Market volatility, tariff tensions with China, the inverted bond yield curve – all are coming together now and prompting recession fears. The factors are linked. The trade war with China is escalating (new tariffs on $112 billion worth of Chinese goods went into effect on September 1), increasing the chances of a more direct impact on the American consumer’s wallet and adding to recession-related worries. Nervous investors are more likely to buy and sell, adding to volatility. The lack of short-term confidence pushes up the cost of the 2-year bond, driving it above the 10-year bond. The inverted yield curve is widely seen as an early predictor of recession, occurring as much as two years before an actual downturn.
So, it’s fair to say that the sky, for investors, is growing cloudy. There may be trouble on the horizon, but of what sort, it’s hard to say. It does, however, make the present the best time to buy into the classic defensive stocks. These are companies that focus on staples, in food and drink, or home health products, or low-cost family entertainment, that bring in steady return no matter the economic conditions. They offer investors strong fundamentals and reliable dividends.
We’ll look at four here, all blue-chip investments, including one of Warren Buffett’s favorites, based on the TipRanks Stock Screener.
Coca-Cola Company (KO)
Warren Buffett loves Coke. He doesn’t hide it; he’s sat in front of Congress with a Coke in hand. And along with his love of the cola, he loves the stock. The Coca-Cola Company meets some of Buffett’s chief criteria for a long-term investment: It has an excellent reputation and one of the world’s best-known brands supporting a business that can practically run itself. As Buffett is reported to have told Bill Gates, “A ham sandwich could run Coca-Cola.”
The reputation and branding are the keys. In a less facetious moment, Buffett also once said, “If you gave me $100 billion and said take away the soft drink leadership of Coca-Cola in the world, I'd give it back to you and say it can't be done.” Buffett’s confidence is built on Coke’s moat, a term Buffett uses for the protection the company gains from its long-term ability to protect its business niche and market share. In addition, Buffett appreciates Coke’s dividend. While modest, at 2.89%, it provides a steady $1.60 per share annually.
Buffett is not the only fan of Coca-Cola stock. Morgan Stanley analyst Dara Mohsenian recently met with the company’s CFO and came away convinced that KO is poised for further growth. He noted three reasons why Coke’s future is bright: “Improved execution and relationships with bottler partners worldwide; a focus on smaller and higher priced goods; and new product innovation, which accounts for 25% of total revenue versus 15% just two years ago.” Mohsenian gives KO shares a price target of $60, suggesting an upside potential of 8%.
Overall, KO shares hold a Moderate Buy rating from the analyst consensus, based on 6 buy and 5 hold ratings set in the last three months. Shares are selling for $55 in today’s trading, and the average price target of $57 gives the stock a potential upside of 3%.
Johnson & Johnson (JNJ)
Like Coke, Johnson & Johnson has an easily recognizable brand. From its ‘no more tears’ baby shampoo to Band Aids, Tylenol, and Listerine, the company’s products are widely used and perennially popular. Along with the company’s pharmaceutical line, which includes drugs to treat autoimmune conditions, cancer, hepatitis, and depression, these products give JNJ the same type of moat that defends Coca-Cola. The company shares its success through a 2.95% dividend, with a $3.80 annualized payout.
Even strong defensive stocks can feel pressure, however, and JNJ has had some bed news recently. The company was named as a defendant in a Federal lawsuit brought by the State of Oklahoma, seeking damages for the epidemic of opioid addiction in the US. In a decision last month, a Federal judge JNJ liable for up to $572 million.
While hardly good news, the lawsuit and verdict did not deter 5-star analyst Joanne Wuensch, of BMO Capital, from setting a buy rating on the stock. She noted the company is not required to pay anything until after the appeals process, which can easily last until 2021, and that JNJ has the cash on hand to simply pay the judgement now if it chooses.
In her note, she says, “Notwithstanding the $15.2 billion in cash, equivalents and marketable securities on the second-quarter balance sheet and its AAA credit rating, J&J is not into the habit of accruing legal payments until they are probable and reasonably estimated. We remind investors that litigation is long, lengthy, and difficult to read, and while the amount is less than it could have been, we would expect an extended resolution.” She put a $157 price target JNJ shares, implying an upside of 21%.
