12 Benjamin Graham Stocks for Defensive Investors

|
 |  Includes: BMY, COP, GPC, INTC, JNJ, LLY, MAT, NOC, PFE, PG, RTN, SLF
by: Insider Monkey

Many investors, such as Warren Buffett, praise defensive investing. Buffett says the first rule of investing is not to lose money, and the second rule of investing is not to forget the first rule. The mentor of this legendary investor, Benjamin Graham, always recommended investing with a margin of safety. Defensive investing doesn’t always bring the best returns; however, it usually provides better protection in inflationary environments.

We are concerned about the Fed’s monetary policy and believe investors may be better off by playing more defensively in near future. Considering the fact that the recent uptrend doesn’t last forever, now may be a good time to follow Graham’s recommendation and invest with a margin of safety. Graham describes the margin of safety concept in Intelligent Investor in detail. Here is what he prescribes for defensive investors:

The selection of common stocks for the portfolio of the defensive investor should be a relatively simple matter. Here we would suggest four rules to be followed:

1. There should be adequate though not excessive diversification. This might mean a minimum of ten different issues and a maximum of about thirty.

2. Each company selected should be large, prominent, and conservatively financed. Indefinite as these adjectives must be, their general sense is clear.

3. Each company should have a long record of continuous dividend payments.

4. The investor should impose some limit on the price he will pay for an issue in relation to its average earnings over, say, the past seven years. We suggest that this limit be set at 25 times such average earnings, and not more than 20 times those of the last twelve-month period.

We've compiled a list of 12 large-cap defensive stocks that may provide a margin of safety to investors. The market data are sourced from Fidelity. All companies in this list have high annualized dividend yields of at least 3%. These stocks also have market capitalizations above $8 billion, current P/E Ratios lower than 20 and maximum total debt/equity ratios of 50%.

Dividend Yield

P/E Ratio

T.Debt / Equity

52-Week Return

Sun Life Financial Inc.

SLF

5.13%

10.37

44.77%

11.75%

Eli Lilly & Co.

LLY

5.11%

8.71

47.87%

14.97%

Bristol-Myers Squibb Co.

BMY

4.56%

15.01

33.82%

19.22%

Pfizer Inc.

PFE

4.05%

18.63

45.99%

38.40%

Raytheon Co.

RTN

3.74%

9.80

36.43%

-2.87%

ConocoPhilips

COP

3.45%

9.21

39.08%

50.05%

Johnson & Johnson

JNJ

3.38%

15.29

29.78%

15.99%

Mattel Inc.

MAT

3.37%

14.07

47.67%

24.78%

Procter & Gamble

PG

3.24%

17.06

46.77%

6.61%

Intel Corp.

INTC

3.24%

10.26

4.51%

7.34%

Genuine Parts Co.

GPC

3.15%

17.10

17.42%

40.29%

Northorp Grumman Corp.

NOC

3.10%

9.34

31.38%

29.79%

AVERAGE

21.36%

Click to enlarge

In the last 52-week period, the average return of these 12 large-cap US stocks was 21.36%. Only one stock in this group – RTN – had a loss in the past 12 months, whereas all other stocks except two – PG and INTC – provided double digit returns in the same period.

Sun Life Financial Inc. is a leading life insurance company operating worldwide. SLF has a 5.13% dividend yield and returned 11.75% during the past 12 months. The stock has a market cap of $16.61B and P/E Ratio of 10.37. Israel Englander and Steven Cohen are prominent SLF investors.

Eli Lilly and Co. is a large pharmaceutical company operating worldwide. LLY has a 5.11% dividend yield and returned 14.97% during the past 12 months. The stock has a market cap of $44.37B and P/E Ratio of 8.71. Jim Simons had more than $200M in LLY at the end of March 2011. (See Simons’ favorite stocks.)

Bristol Myers Squibb Co. is a global pharmaceutical company. BMY has a 4.56% dividend yield and returned 19.22% during the past 12 months. The stock has a market cap of $49.42B and P/E Ratio of 15.01. Both Samuel Isaly and Simons hold more than $100 Million of BMY.

Pfizer Inc. is another leading pharmaceutical company. PFE has a 4.05% dividend yield and returned 38.40% during the past 12 months. The stock has a market cap of $156.05B and P/E Ratio of 18.63. David Einhorn has the largest PFE position among the funds we are tracking, holding more than $500 Million of the stock (check out Einhorn’s other top stock picks). Ken Fisher, Lee Ainslie, David Tepper and Phil Gross are other prominent PFE investors.

Raytheon Co. is a global defense contractor and military equipment manufacturer. RTN has a 3.74% dividend yield but lost 2.87% during the past 12 months. The stock has a market cap of $16.40B and P/E Ratio of 9.80. Alex Roepers' Atlantic Investment holds more than $1O0M of RTN. Ric Dillon, Steven Richman and Cliff Asness are also among RTN investors.

ConocoPhillips is an energy company delivering various energy products worldwide. COP has a 3.45% dividend yield and returned 50.05% during the past 12 months. The stock has a market cap of $108.02B and P/E Ratio of 9.21. Buffett had a massive $2B worth holding in COP (see Buffett’s other massive holdings).

Johnson & Johnson is a US company providing consumer healthcare and pharmaceutical products worldwide. JNJ has a 3.38% dividend yield and returned 15.99% during the past 12 months. The stock has a market cap of $184.89B and P/E Ratio of 15.29. Buffett holds more than $2 Billion of JNJ. Simons, Dillon, Fisher and Bill Miller are also among JNJ investors.

Mattel Inc. is a large toy company operating worldwide. MAT has a 3.37% dividend yield and returned 24.78% during the past 12 months. The stock has a market cap of $9.49B and P/E Ratio of 14.07. Carl Icahn’s Icahn Capital had the largest MAT position among the 300+ funds we are tracking.

Procter & Gamble is a large US company providing consumer packaged goods worldwide. PG has a 3.24% dividend yield and returned 6.61% during the past 12 months. The stock has a market cap of $180.96B and P/E Ratio of 17.06. Warren Buffett had a massive $4.7B worth holding in PG. Gross, Fisher, Brett Barakett, Dillon and D.E. Shaw are among PG investors.

Intel Corp. is a global technology company manufacturing microprocessor products. INTC has a 3.24% dividend yield and returned 7.34% during the past 12 months. The stock has a market cap of $118.61B and P/E Ratio of 10.26. Fisher and Harris Associates have the largest INTC positions among 300-plus funds we are tracking.

Genuine Parts Co. is a U.S. company that provides automotive and industrial replacement parts in U.S., Canada and Mexico. GPC has a 3.15% dividend yield and returned 40.29% during the past 12 months. The stock has a market cap of $8.98B and P/E Ratio of 17.10. Gross' Adage Capital and Ray Dalio's Bridgewater Associates are among GPC investors.

Northorp Grumman Corp. is a multinational company operating in aerospace, defense technology and electronics industries worldwide. NOC has a 3.10% dividend yield and returned 29.79% during the past 12 months. The stock has a market cap of $17.91B and P/E Ratio of 9.34. Jean-Marie Eveillard’s First Eagle holds more than $50M of NOC.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.