrel, Exxon will be positioned to deliver robust cash flows from the exploration and production business.
From a balance sheet perspective, Exxon reported a net-debt ratio of 17% for Q1 2022. Considering strong cash flows, the overall credit health is likely to improve further. This can potentially ensure aggressive share repurchase and dividend growth.
On the date of publication, Faisal Humayun 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.