People are going to buy Coke and Pepsi, most likely, in almost any economy.  Pepsico, Inc. (NYSE: PEP) is actually up 0.6% at $67.23 against a 52-week high of $71.89; Coca-Cola Company (NYSE: KO) is down 0.6% at $76.95 against a 52-week high of $77.82.  With yields of about 3% on average, these pay about the same as the 30-Year Treasury’s long-bond.  The beer segment remains uncorrelated to defensive stocks as it did last week (in part due to currencies): Anheuser-Busch InBev SA (NYSE: BUD) is down by 0.7% at $71.43 and Molson Coors Brewing Company (NYSE: TAP) is down 1.2% at $40.81.  Even the best water utility in America via American Water Works Company, Inc. (NYSE: AWK) is down another 1% $33.99 against a 52-week and all-time high of $34.89.

Food is supposed to be defensive.  You gotta eat, right?  McDonald’s Corporation (NYSE: MCD) is down almost 0.4% at $91.55 and getting further and further away from that $102.22 all-time high recently seen.  The rest of the defensive food segment is up to mixed as food is defensive and with dividends:

• Kraft Foods Inc. (NYSE: KFT) is up 0.4% at $39.20 with a 3% yield that challenges the long-bond;
• ConAgra Foods, Inc. (NYSE: CAG) is down 0.2% at $25.67 with a 3.7% yield that beats the long-bond;
• Campbell Soup Co. (NYSE: CPB) is up 0.25% at $34.49 with a 3.4% yield that beats the long-bond;
• Hormel Foods Corporation (NYSE: HRL) is down only 0.1% at $29.08 but its 2.1% yield is ‘only’ paying what the 10-year has been paying recently.

Smoking has those nice 5%-plus yields for the defensive tobacco sector: Altria Group Inc. (NYSE: MO) is down only 0.1% at $31.75 against a 52-week high of $32.62; Vector Group Ltd. (NYSE: VGR) is down 0.5% at $16.73; and Reynolds American Inc. (NYSE: RAI) is down only 0.2% at $40.41 against a high of $42.81.

Diapers, toothpaste, deodorant, and shaving… consumer products are acting defensive: Procter & Gamble Co. (NYSE: PG) is down only 0.3% at $63.50 with a 3.5% yield; Kimberly-Clark Corporation (NYSE: KMB) is up by 0.3% at $79.62 with a 3.7% yield; Colgate-Palmolive Co. (NYSE: CL) is down 0.1% at $99.20 but it only pays about 2.5% for a dividend yield.

Drug and medical is mixed to positive: Merck & Co. Inc. (NYSE: MRK) is up by over 0.8% at $38.35 with its 4.4% yield; Pfizer Inc. (NYSE: PFE) is down only $0.01 at $22.64 with its 3.9% yield; and Johnson & Johnson (NYSE: JNJ) is down 0.5% at $64.00 with its 3.8% yield.

Those smartphones and telephones are not acting defensive at all today with Verizon Communications Inc. (NYSE: VZ) down 0.9% at $40.80 with its 5% yield and with AT&T, Inc. (NYSE: T) down 0.7% at $33.36 with a 5.4% yield.

Some investors are willing to suffer from the near-zero return of Treasuries, while others are going to try to look for the safest of stocks to seek safe and steady dividends.  The DJIA is down 0.7% and the S&P 500 was down 0.6% at last look.  Both are actually much better than what we were looking at just two hours or so ago.

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JON C. OGG

After the weakness in the broad market has the DJIA down 140 points (or -1.1%) and the S&P 500 Index down 15 points or 1.1%, it turns out that most of the defensive stock sector leaders are holding up far better than the broad market in our go-to defensive stock portfolio.  We have taken a look at each of these with share price snapshots right before Noon EST.

No matter what, you gotta drink!  Pepsico, Inc. (NYSE: PEP) is down 0.5% at $66.28 against a 52-week high of $71.89; Coca-Cola Company (NYSE: KO) is down 0.4% at $76.97 against a 52-week high of $77.82.  With yields of about 3% on average, these are now challenging the 30-Year Treasury yields.  The beer segment is not acting defensive as it should, perhaps because they are foreign issues now with more currency risks: Anheuser-Busch InBev SA (NYSE: BUD) and Molson Coors Brewing Company (NYSE: TAP) are not acting very defensive with price corrections of 3% and 2$ respectively.

