Value Stocks Of The Dow Jones 30

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 |  Includes: AA, AXP, BA, BAC, CAT, CSCO, CVX, DD, DIS, GE, HD, HPQ, IBM, INTC, JNJ, JPM, KO, MCD, MDLZ, MMM, MRK, MSFT, PFE, PG, T, TRV, UTX, VZ, WMT, XOM
by: MyPlanIQ

Anand Chokkavelu has an interesting slant on the big boys in the stock market: He points out that the Dow Jones industrial average is made up of the stocks of just 30 companies. Yet these 30 stocks make up more than a quarter of the total market value of the entire U.S. stock market. These are blue chip organizations that are household names.Today, these companies are inexpensive to buy, despite their size and stability. With a decade of close to zero returns, these equities are not highly prized. The result is that the 30 stocks in the Dow are now cheaper than the rest of the stock market.

To assess cheapness, he used a five-year P/E ratio. In other words, today's price divided by the five-year average of earnings. Looking at five years balances the need to include good years and bad with the need to include timely data.

A regular one-year P/E ratio under 15 is pretty attractive for a large blue chip. Seeing nearly half the Dow stocks with five-year P/E ratios under 15 is mouthwatering.

Company Name

5-Year P/E Ratio

Hewlett-Packard (NYSE:HPQ)

6.6

The Travelers Companies (NYSE:TRV)

7.3

JPMorgan Chase (NYSE:JPM)

9.2

ExxonMobil (NYSE:XOM)

10.6

Chevron (NYSE:CVX)

10.9

General Electric (NYSE:GE)

11.0

Bank of America (NYSE:BAC)

11.9

Microsoft (NASDAQ:MSFT)

12.2

AT&T (NYSE:T)

12.5

Cisco Systems (NASDAQ:CSCO)

13.5

Wal-Mart (NYSE:WMT)

14.0

Procter & Gamble (NYSE:PG)

14.3

3M (NYSE:MMM)

14.4

Johnson & Johnson (NYSE:JNJ)

14.5

Pfizer (NYSE:PFE)

15.0

Intel (NASDAQ:INTC)

15.4

Walt Disney (NYSE:DIS)

15.4

United Technologies (NYSE:UTX)

16.3

Boeing (NYSE:BA)

16.3

DuPont (NYSE:DD)

16.4

Home Depot (NYSE:HD)

16.5

IBM (NYSE:IBM)

16.9

American Express (NYSE:AXP)

16.9

Merck (NYSE:MRK)

17.4

Kraft (KFT)

19.5

Coca-Cola (NYSE:KO)

20.2

Caterpillar (NYSE:CAT)

20.7

Alcoa (NYSE:AA)

21.1

Verizon (NYSE:VZ)

21.2

McDonald's (NYSE:MCD)

22.2

Average

15.0

Click to enlarge

Source: S&P Capital IQ.

Anand created this list to make the point that many of these blue chip stocks are at bargain prices. I thought about what this meant and how we could use this filter. I am going to use this as a blind filter. I don't want to examine the current operation of the company and decide whether management has it together or whether the company is on a winning streak, because I want a long-term investment that will stand the test of time. There are pundits who do that and recommend a company because of its short-term prospects.

We know that all of these companies are large corporations and are not likely to go out of business. What we can deduce is that those with the higher P/E's are growth stocks -- whereas the lower P/E's are value stocks -- all within the boundary of them being large cap, safe equities.

So, I decided to create two portfolios around the average of 15 and compare the returns to see what that gave us. We will look at each portfolio measured against our reference dividend ETF and then compare them. We start off with the value stocks -- the 15 with the lowest P/E ratios -- which are:

  • Hewlett-Packard
  • The Travelers Companies
  • JPMorgan Chase
  • ExxonMobil
  • Chevron
  • General Electric
  • Bank of America
  • Microsoft
  • AT&T
  • Cisco Systems
  • Wal-Mart
  • Procter & Gamble
  • 3M
  • Johnson & Johnson
  • Pfizer

This list is dominated by technology and financial stocks, but has a reasonable representation of a cross-section of market sectors. We are assuming that there is good potential upside with these stocks, as their businesses are not in long-term decline (we assume) and the brand is strong enough to find better times around the corner. This is a little intuitive, but this is the approach I am taking.

Almost any selection in the Dow Jones 30 are going to be good long-term selections and so it will be interesting to compare it against our reference dividend portfolio.

Asset Fund in this portfolio
REAL ESTATE ICF (iShares Cohen & Steers Realty Majors)
CASH CASH
FIXED INCOME TIP (iShares Barclays TIPS Bond)
Emerging Market VWO (Vanguard Emerging Markets Stock ETF)
US EQUITY DVY (iShares Dow Jones Select Dividend Index)
US EQUITY VIG (Vanguard Dividend Appreciation ETF)
INTERNATIONAL EQUITY IDV (iShares Dow Jones Intl Select Div Idx)
High Yield Bond HYG (iShares iBoxx $ High Yield Corporate Bd)
INTERNATIONAL BONDS EMB (iShares JPMorgan USD Emerg Markets Bond)
Click to enlarge

Portfolio Performance Comparison

Portfolio/Fund Name 1-Year AR 1-Year Sharpe 3-Year AR 3-Year Sharpe 5-Year AR 5-Year Sharpe
Retirement Income ETFs Tactical Asset Allocation Moderate 3% -5% 10% 79% 8% 61%
Retirement Income ETFs Strategic Asset Allocation Moderate 1% 2% 14% 74% 2% 10%
Dow Jones Value Stocks 2% 9% 6% 26% -0% -5%
Click to enlarge

We can immediately see that the ten-year no-return drag is present and correct for this Dow selection over the five year horizon. Over the three and one year horizon the situation looks a little better. I want to look at the graphs to see what more I can glean from looking back.

Three-Month Chart One-Year Chart Three-Year Chart Five-Year Chart

As I look at the five-year performance, we can see that the portfolio suffered the 2009 crash, but its lowest point was in 2009, which was towards the end of the period. However, the recovery was not as marked as the reference portfolio, and given the US had a banner year in 2010, the results were rather flat. The ETF portfolio benefited from emerging markets, real estate and small cap stocks. We note that recently, with the flight to safety, these stocks have benefited more than the other portfolios as a combination of both large scale and low cost may have made them a haven.

My current concern would be that any recovery would show the same results as before -- money would start moving to higher-risk equities (mid cap for example) and the returns would not grow. However, this is an unscientific reaction, and one that I would want to test by tracking what has gone on.

At this point, I am not sure what conclusions to draw. I am not motivated to move from my ETF portfolio to this but there is some interest in recent performance and it will be interesting to see how this set of stocks perform.

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

Disclaimer: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.