Investors usually flock to defensive stock names during a bear market or when they are concerned that the market may not run much more. Whether this is becoming a bear market or a bull market at all depends upon how long you’ve been in the market and how long you have been investing. The latest wave of selling pressure this week is making many investors rethink their technology and growth investments as the recovery has started to slow considerably. Defensive stocks should be the winners in uncertainty.
24/7 Wall Street looked through some of our existing go-to stocks in the defensive stock sector to find some stocks that are likely to hold up if the stock market pressure continues to push stocks lower. Generally speaking, defensive stocks fall into boring sectors. If you have to apply it to your body, smoke it, drink it, or eat it, chances are it is a defensive stock. If the company owns your water or electricity or if it makes drugs that your life depends upon, chances are that it is a defensive stock. The more important consideration is that not all defensive stocks are created equal and some are more attractive or less attractive through time when compared to their peers. We wanted to look through our defensive stocks universe and pick out names which offer safety but also that are expected to still grow in earnings and revenues from 2010 to 2011.
Three of our safe defensive stocks are McDonald’s Corporation (NYSE: MCD), American Water Works Company, Inc. (NYSE: AWK), and Teva Pharmaceutical Industries Limited (NASDAQ: TEVA).
Casual Dining… “I’m Lovin’ It.”
In our recent coverage of food stocks with the safest dividend, Yum Brands was best positioned to have a safe dividend. But when it comes to which food retailer has the safest stock profile, look no further than Mickey-D’s and the Golden Arches. McDonald’s Corporation (NYSE: MCD) recently saw shares hit a new all-time high. The company’s 7% growth in same-store sales blew past estimates, and July comparable sales figure was still up by 5.7% if you just want a U.S. figure. Apparently everyone is confirming the “I’m lovin’ it” slogan.
A recently quoted report from Scarborough Research showed that the company is keeping a huge lead in the breakfast market. Thomson Reuters has estimates of of $4.51 EPS for 2010 and $4.89 EPS for 2011. While that reflects a to be expected slowing of growth after $3.98 EPS for 2009, the forward P/E ratios for the stock at $72.06 are 15.9 this year and 14.7 next year. Thomson Reuters has an average price target of roughly $79.00 here, implying almost 10% upside in the stock. While it is never fun buying stocks at all-time highs, there have just been no huge pullback opportunities for investors to jump in here. It has been steady and there are very few times recently that it has come in more than 10% from any current price. The bonus here is the 3.1% dividend, among the highest payout of the casual dining companies, with plenty of dividend coverage to keep hiking payouts.
Water… Life’s number one necessity
American Water Works Company, Inc. (NYSE: AWK) is still relatively new for many U.S. investors since the Germans punted it back on the US market after taking it private. If a water utility is not safe during hard times, then things will have gotten bad enough that small details like drinking water, taking showers, and using toilets have become obsolete. American Water is the largest public water and waste water utility in the U.S. and it serves about 16 million people spread across 35 states and two Canadian provinces. Earnings were solid and a dividend hike came to boot with more dividend hikes possible.
Revenues rose over 9% to $671.2 million, net income rose almost 40% to $72.8 million, and earnings per share rose 31% to $0.42 EPS. The company said there is no immediate need for another equity offering, something that has been a steady overhang, and it raised guidance to $1.42 to $1.52 EPS. Before earnings, American Water boosted its dividend by 5% to $0.22 EPS per quarter, giving the water utility ample room to further boost its payout each year. This is not a home run stock, but it is also one that doesn’t strike investors out. Thomson Reuters has estimates of $1.58 EPS for 2011, so its $22.48 stock gives a forward ratio of 14.2 with a 52-week trading range of $18.75 to $23.77. The new dividend yield offers a large cushion with a 3.9% dividend yield. Thomson Reuters also shows an average analyst price target of above $25.00, implying upside of more than 12% in share price.
“Safe Pharma, with growth”
The drug and pharmaceutical sector has been a defensive sector in the past, but that has been less of a case with healthcare reform coming. Generics offer some safety in a stormy sea, and no company has been better than Teva Pharmaceutical Industries Limited (NASDAQ: TEVA) in the group. Teva is actually based in Israel, it has been making selective acquisitions to get a larger international footprint, it has some branded drugs that are not generics, and its stock has pulled back considerably from the March and April highs when it almost reached $65.00 per share. Because it has been an acquirer and because its stock has risen, its dividend yield is lower than most drug companies at an implied yield today of roughly 1.3%.
What investors have here is growth that has not been seen elsewhere. Earnings were $3.37 EPS in 2009, but Thomson Reuters has estimates of $4.56 EPS in 2010 and $5.10 EPS in 2011. Based on the near 20% pullback from the highs, this gives forward expected P/E ratios of 11.1 for 2010 and 9.9 for 2011. There is substantial room for dividend growth ahead. Its $45 billion market may sound high, but that is actually nowhere near the largest drug makers. Thomson Reuters also shows an average analyst price target of above $67.00, implying upside of more than 30% because of the pullback.
Again, the idea is to find stocks that have not changed their models or that have not put their business at risk. Defensive stocks are supposed to offer at least some safety in down markets. When you can find the ones that can still keep growing on top of a safety profile, those are the stocks that investors are likely to flock to.
JON C. OGG