Perhaps the most defensive you can get is water, and the top water utility is American Water Works Company, Inc. (NYSE: AWK) with a premium valuation.  This water leader is down 0.8% at $33.73 against a 52-week and all-time high of $34.89.

Food is supposed to be defensive, although a drop of 1.5% in McDonald’s Corporation (NYSE: MCD) to $94.10 is causing some added stress in what was the darling of the DJIA in 2011.  The rest of the defensive food segment seems to be less damaged when you evaluate the moves: Kraft Foods Inc. (NYSE: KFT) is down only 0.4% at $39.11; ConAgra Foods, Inc. (NYSE: CAG) is down 0.7% at $25.52; Campbell Soup Co. (NYSE: CPB) is down only 0.3% at $33.97; and Hormel Foods Corporation (NYSE: HRL) is down only 1 penny at $28.92 as the world is getting excited about Spam again.

Smoking is defensive again and the tobacco stocks are holding up much better than the broad market with those 5% and higher dividends: Altria Group Inc. (NYSE: MO) is down only $0.3% at $32.10 against a 52-week high of $32.62; Vector Group Ltd. (NYSE: VGR) is down only 0.2% at $16.88; and Reynolds American Inc. (NYSE: RAI) is down only 0.2% at $40.18 against a high of $42.81.

Shaving, diapers, toilet paper, and other consumer products are acting defensive with some gains on a weak day.  Procter & Gamble Co. (NYSE: PG) is trading up $0.11 at $64.36 and Kimberly-Clark Corporation (NYSE: KMB) is up $0.08 at $79.08 with KMB challenging the 52-week high.  Colgate-Palmolive Co. (NYSE: CL) is down ‘only’ 0.5% at $99.10 against a 52-week high of $100.81.

Drug and medical is holding up on the consumer end with losses look far less than the broader market: Merck & Co. Inc. (NYSE: MRK) is down 0.35% at $38.40; Pfizer Inc. (NYSE: PFE) is down 0.3% at $22.38; and Johnson & Johnson (NYSE: JNJ) is down the least with a drop of 0.2% at $64.65 against a 52-week high of $68.05.

Those smartphones and telephones are somewhat defensive, and those 5%-plus yields sure shield investors who are worried about chasing the hottest growth stocks.  Verizon Communications Inc. (NYSE: VZ) is down only 1-penny at $40.52 with a 5% dividend yield and AT&T, Inc. (NYSE: T) is actually up 0.2% at $33.08 with a yield of about 5.4%.

When investors want safety and when the Treasury yield is so low on the longer-term Treasury market, many investors turn to the safety of the higher dividends and safer stocks that are defensive.  Greece and the rest of PIIGS may fall again, but the logic is that U.S. consumers still have to eat, drink, shave, put on deodorant, and tend to stick with their core vices as best as they can.

JON C. OGG

This is the largest of the public utilities in America and it has only been public (again) since 2008.  If you look just at the charts the initial thought may be that the stock got away from you.  We have been calling for a bright future here on this one since the low-$20′s, but we would still not shy away.  Investors should use any weakness as the opportunity, but the problem to consider is that this stock almost never pulls back by 10% from its new highs.  When it does, it has proven time after time to be a bargain.

American Water Works serves approximately 15 million people with drinking water, wastewater, and other water services in about 30 states and 2 Canadian provinces.  The market value is still not off the charts compared to electric utilities as it is valued at $5.85 billion.

Where it sounds expensive is its 17-times expected earnings multiple.  The reason for this is simple: it is a series of built-in local monopolies around America.  Power companies and telecom companies often have competing interests for their services even at the expense of some of the large operators.  That is just not the case in the world of water.

At $33.35, the 52-week trading range is $25.39 to $34.67 and the Thomson Reuters consensus is now up to $36.07.  Long-term we see this one going to $40.00 and the dividend yield is currently about 2.8% and it is a member of our Model 2012 Dividend Portfolio.  We expect another dividend hike to be announced this summer.

