We Are Not In A Defensive Bubble

Includes: KMB, KO, PG
by: David Wren

Investors are pouring money into defensive, dividend-paying stocks because of the slowing economy. As today's market is driven by fears over Europe, the looming fiscal cliff, and Fed chairman Ben Bernanke's every word, portfolios have been looking for safe returns. This has pushed some of the big name blue-chips to being at some of their priciest levels. P/E ratios are higher than usual, suggesting these stocks are overvalued:

  Past 5-years P/E Current P/E
PG 16.77 19.9
KO 18.49 20.4
JNJ 15.51 21.8
WMT 14.31 15.6
KMB 15.23 19.7
T 19.95 51.9
WEC 15.06 18.3
PM 15.08 17.6
KFT 15.97 20.1

So are we experiencing a dividend bubble? Is it the 1990's dot-com happening all over again? No. Comparing these companies to the likes of Boo.com, Startups.com, Pets.com, in the first place is absolutely absurd. Is a company like Procter & Gamble (PG) going to bankrupt any time soon? I think not.

It may not be a bubble, but these stocks could be a little overpriced. They have had a nice run up recently, pushing them all to being close to 52 week highs. Historically, defensive stocks don't outperform the market for long. So why do I not call this a bubble?

  • Look at what you're getting from these companies. All of them sport high yields, strong fundamentals, and great histories. These are long-term holdings in a portfolio. If you do your homework and find the intrinsic value of a company to be much greater, then you shouldn't worry too much about the current price level. Sure, you might wait a little bit for a pullback, but nobody can time the market perfectly every time.
  • The market is driven by news these days. If Bernanke doesn't say "QE3" in his speech, then the market tanks. If a revered news anchor says something negative about Europe, the market tanks. And somehow everybody is surprised when the looming fiscal cliff is brought up periodically like it's completely new. As long as investors are scared or worried, money will keep flowing into these safer stocks.
  • These companies have been around a while for a reason. They aren't some startups trying to capitalize on a new trend. People all around will still go buy Kimberly-Clark's (KMB) diapers even when the economy is in the dumps. Coca-Cola (KO) will continue to sell drinks even when Bernanke doesn't say what the market wants him to.

Safety might be slightly overvalued right now. But it's not a bubble. How could it be? Everybody could use a little protection against the weak economy, and big blue-chip companies provide it. They have been providing it for years, and will continue to for years to come. Maybe wait for a pullback to buy them, as they are a bit pricey. But there is no bubble to be popped, and they will not come crashing down.

Disclosure: I am long KO.