The S&P downgrade of the United States may have the investment community in a fuss, but many investors saw this coming long before. To say that investors will not see a knee-jerk reaction in stocks may be a bit naive, but there are actually some great American brands owned by great American giants that are likely to not ever notice that S&P’s rating of the United States even matters. After reviewing our defensive stock picks and including some other companies, we identified several companies which are likely to be bullet-proof against S&P’s credit rating action. Our bullet-proof stock list includes the following: Altria Group, Inc. (NYSE: MO); American Water Works Company, Inc. (NYSE: AWK); AT&T, Inc. (NYSE: T); Kimberly-Clark Corporation (NYSE: KMB); Kraft Foods Inc. (NYSE: KFT); McDonald’s Corporation (NYSE: MCD); and Pepsico, Inc. (NYSE: PEP).
Many of these stocks have peers and competitors, but these were chosen for their dividends or due to their share price performance and value. All of these have consensus analyst price target objectives which are higher than the share price and they are in sectors that investors cannot live without. Another attribute is a solid and stable dividend that will rise through time, and these all out-yield the 10-year Treasury note (most recently at 2.55%) and many out-yield the 30-year Long Bond’s 3.82% yield. We even showed what S&P’s rating is on these after the U.S. credit action, and none are actually “AAA” in comparison. We have also shown the price to book value and return on equity based upon data from FinViz.
Altria Group, Inc. (NYSE: MO) recently closed at $25.89 and analysts have a consensus price target objective of $27.86. It carries a 5.9% dividend yield and the stock is down 7.9% from its 52-week high. The price to book value is almost shockingly high at 11 but its return on equity is over 70%. S&P may only have a “BBB” local long-term credit rating here, but the domestic tobacco leader has been a significant winner and it carries no currency risks to speak of. Each generation that has tried to bet against the viability of the tobacco sector has failed to win. Besides, both Boehner and Obama can’t really attack tobacco companies too harshly as they are both smokers.
American Water Works Company, Inc. (NYSE: AWK) recently closed at $27.41 and analysts have a consensus price target objective of $31.60. It carries a 3.4% dividend yield and the stock is down a very rare 10.7% from its 52-week high (almost never pulls back 10%). The price to book value is 1.16 and its return on equity is almost 7%. S&P has a rating of BBB+ with a stable outlook for its local long-term ratings. This is the biggest independent water utility operator in the United States with some business in Canada, giving it very limited exposure to currency issues. Being the water utility offers perhaps the best defensive mechanism of all: no one can really live without water.
AT&T, Inc. (NYSE: T) closed at $28.93 and the analyst consensus price target is $32.78. It carries a 5.9% dividend yield and the stock is down 9.4% from its 52-week high. The price to book value is 1.5 and its return on equity is 18%. S&P gives a “A-” local long-term credit ranking. Our only caveat on AT&T is the pending T-Mobile deal, which could result in a multi-billion charge if the buyout fails to win approval. The yield is amazing here and it did not have the iPhone defections at a rate that many expected.
Kimberly-Clark Corporation (NYSE: KMB) is at $64.07 and analysts have a consensus price target objective of $70.46. It carries a 4.4% dividend yield and the stock is down 6.4% from its 52-week high. The price to book value is about 4. S&P carries a “A” rating on its local long-term system. Kleenex, Huggies, Kotex, Depend, and on… Hard to live without.
Kraft Foods Inc. (NYSE: KFT) recently closed at $34.87 and the analyst community’s price target objective is $37.69. The dividend yield is 3.3% and the stock is down only 3.9% from its 52-week high. The price to book value is 1.5 and its return on equity is 8.5%.S&P has a local long-term rating of “BBB” and a stable outlook despite the recent proposed break-up. The break-up here is only adding value to holders in what was becoming a very dead-money stock for investors. Its Cadbury deal added leverage and Warren Buffett had backed off his holdings on that acquisition.
McDonald’s Corporation (NYSE: MCD) is at $85.08 and analysts have a consensus price target objective of $97.68. It carries a 2.9% dividend yield and the stock is down 5% from its 52-week high. McDonald’s trades at close to 6-times book value, but its return on equity is 37%. S&P carries an “A” local long-term rating on the Golden Arches. In the “you gotta eat somewhere” theory, McDonald’s seems to keep winning over and over and its shares and same-store sales keep rising handily.
Pepsico, Inc. (NYSE: PEP) was most recently at $64.67 and the analyst community price target is $76.67. Investors get a 3.2% dividend here and its shares are down 10% from its 52-week high. The price to book value is 4 and its return on equity is about 28%. S&P has an “A” rating its local long-term system. Pepsi is often considered to be more like Coca-Cola, but its snack food business gives it at least some of the same aspects of Kraft. CEO Indra Nooyi has been performing well and growing its international operations. We would not expect for Pepsi to break itself up.
These will not all just trade higher suddenly because they are supposed to immune or insulated. They do offer the defensive parameters for investors who are looking for stocks that pay more than long-term Treasury yields and which also still offer upside in share price as well. S&P is not going to be able to kill these companies, even if they have further highlighted the damage to the long-term ratings of the United States.
JON C. OGG