JON C. OGG

McDonald’s went on to warn that the challenges are expected to impact the company’s first-quarter operating income growth.

Yum! Brands, Inc. (NYSE: YUM) is up 0.8% at $67.06 against a prior 52-week trading range of $47.15 to $66.65.  Call that a new high!  The Wendy’s Company (NYSE: WEN) is up 0.6% at $4.82 against a 52-week trading range of $4.29 to $5.62. Jack In The Box Inc. (NASDAQ: JACK) is up 0.6% at $23.21 against a 52-week trading range of $18.25 to $24.59.

Chipotle Mexican Grill, Inc. (NYSE: CMG), a former McDonald’s brand, is actually up 1.7% at $398.71 on the day and that is a new all time high as well.

With McDonald’s shares down 3.2% at $96.99, it sure seems as though there may be concern that McDonald’s may not have the ability to endlessly grow its earnings and revenues at the same rate indefinitely through good times and bad.  Keep in mind that the market value here was over $100 billion before today’s drop. Yum’s value was approaching $30 billion and Chipotle’s value was approaching $12.3 billion.

JON C. OGG

The new annualized dividend will be $1.59 per share, which represents a 9% hike to the payout from the previous rate of $1.46 per share on an annualized basis.  The new rate will be paid to shareholders in four quarterly payments of $0.3975 per share.

Shares closed at $59.08 on Wednesday and the shares are indicated up almost 1% around $59.60.  At the new price of $59.60, the prior yield was 2.45%.  The new rate is now going to be 2.66%.

This might not be a huge yield for a DJIA component but this is a high yield compared to many retail names out there.  By the way, go ahead and expect another dividend hike in a year from now.

Wal-Mart’s 52-week trading range is $48.31 to $62.63 and Thomson Reuters has a consensus price target of $63.74.

JON C. OGG

An interesting read from one of our friends talks up the consolidated annual growth rate of Berkshire Hathaway going all the way back to 1989.  It shows what the great Warren Buffett hopes you will believe for the future: 14.9% CAGR for Berkshire Hathaway versus 6.8% for the S&P 500 Index. Our question is more about how this will compare in the years ahead. 

Buffett himself has said he already expects that Berkshire Hathaway shares will lag the S&P 500 Index in years when the S&P rises sharply.  This puts Berkshire Hathaway in a slightly defensive bet against the S&P 500.  The company maintains a large cash balance and it is actively invested in bonds.

Another argument we have is that perhaps Berkshire Hathaway should be benchmarked more against a blend of the Barclays Aggregate index and the S&P 500 Index so that it tracks a blended performance of stocks and bonds.  Should it be an equal-weighting between the two indexes?  Probably not.  Maybe it should only be 30% weighted in the bond side.  We’d love to see a blended analysis of this through time.

Consider how many corporate bets Warren Buffett has made on the preferred share investments rather than just the common stock.  Some bets have included warrants so that there is large upside, but arguably these were debt investments which have a priority over the common shareholders if there is ever an implosion.  Some of the bets in this manner were in Bank of America Corporation (NYSE: BAC) most recently, but there have also been big bets of this sort in Goldman Sachs Group Inc. (NYSE: GS) and General Electric Co. (NYSE: GE). 

Buffett even took a $600 million stake in senior unsecured notes in Harley-Davidson Inc. (NYSE: HOG) in 2009 with a 2014 maturity at 15%.  He also took a 10% note offering in Tiffany & Co. (NYSE: TIF) in early 2009 of $250 million with those notes maturing in 2017 and 2019.

Warren Buffett of course is no different from other great managers in the sense that he talks his book.  He has to use all of those corny old analogies to try to keep investors focused on the long-term horizon rather than just a few months out.  Buffett has also recently said he prefers more stable foreign sovereign debt than what the low rates of the United States pays in Treasuries.

Much of this long-term pondering about Buffett’s performance only matters to those who bought back then and held.  All that matters for new investors is what the prospects are for the next ten years.  Our take is that Berkshire Hathaway comparisons to “the market” need to at least have some form of a blended bond portfolio with a smaller weighting than the S&P 500 Index.

