Four quality US defensive stocks for your portfolio
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Associate Editor
David Stevenson Mar 01, 2010
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As with so much else in life, the best investment strategies tend to be the simplest ones. And few methods could be much simpler than buying high-yielding shares.
In several recent editions of Money Morning, we've highlighted a range of stocks that are both cheap and which offer a high yield. And we've focused on sectors that are 'defensive', i.e. they don't depend on economic growth to make their money.
But most of these have been based in the UK. So we thought it was time to widen the net. We've been looking across the pond at what's on offer among US shares.
You have to dig a bit harder – but we've found at least four stocks that fit the bill nicely...
Why it pays to hold high-yielding stocks
You've probably already heard our case for buying stocks with high dividend yields. If not, here's a quick recap. First and foremost, they should do what they say on the tin, which is to provide you with a good income.
Second, a decent dividend yield means that a share price is low compared with the level of its payouts to shareholders. In turn, that suggests it could also be good value relative to the underlying company's profits and assets.
Third, a share offers a high yield because it's largely unloved by investors. If it had already become the flavour of the month, the price would have been driven up much higher, meaning the yield would be a lot lower. But I rather like out-of-favour stocks. Should they return to fashion, there's a good capital gain to be made.
When looking for high yielders, we've focused largely on the UK market. That's because there's a decent list of such stocks to choose from. As we pointed out two weeks ago, the US is a different story. Even although quite a lot of US companies are cash-rich, the yield on the main bellwether index, the S&P 500, is just over 2%. And only about 10% of the stocks in the index yield more than 4%.
US blue chips look cheap and resilient
But there are still some good high-yielders if you're prepared to dig around. And when you see that high quality US 'blue chip' stocks are Jeremy Grantham's favourite asset class right now, it's a good sign you're on roughly the right track.
Grantham is co-founder of the GMO fund management group. And he's been around for a while. Back in January 2000, you may recall, he warned that US shares were more overvalued "than at any time in the last 70 years due to the massive overpricing of technology and dot-com stocks". What happened next, as they say, is history.
He also went on record as being bearish in 2007, which was a pretty good call too. Right now, he reckons the S&P overall is overvalued by some 30%, which rather dovetails with our view on the subject.
It follows that Grantham only holds the sort of stocks that he reckons should withstand the worst in a market downswing. So I've been trawling through GMO's portfolios to see which of America's biggest companies feature among the firm's largest holdings.
Then I've put this list through a couple of extra screens, so as to slim it down to some real value. Firstly, the dividend yield has to be at least 50% higher than that 2% market average. Secondly, the p/e has to be a third or more lower than the S&P's current multiple of almost 19.
Two healthcare firms to buy now
And here are four stocks that fit the bill. It's no surprise to see a couple of healthcare firms appearing here – we've been banging the drum on this defensive sector for several months. We've already mentioned the world's biggest drug maker, Pfizer (NYSE: PFE). It's got net cash on the balance sheet, and is generating plenty more.
On a current year p/e of just eight, which is expected to drop to 7.6 for the 12 months to end-2011, it's clearly very cheap at $17.63. Meanwhile the prospective yield is 4.4%, which is predicted to rise to 4.7% next year.
Then there's Johnson & Johnson (NYSE: JNJ), the world's most respected company, according to Barron's. J&J is a global leader in pharma and healthcare, with a massive $175bn market cap at the current price of $63.15. It's a bit more highly rated than Pfizer, but a current year p/e of 12.9 is hardly over the top. Particularly as the multiple is forecast to drop to below 12 in 2011. The prospective dividend yield is 3.3%, which analysts see rising to 3.5% next year.
And two energy stocks with fingers in many pies
Switching tack slightly, also passing muster are two international integrated energy stocks. These are firms that produce oil, natural gas, chemicals and plastics, and also refine and market petrol. That means they've got fingers in lots of different pies, which is quite handy if the economy isn't doing too well.
Chevron (NYSE: CVX) has a market cap of $145bn. At $72.32 it's on a current year p/e of just over nine, which is predicted to drop to only seven in 2011. The prospective yield is 3.9%, which is forecast to rise to 4% next year.
And if you think that's good value, look at ConocoPhilips (NYSE: COP) at $48.12. This company is only half the size, market value-wise, of Chevron, but it's even cheaper. A 2010 multiple of 7.9 is forecast to fall to a mere 6.3 for the 12 months to end-December 2011. And the prospective yield is 4.2%, with 4.4% pencilled in for next year.
We've said it before, but in today's uncertain markets, this is just about as good as it gets.
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