Her optimism is shared by Raymond James analyst Jayson Bedford. While declining to set a specific price target on the stock, Bedford agrees with Wuensch about the likely long-term path of the litigation. He says, “After speaking with management, we remain optimistic in the defense case for J&J when heading to the appellate courts and ultimately believe the $572M will likely be reduced.” In line with his optimism, he gives JNJ shares a firm buy rating.
The analyst consensus on Johnson & Johnson is another Moderate Buy, based on an even split of 4 buys and 4 holds. In a sign of the stock’s underlying strength, the $151 average price target suggests an upside of 17% from the share price of $128.
Procter & Gamble Company (PG)
Since the spring of 2018, Procter & Gamble has been showing steady share price growth, regardless of the broader market conditions. In an obvious indicator of the stock’s steady growth, PG is up 32% year-to-date.
Procter & Gamble has built its success on a diverse line-up of home-health and cleaning products, including Tide laundry detergent, Ivory soap, Pampers, Crest toothpaste, and Charmin toilet paper. For the most part, these are true staple products, needed in every household, and they underlie PG’s $67 billion-plus per year in revenue. The company shares those revenues with investors, through a dividend. Like the other stocks in this list, PG’s dividend offers a modest yield, at 2.46%, but offsets that with a $2.98 annualized payout and a reliable payment history.
Morgan Stanley’s Dara Mohsenian, quoted above on Coca-Cola, is also bullish on PG. He gives the stock a $129 price target, and said that the company’s recently completed fiscal year gave “…greater confidence in our thesis that the company's market share gains and strong category pricing can continue to drive above-consensus topline growth. Coupled with P&G's outsized gross margin expansion, we expect higher EPS growth than peers.” Mohsenian’s price target suggests 5% upside to the stock.
PG’s recent gains have pushed the stock right up to its $122 average target. The share price is now $121, leaving room for just a 1% upside. This is reflected in the Moderate Buy analyst consensus, based on 4 buys and 5 holds from the past three months.
Walt Disney Company (DIS)
The House of Mouse is a perennial strong performer, based on the solid foundation of the famed Disney Vault, a near-century’s worth of animated and live action family films, and the universal brand of Mickey Mouse. Disney has defended both its reputation and its profitability over the years, partly by producing consistently high-quality films, partly by making smart acquisitions, and partly by adapting to changes in the movie industry. The company now owns the Star Wars and Marvel franchises, along with a cruise line, consumer products like Disney Princesses, and ESPN.
This array of entertainment business is enormously lucrative, and in its last fiscal year Disney recorded almost $60 billion in revenues and over $12 billion in net income. Shareholders benefit directly from the 1.29% dividend yield, which gives them a payout of $1.76 per share annually. The company is using its income and cash flow to continue its history of adaptation to changing conditions; Disney will launch a streaming service later this year, competing directly with giants like Netflix (NFLX) and Apple (AAPL) in the online TV-on-demand space. The Disney Vault – a giant well of fully-owned content of proven popularity – will undoubtedly give the Mouse a leg up in that competition.
5-star analyst Ivan Feinseth of Tigress Financial reviewed Disney last week and affirmed his upbeat outlook on the stock. He believes a recent pullback in share price offers investors a point of entry, and writes, “[We see] the company's continued accelerating business performance from its strong studio results and expect the ramp of its DTC streaming service to generate increasing return on capital. This stock is in our Research Focus List and also our Focus Opportunity Portfolio. Management is still investing significant cash in new growth initiatives and strategic acquisitions.”
Of the four stocks in this list, Disney is the one with a Strong Buy from the analyst consensus. The stock has received 11 buys and 3 holds over the past three months, a clear sign of investor confidence. The average price target of $156 suggests an upside potential of 14% from the share price of $136.
Visit TipRanks’ Analysts Top Stocks page to find out which companies have the attention of Wall Street’s best analysts.