JON C. OGG

After the group of utilities we have added some color on why these stocks are performing the way they are, what the upside could still be, and other macro issues.  To show how bad the group has been with many of its top components down about 10% from their recent highs, the Utilities Select Sector SPDR (NYSE: XLU) is down almost 3.5% from its recent highs.

American Electric Power Company (NYSE: AEP) trades around $38.00 and the stock is down from a 52-week high of $41.98.  Its dividend now screens out at roughly 5% and the consensus analyst price target is $41.67.  AEP trades at 12.1-times expected 2012 earnings estimates.  While it may have had an issue over rate hikes in Ohio, this one is very diversified and our take is that the fears of its coal plants may have gone too far as analysts are playing tug of war.

Constellation Energy Group, Inc (NYSE: CEG) trades around $36.40 and the stock is down just from a 52-week high of $40.97.  Its dividend now screens out at roughly 2.6%, which has been under our dividend criteria for this sector.  The consensus analyst target is $41.25.  Constellation trades at 15-times expected 2012 earnings estimates.  This one is outside of our parameters except that it was down the most in the Finviz.com screen on a year to date basis.

Exelon Corporation (NYSE: EXC) trades around $39.20 and the stock is down just over 10% from a 52-week high of $45.45.  Its dividend now screens out at roughly 5.3% and the consensus analyst price target is $43.65.  Exelon trades at 12.9-times expected 2012 earnings estimates.

Public Service Enterprise Group (NYSE: PEG) trades around $30.65 and its stock is down over 13% from its 52-week high of $30.65.  Its dividend yield is about 4.7% and the consensus price target is $33.07.  This one trades at about 12.7-times expected 2012 earnings estimates.

The good news on coal is that prices are cheap.  Ditto for nat-gas.  The bad news is that the EPA and other pressuring forces are trying to move to less coal in a manner which may be too fast.  AEP and others in this sector are already lobbying to alleviate some pressures.

You see that the ones we generally prefer tend to have dividend yields of close to 5%.  This sounds great and it is better than our median targets in our 2012 Model Dividend Portfolio of which AEP is a member.  One critical issue is that Obama’s dividend tax aspirations could significantly lower the need to chase yield among the high-income earners in America.  Could the wealthy dividend investors feel crowded out of income stocks?

Oil prices have risen enough that if they remain high you should just expect that the rest of the energy basket will rise.  Can nuclear really get a foothold ahead?  We think so, but it won’t happen overnight.

There are two more pieces of macroeconomic bits working in favor of these utilities.  Unemployment is getting better and that allows younger workers to go out and rent houses, townhouses, or apartments.  The U.S. is not appearing to slide into a new recession as so many investors believed was happening in late-2011.  Overall business activity is holding up, and that in turn means more electric power consumption.

The downside of the better economy is that the current environment is favoring a “risk-on” mentality among investors.  In a climate of risk-on, investors want growth over safety in dividends with earnings stability.

The reversal in Ohio is far from a welcome wagon and we have seen some ratings agencies weigh in that this could impact some utilities.

After it is all said and done, investors have to always pick their poison.  Many of these great companies almost never pull back more than 10% from their highs except in points of market crisis or in a real bear market.  When that happens, investors who want equity exposure at least increase their weighting in utilities because of the high yields and defensive stock positions.

What poses the biggest risk to utilities in our view?  Another 10% market rally ahead of continued recovery.

Picking an exact bottom is a fool’s game.  You probably haven’t seen the exact bottom on the utility sector, but these are getting very close to being true bargains for investors with a long-term investing outlook in what is likely to still be a low-growth environment.

JON C. OGG

Warren Buffett again has not disclosed exactly who will run Berkshire Hathaway when he retires, but he did disclose that the board of directors knows its selection (anticipated as seemless), and the hint is that it is not the new portfolio managers Todd Combs nor Ted Weschler.  The hint of two back-up candidates might imply them, but they are said to each manage a few billion dollars in 2012.  Regarding those two Buffett noted, “but they have the brains, judgment and character to manage our entire portfolio when Charlie and I are no longer running Berkshire.”

