The second day of June arrived with a thud. Major indices had their worst day of the year as a poor ADP report and the overwhelming signs that the economy is dramatically slowing down shook investors. As I have been saying for months, this was going to be a year to sell in May and go away. It is going to be a rough summer, but hopefully one that will be bring some opportunities after a significant pullback. In the meantime, besides cash; I want to be invested in safe blue chip stocks with reasonable valuations, stable revenues and high dividend yields. I also do not want anything that is reliant on commodity prices as I think the end of QE2 and a slowdown in the emerging markets will cause that market to pullback as well.
I will not buy any company heavily dependent on goods from China as I believe wage inflation there is going to raise the costs of their exports significantly. This leaves Wal-Mart (WMT) out, which otherwise would have been on the list as I think consumers here will go down market again as they did the last time gas prices hit $4 a gallon. Here are three stocks that make the list.
Johnson & Johnson (JNJ) - Johnson & Johnson engages in the research and development, manufacture, and sale of various products in the healthcare field worldwide. The company operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics. The Consumer segment provides products used in baby care, skin care, oral care, wound care, and women’s healthcare fields, as well as nutritional, over-the-counter pharmaceutical products, and wellness and prevention platforms.
Valuation – JNJ sells at just over 13 times this year’s expected earnings and around 12.5 times 2012’s expected earnings. Earnings estimates for 2011, and 2012, have improved over the past three months. Johnson and Johnson is one of the few stocks that can boast a triple AAA rated balance sheet. JNJ delivers a 3.4% dividend and has more than tripled its dividend payout over the prior decade. It has had some temporary problems with quality issues in some of its consumer brands, but it has one of the strongest late stage pipelines in the pharma sector. It also should benefit by the continued rotation into healthcare stocks as investors assume a more defensive posture.
Merck (MRK) - Merck & Co., Inc. provides various health solutions through its prescription medicines, vaccines, biologic therapies, animal health, and consumer care products. The company’s Pharmaceutical segment provides human health pharmaceutical products, such as therapeutic and preventive agents for the treatment of human disorders in the areas of bone, respiratory, immunology, dermatology, cardiovascular, diabetes and obesity, infectious diseases, neurosciences and ophthalmology, oncology, vaccines, and women's health and endocrine.
Valuation – Merck sells at under 10 times this year’s earnings and a little over 9 times 2012’s consensus earnings. MRK has beat earnings estimates four straight quarters. It sells at the bottom quarter of its five year valuation range based on P/E, P/B, and P/S. It yields 4.2% and Merck has a 40% payout ratio and can afford to increase dividends in line with earnings going forward. It has an AA rated balance sheet and a good pipeline including a Hep C drug that just was approved by the FDA. It is selling at a little over $36 a share. Price targets are $44 at Credit Suisse and $42 at S&P.
AT&T (T) - AT&T Inc., together with its subsidiaries, provides telecommunication services to consumers, businesses, and other service providers worldwide. Its Wireless segment offers wireless voice communication services, including local wireless communications service, long-distance service, and roaming services. This segment also sells various handsets, wirelessly enabled computers, and personal computer wireless data cards; and accessories comprising carrying cases, hands-free devices, batteries, battery chargers and other items.
Valuation – AT&T is selling at just over 13 times 2011’s projected earnings and around 12 times next year’s consensus EPS. It provides a robust yield of 5.5% and has an A- rated balance sheet. AT&T is a cash flow machine and sells at less than 7 times operating cash flow. Hudson Square Research just upgraded AT&T shares to Buy from Hold and put a $36 price target on the stock. Their analyst argued AT&T will get most of the “marketing advantage” from the next round of Apple‘s (AAPL) iPhone, not Verizon (VZ), as it will be able to offer 4G on the new phone which its competitor will not. T is priced at $31 currently. Not a huge upside for capital appreciation, but the dividend puts a floor under the stock.