The US debt ceiling crisis looks to be nearly resolved, but the next big concern for some investors is whether a downgrade of the AAA credit rating will follow.
A Credit Suisse analyst and many others also believe there is a strong chance the US will lose it's AAA credit rating regardless of how the debt ceiling is raised. However, the Credit Suisse report also states that even if the US credit rating is downgraded: “We doubt it will have much effect," he continued. "Japan has a 1.1 percent yield and an AA- rating, many US Treasury funds do not have credit-rating limitations and national bank regulators would probably keep risk weightings for US sovereign debt at zero.” Read more details on the Credit Suisse report here.
The media has worked this debt ceiling and downgrade issue into a frenzy and some investors are panicking. Meanwhile US Treasury rates are remaining stable which is one sign that this whole "crisis" is possibly just a paper tiger much like the Y2K crisis was. Do you remember how the media convinced some people to fill their bathtubs with water to ensure their water supply when the clocks turned at midnight? All of a sudden the media has convinced some investors that armageddon could be coming, however, if you calmly evaluate the situation, there really is nothing new about high US government debt levels or that we need to do something about it.
There is also nothing new about the likelihood for ratings agencies to downgrade US debt, most savvy investors have known this is probably a done deal. Many investors also know that countries like Japan have already been downgraded and in spite of the downgrade, rates in Japan remain extremely low and the world continues. If nothing is resolved through common sense in Washington by next week, of course we could see some investors become willing to give away their assets at lower prices. However, I expect bargain hunters to come in and quickly reverse much or all of the market losses possibly on the same day we see any substantial sell off, much like we recently saw with mortgage REIT stocks.
Some mortgage REIT stocks saw a "flash crash" on Friday, and plunged significantly, only to recover almost all of their losses once panic stricken investors were done giving away their assets at fire sale prices. One thing is for sure, people around the world will keep buying food, cars, and yes, even keep buying US Treasuries, even if they go from AAA to AA.
It's also likely that one way or another, the US will keep paying the bills. Some great companies are on sale right now, so it makes sense to be ready to buy undervalued stocks in the face of this possible credit rating downgrade which might end up being as scary as Y2K. Here are some dividend stocks to consider that can do well regardless of what happens:
Merck (MRK) is trading at $33.40. These shares have a 52 week range of $31.06 and $37.68. Earnings estimates for MRK are about $3.74 per share in 2011 and $3.85 for 2012. This puts the PE ratio at about 10. Book value is stated at $17.63. MRK pays a healthy dividend of $1.52 per share which is equivalent to a yield of 4.5%. Drugs and other healthcare products will continue to be in strong demand regardless of the economy or government debt issues, and the dividend at Merck beats many bonds and other investments.
The Coca Cola Company (KO) shares are trading at $68.01. Coca Cola is a leading beverage maker and distribution company, based in Georgia. The 50 day moving average is $66.94 and the 200 day moving average is $64.41. Earnings estimates for KO are $3.88 per share in 2011 and $4.30 for 2012. The 52 week range is $54.43 to $69.82. Book value is stated at $22.19. KO pays a dividend of $1.88 per year which is equivalent to a 2.8% yield. Coca Cola is one of the world's most famous brands but this company owns many other well known brands such as Sprite, Vitamin Water, Minute Maid, Dasani, Fanta, and others.
Molson Coors Brewing Company (TAP) shares are trading at $45.05. Molson Coors is a brewing company with a diversified line of products including Coors, Blue Moon, and Keystone. The 50 day moving average is $44.97 and the 200 day moving average is $46.37. Earnings estimates for TAP are about $3.67 per share in 2011 and $3.95 for 2012, so the PE ratio is only about 11. TAP pays a dividend of $1.28 per share which is equivalent to a 2.8% yield. The book value is stated at $41.75. These shares are trading at a discount to other brewers and beverage companies in terms of PE ratio.
Johnson & Johnson (JNJ) is trading at $64.79. These shares have a 52 week range of $56.99 and $68.05. The 50 day moving average is $66.36 and the 200 day moving average is $62.49. Estimates for JNJ are for a profit of $4.97 per share in 2011, and profits of $5.29 per share in 2012. Book value is stated at $20.66. JNJ has had a number of issues with some of their products, which has caused significant concern for investors. It may take time for investors to feel confident again. JNJ pays a healthy dividend of $2.28 per share which is equivalent to a yield of 3.5%.
Cisco Systems, Inc. (CSCO) shares are trading at $15.97. Cisco is a premier networking hardware company. The 50 day moving average is $15.69 and the 200 day moving average of $18.48. Cisco pays a 24 cents per share dividend, which is a yield of about 1.5%. The earnings estimates for CSCO are $1.60 for 2011, and $1.71 for 2011. CSCO now trades for about 10 times earnings and they have an extremely strong balance sheet. The rock solid balance sheet and dividend are also supportive of a higher stock price.
Hewlett Packard (HPQ) shares are trading at $35.17. HPQ is a leading technology company with products ranging from computers to printers. The 50 day moving average is $35.74 and the 200 day moving average is $41.01. Earnings estimates for HPQ are just over $5 per share in 2011 and $5.37 for 2012. This gives HPQ a super low PE ratio of only 7. Hewlett pays a 48 cents per share dividend, which is a yield of about 1.4%.
The data is sourced from Yahoo Finance and Stockcharts.com.