Buffett claimed that his five largest non-insurance companies (BNSF, Iscar, Lubrizol, Marmon Group and MidAmerican Energy) delivered record operating earnings in 2012 with more than $9 billion in cumulative pre-tax income in 2011.

We already had the public holdings of Berkshire (FULL HOLDINGS HERE) but the following were the big investments and stakes named:

a $5 billion 6% preferred stock of Bank of America Corporation (NYSE: BAC) which came with warrants to buy 700 million common shares at $7.14 per share any time before September 2, 2021;

63.9 million shares of International Business Machines Corporation (NYSE: IBM) at a cost of $10.9 billion (roughly $170.57 per share) for a 5.5% stake;

Counting the IBM stake, Team Buffett now has large ownership interests in three other companies: a 13.0% stake of American Express Company (NYSE: AXP); an 8.8% stake of The Coca-Cola Company (NYSE: KO); and a 7.6% stake of Wells Fargo & Company (NYSE: WFC).  On those stakes: “We view these holdings as partnership interests in wonderful businesses, not as marketable securities to be bought or sold based on their near-term prospects.”

Berkshire Hathaway’s 110% of book value share repurchases only lasted a few days and the company was able to only repurchase $67 million worth of its shares.  Buffett’s logic is that 110% of book value is at a discount to intrinsic value, although he said that would be impossible to calculate.

As far as which person will run the company ahead, the thought of 24/7 Wall St. is that Ajit Jain will be in charge.  Our prior coverage of the 2010 annual letter showed Warren Buffet saying of Jain, “If Charlie, I and Ajit are ever in a sinking boat – and you can only save one of us – swim to Ajit.” If that is not the world’s greatest praise, what is?

The full annual report from Berkshire Hathaway is here.

JON C. OGG

The electric power utility gave 4% to 6% earnings growth for a few years out as acceptable and it will separate its Ohio businesses. For 2012, AEP sees $3.05 to $3.25 EPS versus Thomson Reuters targets of $3.17 EPS.

AEP has noted a refocus on its transmission business and putting capital to work in the regulated generating fleet to comply with new EPA regulations. The regulated units generate a significant portion of AEP’s earnings and supports its dividend.

The company is filing with the Federal Energy Regulatory Commission to separate its Ohio businesses and it will terminate and then replace its Interconnection Agreement for its eastern generating assets under a new power cost sharing arrangement. The Public Utilities Commission of Ohio approved AEP’s plan back in January to move forward with the separation of its Ohio generation assets.

As far as FERC is concerned, the company expects that the FERC will decide on the implementation of corporate separation and the termination and replacement of the Interconnection Agreement in the first quarter of 2013.

On a day when the DJIA is down 1%, AEP is up 0.3% at $39.50 and the 52-week trading range is $33.09 to $41.98.

AEP’s dividend should not just be safe ahead… it should still grow even with the coal risks which could lie ahead.

JON C. OGG

As far as 2012 is concerned, Pfizer is targeting $2.20 to $2.30 earnings per share, which is slightly under prior targets and is currently compared to a Thomson Reuters consensus of $2.28 EPS.  The new 2012 guidance for sales is $60.5 billion to $62.5 billion versus a prior range of $62.7 billion to $64.7 billion.  The Thomson Reuters consensus is $2.30 EPS for this coming year.

The company noted:

• Its Primary Care unit revenues were favorably impacted primarily by foreign exchange;  growth from Celebrex, Lyrica, Pristiq and Spiriva, among others; and the addition of $93 million, or 2%, from legacy King products…
• Negatively impacted by the loss of exclusivity of Lipitor and Caduet in Nov-2011 and Aricept in Nov-2010; Together, those losses reduced Primary Care unit revenues by $775 million, or 13%, versus fourth-quarter 2010.
• Emerging Markets unit revenues were negatively impacted by foreign exchange and increased pricing pressures.
• Animal Health unit revenues rose 13% due to the addition of legacy King products as well as strong performance in the global livestock portfolio.

Pfizer has been trading up and down in the early hours of the pre-market and shares are up 0.3% at $21.65 on last look against a 52-week range of $16.63 to $22.17.

JON C. OGG