With Friday’s terrible jobs report sending markets spiraling downward. Many analysts are now coming to the realization that a slide back into recession is entirely possible. This is just one more piece of negative news that is weighing on global markets. Europe seems to be the catalyst for all of this negativity as its sovereign debt crisis continues to remain unresolved.
Ben Bernanke did not put out any indication of that the Fed will roll out QE3 during his Jackson Hole speech. However, the members of the FOMC seem to be divided on their opinion of the need for QE3. We are facing the two most historically negative months (September, October) for the market will a further turn down propel the Fed into action? This is a question that no one can answer definitively but I would like to take a look at some defensive plays that could help us prepare for this possible slide into future recession.
Some important factors that I am looking for in companies:
- Strong Cash Balance Sheets
- Debt to Equity < 50
- Global Exposure (emphasis on emerging markets)
- Solid Dividend Yield > 3%+
- Dividend Payout Ratio < 60%
- Solid History of Paying Dividends
- P/E Ratio < Industry average
Johnson and Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. I am really coming to believe that JNJ is the best in show when it comes to the healthcare sector.
Healthcare itself has always been seen as a recession resistant sector which makes it very attractive given recent the economic developments. In fact in the most recent labor report healthcare was one of the only areas to actually add jobs.
Here is how its numbers match up:
Cash Balance Sheet - Over $29 billion in cash
Global Exposure - International sales increased by 15.9%
Solid Dividend Yield - 3.50%
Dividend Payout Ratio - 52%
Solid History of Paying Dividends –Consistently increasing dividends for 47 years
P/E Ratio - 15.33(ttm) with a forward P/E of 12.11
Johnson and Johnson passed all of my standards when looking for a strong company with a healthy sustainable dividend. I am very bullish on the healthcare sector as a whole. Some alternative plays to JNJ would be Merck, Eli Lilly, Pfizer, and Bristol Meyers Squib. However, as previously stated I am of the opinion that JNJ is the best in show. This would be a fantastic defensive stock for any value investor’s portfolio.
Illinois Tool Works (ITW) is a company that produces engineered fasteners and components, equipment and consumable systems, and specialty products. Today, it employs nearly 60,000 people in 825 business units across 52 countries. ITW is a dividend champion with a very attractive yield. A major positive aspect of ITW is its extremely diversified product line. This should help it withstand the weakening economic environment.
Here is how its numbers match up:
Cash Balance Sheet – $1.2 Billion in cash
Debt to Equity - 39.08
Global Exposure - Illinois Tool Works gets almost 58% of its revenue from overseas - mainly China and India.
Solid Dividend Yield - 3.10%
Dividend Payout Ratio - 35%
Solid History of Paying Dividends –Consistently increasing dividends for 43 years
P/E Ratio – 11.93(ttm) with a forward P/E of 9.84
ITW looked great when looking at its financial metrics. It seems that its strategy of buying up smaller companies in order to increase its revenues is working well. I think ITW is a stalwart stock that should hold up well no matter where the economy is going.
Emerson Electric Co. (EMR) operates as a diversified manufacturing and technology company. The company engages in appliance solutions, climate technologies, industrial automation, motor technology, network power, process management, professional tools, and storage solutions businesses. Just like ITW it has a diversified product line which should help them in troubled times. Here is how its numbers match up
Cash Balance Sheet – $1.78 Billion in cash
Debt to Equity – 47.41
Global Exposure – In the most recent quarter it grew its international sales by 13% with an addition of 15% in the emerging markets
Solid Dividend Yield - 3.00%
Dividend Payout Ratio – 42%
Solid History of Paying Dividends - Increasing dividends since 1982
P/E Ratio – 13.57(ttm) with a forward P/E of 11.93
This is another solid yielding dividend company with a long history of paying and increasing its payouts. This was enough to land it on S&P’s dividend aristocrats list of 2011.
Raytheon (RTN) is a major American defense contractor and industrial corporation with core manufacturing concentrations in weapons and military and commercial electronics. It is the 5th largest contractor in the world. When the world went through the great recession of 2008/09 the defense industry was one of the few that continued to add jobs. If you don’t have a moral objective to owning a weapons manufacturer than I would seriously suggest taking a look at RTN.
Here are the metrics:
Cash Balance Sheet – $2.12 Billion in cash
Debt to Equity – 34.94
Global Exposure – As of 2009 21% of its sales came from the international market
Solid Dividend Yield - 4.00%
Dividend Payout Ratio – 28%
Solid History of Paying Dividends - Increasing dividends for 29 years
P/E Ratio – 7.59(ttm) with a forward P/E of 7.48
Raytheon as well as its competitors Lockheed Martin (LMT) and Northrop Grumman (NOC) should be good defensive plays with solid dividend yields. The one area of concern is the political maelstrom that is coming with the budget battle. Defense is one of the largest expenditures of the United States government and therefore could be subject to cuts.
Intel (INTC): I know what you are thinking. Is he really picking a tech stock for a defensive portfolio? Yes I am because Intel is the exception to the rule. It is the world's leading producer of microprocessors. Intel Corporation engages in the design, manufacture, and sale of integrated circuits for computing and communications industries worldwide.
The numbers look like this:
Cash Balance Sheet – $11.55 Billion in cash
Debt to Equity – 4.82
Global Exposure – Intel is perfectly positioned to take advantage of the rapid growth in the international computer industry.
Solid Dividend Yield - 4.20%
Dividend Payout Ratio – 31%
Solid History of Paying Dividends - It has paid a cash dividend to its shareholders since 1992. Since 2003 Intel's dividend has steadily increased at a 33 percent compound annual growth rate (CAGR).
P/E Ratio – 9.17(ttm) with a forward P/E of 8.09
Intel is a market leader with an extremely healthy dividend. Anyone looking for an unheralded dividend stock should look no further than Intel. It really is a solid dividend play for anyone seeking some stability in its portfolio.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.