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Morgan Stanley (NYSE:MS) Research recently published its US equity strategy report. The report said that the right strategy in this environment is investing in companies with sustainable dividends. Wal-Mart (NYSE:WMT), Intel (NASDAQ:INTC), Procter & Gamble (NYSE:PG), and McDonald’s (NYSE:MCD) were among Morgan Stanley’s top dividend stock picks.

Morgan Stanley recommended high-dividend stocks as an alternative to 10-year Treasuries, which yield around 2%. This makes sense. Morgan Stanley also opined on the riskier stocks they expect to underperform. “If investors think our stance is too conservative, quality beta could be sensible. We noticed that during EPS season investors differentiated more between high and low quality.” Morgan Stanley’s report said.

Here is the list of “high quality” stocks Morgan Stanley recommended:

PENSKE AUTOMOTIVE GROUP

PAG

Consumer Discretionary

AUTOLIV INC

ALV

Consumer Discretionary

JOHNSON CONTROLS INC

JCI

Consumer Discretionary

AMERICAN EXPRESS CO

AXP

Financials

CATERPILLAR INC

CAT

Industrials

UNUM GROUP

UNM

Financials

MEREDITH CORP

MDP

Consumer Discretionary

T ROWE PRICE GROUP INC

TROW

Financials

HALLIBURTON COMPANY

HAL

Energy

FRANKLIN RESOURCES INC

BEN

Financials

Morgan Stanley didn’t provide the details of its methodology. Most of these high-quality stocks are from consumer discretionary and financials sectors. Some of these stocks are underfollowed and underowned by hedge funds. Penske Automotiv (NYSE:PAG), Autoliv (NYSE:ALV), Meredith Corp (NYSE:MDP), and T Rowe Price (NASDAQ:TROW) are among these names. However, we are very bullish about Halliburton (NYSE:HAL), which was owned by nearly 15% of the long/short equity hedge funds we track. Billionaire investor Jim Simons’ Renaissance initiated a $94 million position in HAL during the third quarter. Renaissance returned around 30% during the first 10 months of this year. Halliburton’s forward PE ratio is only 11 and analysts expect its earnings to grow by 18% annually over the next 5 years. We believe HAL is an attractive investment.

Another stock that is favored by hedge funds is American Express (NYSE:AXP). Nearly 10% of the hedge funds we track are bullish about AXP. It is expected to grow its earnings by 11% over the next five years and trades a forward PE ratio of 12. As you can see, it isn’t as attractively priced as HAL but it is much cheaper than MasterCard’s (NYSE:MA) forward PE of 20 and Visa’s (NYSE:V) forward PE of 16. Warren Buffett had nearly $7 billion in American Express at the end of the third quarter (see Warren Buffett’s portfolio).

The third stock that is favored by hedge funds is Caterpillar (NYSE:CAT). Nine percent of the hedge funds we track had CAT in their portfolios at the end of September. The stock trades at a forward PE of 14. Analysts expect the stock to grow its earnings by more than 20 percent annually over the next five years. We don’t agree with them because this implies very healthy global growth rates. We think stocks like Apple (NASDAQ:AAPL) and Halliburton are more likely to achieve higher growth rates.Ken Fisher is the most bullish fund manager about Caterpillar. He had more than $300 million invested in the stock at the end of September.

Out of the 10 stocks recommended by Morgan Stanley (MS) we like Halliburton the most. It is more attractively priced than other large cap stocks recommended by MS. It is expected to grow faster than Schlumberger (NYSE:SLB) and its forward PE ratio is almost 50% less than Schlumberger’s.

Source: 10 High-Quality Stocks Morgan Stanley Recommends