One of the best areas of the stock market to own has been the mega cap arena, and now may still be the best time to add these top stocks to growth and income portfolios. Mega caps by nature are defensive, have incredible liquidity and usually have such strong brand awareness that the thought of their products becoming obsolete is almost out of the question.
In a new research report from RBC Capital Markets, superb analyst Nik Modi and his team stress that while two stocks are their absolute top picks now, they are hardly pulling back the curtain on non-crowded stocks. With that caveat in place though, and an understanding that stock picking is crucial to sustain alpha on a relative basis, they put their chips on two mammoth market leaders.
Both stocks are rated Outperform at RBC, and both are quite suitable for growth and income accounts looking for total return.
This remains a top Warren Buffet holding and offers not only safety, but an incredible strong worldwide brand. Coca-Cola Co. (NYSE: KO) is the world’s largest beverage company, refreshing consumers with more than 500 sparkling and still brands. Globally, it is the number one provider of sparkling beverages, ready-to-drink coffees and juices and juice drinks.
Led by Coca-Cola, one of the world’s most valuable and recognizable brands, the company’s portfolio features 20 billion-dollar brands, including Diet Coke, Fanta, Sprite, Coca-Cola Zero, vitaminwater, Powerade, Minute Maid, Simply, Georgia and Del Valle. Through the world’s largest beverage distribution system, consumers in more than 200 countries enjoy its beverages at a rate of more than 1.9 billion servings a day.
The strong U.S. dollar may not continue to be a headwind to the international business as the uptrend seems to have rolled over. The company has expanded its product lines, and it posted fourth-quarter earnings that top Wall Street analysts were very encouraged by.
The RBC team noted that there are four main drivers of potential continued upside for the stock.
- Volumes are accelerating due to what they term “re-franchising.”
- The importance of new marketing and the impact on category growth and market share trends.
- What they term as a growing “cost culture” at the company that should result in a best-in-class profit per employee metrics.
- Most importantly perhaps, the emergence of pricing power for the drink giant.
Coca-Cola investors receive an outstanding 3.01% dividend. The RBC price target for the stock is $51, and the Thomson/First Call consensus price target is $47.14. The stock closed Tuesday at $46.53.
This leading tobacco company is the other top mega cap pick at RBC. Reynolds American Inc. (NYSE: RAI) manufactures and sells cigarettes and other tobacco products in the United States. It operates through RJR Tobacco, Santa Fe and American Snuff segments.
The RJR Tobacco segment offers cigarettes under the Newport, Camel, Pall Mall, Doral, Misty and Capri brands, as well as Camel Snus, a smoke-free tobacco product. It also manages various licensed brands, including Dunhill and State Express 555. The Santa Fe segment manufactures and markets cigarettes and other tobacco products under the Natural American Spirit brand. The American Snuff segment provides smokeless tobacco products, such as moist snuff under the Grizzly and Kodiak brand names.
The company also manufactures and markets digital vapor cigarettes under the Vuse brand name, and it markets nicotine replacement therapy products under the Zonnic brand. It distributes its products primarily through direct wholesale deliveries from a local distribution center and public warehouses.
The RBC team recently raised estimates for the tobacco giant for 2017, shifting their estimate to $2.63 from the prior figure of $2.55. They cite significant factors like buybacks occurring sooner than expected and higher top-line volume and pricing. The analysts also note that overall tobacco industry fundamentals remain constructive due to lower gas prices, rising consumer confidence among low-income consumers and rising wage inflation.
Reynolds American investors receive a very solid 3.33% dividend. The RBC price objective is $57, and the consensus target is $54.75. Shares closed Tuesday at $50.50.
The bottom line is these are safe consumer stocks for what could be rocky waters as the election cycle continues to grind through 2016. Investors may want to consider scale buying shares as both stocks have had a solid run this year.
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