Blue Chips: The Time To Buy Is Now
July 02, 2008
– Comments (30) |
RELATED TICKERS: MMM
, KO
, DD
I recently read an article highlighting 5 blue chips that are decent investments right now. After thinking about it for a moment, I heartily agree. We're talking about Dow 30 stocks here (non financials - still way too early), and I might throw in a couple of non-dow large caps.
A lot of us talk about oil, gas, energy, and commodities (ag and precious metals). As a dyed-in-the-wool value investor, I'm always looking at companies that are well-run, and are at a discount to what I think their fair value is. Right now, there are a bunch of real blue chips that are ripe for the picking that have sold off with the general market, and even if the Dow goes to 9000, should still be good investments for the long-term buy-and-hold (LTBH) investor.
What do I look for in a blue chip company, and what's my investing thesis? Well as for what I look for, I want a company that has many decades of success, preferably having been in business before 1929 - so you know there is a good company history. I also look for them to be mostly ethical, to have sound accounting, and to be a market leader in their respective industry. This is pretty much the definition of a blue chip, but I just wanted to let you know what I'm looking for. It also helps to see the products of a blue chip company - if you use their products every day, and can see those products, you can do your own simple due diligence by testing those products yourself.
My investing thesis is if a company is well-run, and has steady growth, I am looking for the company to drop with a broad market sell-off, and get a maximum dividend yield on the stock. Many dividend yielding stocks are yielding much more than your average savings account, and some are yielding more than online big percentage savings accounts. Assuming the company in question has international sales, you are also hedging your investment from dollar devaluation, and in some cases your total return may be even improved with a dollar devaluation.
Now I want to assure everyone that I'm not suggesting investing in all blue chips. Many of them are value traps. But I'd like to highlight some that I feel make really good investments right now. I'll check back on my blog in a year and see how well my predictions play out.
So here are the blue chips I'm suggesting:
MMM, KO, PEP, JNJ, PM, T, VZ, PG, DD.
Honorable Mention: UTX, IBM, GE (would be a buy but for financial division), MRK, DOW
Ones to avoid: Anything doing with financials or cars. And Pfizer. Even with the yield that company is just mired in the mud.
Ones I'm not talking about: Heavy industrials (like cat and boeing), and oil/energy (like xom and cvx)
I'm going to highlight the companies I feel are definite buys:
Ticker - Dividend Yield
MMM - Yield 2.9%. Out of all the Dow stocks, I'm most bullish on 3M. 65% of sales are international. CEO is a well-respected engineer. Usually makes brilliant acquisitions. Used a piece of tape lately? Or a post-it note? Wear a shoe? This company, founded in 1902, will likely never be a huge grower, but a steady grower with a good dividend that will protect your dollar and likely grow it beating inflation, and currently is near a FIVE YEAR LOW. 3M dipped below 70 for a few short weeks in August of 2006, and before that had not been below 70 since 2003, at the tail end of the last bear market. Did I also mention that in that 2000-2003 bear market, MMM returned a total of 35% (simple return not annualized)? If this isn't a defensive stock, I don't know what is. As an American company with American tradition but strong international sales growth, you are getting the best of both worlds: the value of a blue-blooded well-run hard working Midwestern headquartered company, with expansion in the markets that are growing the fastest. It doesn't matter if oil goes to 300, or to 30. MMM is going to make money, likely increase their revenues, and likely increase their dividend.
KO - Yield 2.9% Near a 52-week low. Also with strong international sales. Also will make money whether oil is 300 or 30. I'm going to steal the top pitch for the rest of my bull argument: "Stock market goes up you drink coke. Stock market goes down you drink coke. Recession you drink coke.
This pitch could go on forever.
PS. Great emerging market play."
Remember, it's Jack and Coke. Not Jack and RC Cola.
PEP - Yield 2.7%. Might as well stick with the diabetes makers. Pepsi management has shown stellar performance over the past 30 years. It is often held up as a stable of LTBH return value investing by Motley Fool investors going back to 1980. Just like KO, Pepsi has strong international sales, and people will continue to use their product aaaaaaaaaaaaand... will also make money whether oil goes to 300 or 30. What's your local bank paying again on savings accounts? And if the dollar goes down by another 20-30% in 5 years, what will be worth more, the dollars in your account, or a well-run large cap with international exposure?
JNJ - Yield 2.9% Quite possibly the best play on the aging of the US and the world's baby boom population. Oh yes, did we mention that the "baby boom" wasn't just a US phenomenon - europe and japan and canada and many other countries had baby booms after WW2. The eldest of these boomers are now 62, and over the next 15-20 years or so we are going to see the world's largest percentage increase in aged people in recorded history. JNJ has products for people of all ages - from baby shampoo and bandaids for boo-boos, to orthopedic prosthetic joints (hip, knee, shoulder replacements anyone?). Other JNJ products in my bathroom: Aveeno (soaps and lotions), Listerine, Sudafed, Tylenol. The bear case for JNJ will be that their pharmaceutical segment will drag on earnings; this may or may not be the case for the future. But I believe the growth in their other divisions will more than make up than the FDA dragging it's feet on the entire industry, and oh by the way, JNJ tends to do quite well during democratic administrations. (January 1993: 11.0. January 2001: 46.56. That's a 4 bagger in 8 years under Clinton. And that's not counting dividends. During the Carter administration, JNJ returned almost 50% in 4 years. This was in a flat market, and again not counting dividends.) If you had bought JNJ in January of 1970, and not sold a share, each share would be worth about 62 times your initial investment - not including dividends. Now, I think there might be a bit of a chance for a turn-down in JNJ's share price. It is a definite buy under 60/share. At a current level of 64.69, it's slightly undervalued. What was the dividend yield you say? 2.9% - seems to be a popular number nowadays.
