Amidst all the uncertainty in the markets, investors are struggling with being in cash or trying to find some safe defensive plays that will be able to weather the storm. Some say pick cyclical stocks, others say target solid companies, and still others are saying play dividends. Below I will outline some stocks commonly sought out as defensive plays and why they are a good way to defend your portfolio in the current market.
Lockheed Martin Corp (LMT): Shares were trading around $82 at the time of this writing, just off their 52 week high of $83.71 and above their 52 week low of $66.36. Lockheed offers an annual dividend of $4 for a 4.8% yield with a 36% payout ratio. The most recent increase to its dividend came in the last quarter of 2011 when it went from $0.75 to $1.00. In its most recent 10-Q Lockheed acknowledged that sales to the U.S government make up 85% of sales, 14% to other governments, and only 1% to commercial customers.
With the U.S. defense cuts coming, one would think the outlook is bleak for Lockheed. Fortunately for Lockheed though, its main aircraft programs are not on the initial list of aircraft cuts announced. The C-130 is a transportation workhorse for both personnel and cargo in combat areas and the C-5 gets everything to those theaters. With forces pulling out and coming home, if there was a need to rapidly deploy, the U.S. would need plenty of aircraft to pick up and move all those troops and their gear. The F-35 is Lockheed's newest and most promising development. The Department of Defense has been going back and forth with Congress about how many to buy. If Lockheed can work out the bugs, it will get picked up sooner than later. I agree with Lockheed's latest guidance. Look for operating margin and most items to stay flat in 2012. But in lieu of that growth, shareholders should look to be rewarded with the 4.8% dividend.
Eli Lilly & Co. (LLY): Shares were trading around $40 at the time of this writing. This is closer to the $52 week high of $42.03 than the 52 week low of $33.46. Eli Lilly also offers a 4.95% yield of about $2/share annually with a payout ratio of 47%. In its last 10-Q, Eli Lilly lowered guidance for 2011 because the company expects Zyprexa sales to rapidly decline due to patent expiration, Xigirs impairment and termination charges, and health care reform. It does have several newer drugs that are increasing in revenues as they are on the market longer, so this should help offset many of the losses. With new drugs coming to market, I see slight growth for end of 2012 to get up to around $50/share. It also has 66 new drugs in the pipeline, 10 of which are in phase 3. In addition to that, Eli Lilly has seven drugs that are currently being studied for additional uses. With a robust pipeline, Eli Lilly is a solid play to maintain current EPS levels. And with less than a 50% payout, it is a good dividend play in a tough market.
GlaxoSmithKline (GSK): Shares were trading around $45 at the time of this writing, just off their 52 week high of $46.20 and above their 52 week low of $36.28. GlaxoSmithKline offers an annual dividend of $2.17 for a yield of 4.8% with an 87% payout ratio. It is the world's second largest pharmaceutical company. According to its website it currently has over 50 drugs on the market with over 30 more in late stage phase 3 development. It also mentions that by the end of 2012, another 15 may be added to that 30. Vaccines are currently its second largest sales category and growing fast. With so many drugs in late stage development GlaxoSmithKline is a safe play for both growth and dividends. According to GlaxoSmithKline's latest conference call, positive results are showing from the operating efficiency measures mentioned and started in Q2. I think share growth will correspond to how fast it can get those drugs successfully out to market and think shares will grow on average an additional $5/share per drug. I say buy for the dividend and enjoy any extra growth.
H&R Block (HRB): Shares were trading around $17 at the time of this writing, just off of their 52 week high of $18.00 and above their 52 week low of $12.40. Block offers an annual dividend of $0.80 for a 4.73% yield with a 58% payout ratio. According to its website, that dividend has been paid without interruption since March of 1977. In the latest 10-Q, the company saw a reduced EPS due to the sale of RSM McGladrey in November 2011, which was approx 22% of revenues and 7% of profits.
The main business is tax preparation services. This year Block increased advertising and online offerings. A key service "Block Live" allows people to have their return prepared via a Skype type video interface with a shared desktop work area. Customers fax or scan in their documents for the preparers and everything is completed via the internet. According to some scuttlebutt however, the preparers engaged in this segment are paid an hourly wage around $25/hr to sit by the computer and wait for potential customers. Also, some customers that aren't very computer savvy attempt the process and then aren't able to complete it. Based on that, I am skeptical about how successful this may be, I think it has promise, but may need more refinement before it yields substantial returns. I see shares staying under $20 through 2012 and growing in 2013. I see a solid dividend and that, with a share price that won't decline, makes Block a good defensive play.
Terra Nitrogen Company (TNH): Shares were trading around $193 at the time of this writing, just shy of their 52 week high of $199.50 and almost double their 52 week low of $101.21. It currently offers an annual dividend just shy of $16 for an 8.3% yield with an 81% payout ratio. Terra Nitrogen is a limited partnership that has to distribute 100% of its available cash each quarter. According to its website annual distributions have ranged from under $2 in 2006 to nearly $15 in 2008 to nearly $5 in 2010 and almost $14 in 2011. In 2011 increased demand and an average price increase of nearly $100/ton and $200/ton for their main products (anhydrous ammonia and urea ammonia nitrate [UAN] respectively) resulted in the large increase in revenues. The business is heavily levered to demand for the above listed farming chemicals. Given the expectation for the demand of fertilizer to increase in the coming years because of the need for more crop food, Terra stands to make a lot of money. As a holder, they have to pay you that money and look like a solid play that will stay strong in the current market.