PM - Yield 3.7%. Me and my buddy Deej know the real deal with this one. A US-based company that does not have sales inside the US, only international. PM is Philip Morris International. It beat earnings in it's first report. Marlboro is arguably the #1 recognized brand on the planet. As more nations are lifted out of poverty into a more middle class stratosphere, demand for cigarettes is going to go up. Here in California, the percentage of smokers is small. But I've been to NY. People still smoke. A lot. And my friends who have been to Europe tell me people still smoke like it's 1950. Banning smoking in public places won't stop increasing waves of people who are pulled out of abject poverty into a more meager poverty from smoking. Also because of the international basis, you again get positive currency effects from a falling dollar. (What's it called when the dollar loses value and the price of goods and services go up again? Oh yeah, inflation.) The only bear case on PM is potential lawsuits. I don't see that happening anymore. The Master Settlement Plan has been upheld by many domestic courts and litigation problems are now no greater for PM than they are for any other company.
T - AT&T. Yield 4.9%. Yowzers. Kind of like XOM, when they broke up the Rockefeller oil cartel, and then a hundred years later they are all back together, and now AT&T is back in a national and international dominant position. AT&T in it's current configuration started as SBC Communications in 1983, and ended up taking on the name in 2005 in a merger deal. Now telecom. Kind of boring. Sort of like a utility. A utility yielding 4.9%. With a strong base of cell phone customers (the Demon happens to be one of them). Use an iphone? You are using AT&T. Use a blackberry? Chances are you are using AT&T. Think we'll be using cell phones in 5 years? 10 years? 20? I do. And with a strong positon, strong dividend, and organically growing industry, with an industry that has very little competition, you are looking at a solid investment, if nothing else for the income. I'm not a big fan of their debt load, but that comes with the territory of being a telecom, being very capex intensive.
VZ - Yield 5.0%. Might as well stick woth the telecoms. VZ also used to be a Baby Bell. It's like a big family reuinion. :) In any case, VZ has real potential not just to be an income play, but to be a leader in internet service providing for both consumers and business. They are also talking about getting into cable service. Big money, big business, little competition. Everyone is raving about how awesome FiOS is. Think we'll be using the internet in 10 years? VZ is providing the road for you and me to travel the internet superhighway.
I want to note that with both VZ and T, I'm looking at it more from a real dividend/income play. They are more like utilities. If I had to buy one right now I'd go with VZ because of FiOS. Many people also claim that VZ has the best cell phone support. I have found their support to be equal that of AT&T's. So that's a wash. These are defensive plays to be able to park your cash somewhere other than a bank account and not watch the value of each of your dollars fall.
PG - Yield 2.6%. The lowest yield of the blue chips mentioned here, but still solid. Products from PG in my bathroom: Mach 3 razor, Crest toothpaste, Vicks vapo rub. I occasionally have pringles in my food closet, and duracell is my battery of choice. Things i don't have but you might are always, head and shoulders, pantene, oil of olay, tide, dawn, downey, pampers. This company has been around for 171 years. That means it didn't just survive the depression and 2 world wars, but also multiple depressions in the 1800s. I can't find exact numbers, but from the 10Q summary: "Our products are sold in more than 180 countries primarily through mass merchandisers, grocery stores, membership club stores and drug stores. We have also expanded our presence in "high frequency stores," the neighborhood stores which serve many consumers in developing markets." I believe at least 50% of all sales are outside the US and this number is likely higher. Expect PG to keep growing steadily over the next 10 years.
DD - Yield 3.7%. Dupont for those who aren't familiar. I'm wearing down on this blog post and if you've made it this far congratulations. Dupont has been around for 206 years, is involved in a lot of diverse things, the most exciting of which right now is agriculture. The most important thing I personally use from Dupont is Kevlar. No, I'm no a cop or a marine, although Kevlar has helped save likely countless lives in the streets and on the battlefield. I am, however, a fire performer. See that fire flower that is my avatar icon? The way you make a set of fire poi is by attaching a leather handle to a chain, and at the other end of the chain you attack a wick made of - you guessed it - kevlar. You dip the kevlar wick in a flammable fuel (like kerosine), light it, and presto, you have a set of fire poi to dance with. Now I'm not recommending you go out and do this, but I am recommending Dupont based on their ability to innovate and create products like kevlar, that can be used for such diverse purposes from body armor protection to fire performance. And just to let everyone know I'm safe with not just my investments but also my body, Dupont also makes a fiber called Nomex. I wear Nomex arm-sleeves to protect my arms when I do my fire performance. What exactly is Nomex? It's a flame-resistant fiber, and if you've ever watched a Nascar, IRL, or NHRA (hot rod) race, you have seen drivers wearing Nomex, or a firefighter, or... the list goes on.
Just to show I'm putting my calls where my blogs are, I've now picked all the companies detailed here to outperform. My assertion is that these companies may drop a little bit more, but not much more.
Demondoug owns shares in MMM at the time of publication of this blog post.
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