Is This a Top-Notch Defensive Play?
Dan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Even if you’re bullish on the market, downside risks exist. Eventually, rising interest rates, increased taxes, European austerity, a slowdown in China, our own country's enormous debt, or a black swan event could occur and lead to a steep correction.
Whatever the case may be, you want to be prepared as an investor. Investing in large-cap companies that pay healthy dividends can at least limit downside risk. These are bigger ships to turn, and the dividend payments will help ease your pain.
Ecolab (NYSE: ECL) produces and sells cleaning and sanitation products. It has nearly 50,000 employees, and many of these employees are extremely bright and creative. This, in turn, has led to consistent and impressive innovation, which has helped drive top-line growth. Below are two innovative examples.
Ecolab recently launched Stealth Fusion Fly Light. Its fly-zapping efficiency is 170% higher than the standard fly light. This is great news for restaurants as they always want to keep their food from being contaminated.
Another recent product launch is the Kay Heated Soak Tank Program -- an extraordinary time saver. Plastic and cookware are cleaned between 15 and 60 minutes, and highly carbonated utensils are cleaned within 72 hours, saving two to three days compared to traditional methods.
These types of innovative products have led to a 5% revenue increase year over year in global pest elimination, and nearly a 10% sales increase for quick-service restaurants. For the latter, Ecolab has even seen strength in Europe. This is a rarity for any company in any industry in the current global economic environment. However, other segments haven’t been performing as well in Europe, or North America, for that matter. Ecolab is performing well in Latin America and Asia-Pacific. It’s also streamlining its business for margin improvement.
In addition to relying on innovation for continued growth, Ecolab is aggressive with acquisitions. For example, it recently acquired oilfield chemical player, Champion. This will improve Ecolab’s revenue in its Energy segment.
Are one of these companies a better defensive play?
Procter & Gamble (NYSE: PG) is similar to Ecolab in regards to innovation. Both companies rely on exemplary innovation to help drive growth.
Despite some recent drama and restructuring, Procter & Gamble has proven to be a long-term winner. Procter & Gamble sells consumer packaged goods, including Head & Shoulders, Gillette, Crest, Febreeze, and Bounty. These are all household names, and once a company has established a product line where most of its products are household names, that company is likely to have a bright future. The biggest threat is consumers opting for cheaper generic brands, but the brand loyalty is so strong for Procter & Gamble that it should be able to overcome this headwind. Other positives for Procter & Gamble include a yield of 3.10%, a profit margin north of 15%, a debt-to-equity ratio of just 0.47, and the stock is fairly valued, trading at 18 times earnings.
Johnson & Johnson (NYSE: JNJ) sells healthcare products, pharmaceuticals, as well as medical devices and diagnostics. Johnson & Johnson might not have a reputation as a highly innovative company, but you might recognize some of its brands, such as Tylenol, Band-Aid, Listerine, and Neosporin. Those brands became realities thanks to innovation.
Johnson & Johnson has also benefited from consumer brand loyalty, and it yields an impressive 3.10%. Its profit margin is similar to Procter & Gamble’s -- just north of 15%. This demonstrates good efficiency. And the debt-to-equity ratio for Johnson & Johnson is even more impressive at 0.24. The stock is a little more expensive at 24 times earnings, but when it comes to long-term, dividend-paying investments like these, current valuation shouldn’t be looked at as a major factor.
Both Procter & Gamble and Johnson & Johnson look like solid long-term investments. They also showed decent resiliency during the financial crisis of 2008/2009, with both stocks dropping approximately 25%.
Ecolab also declined approximately 25% at the time. This might sound like a significant drop, but it was actually much stronger than most stocks throughout the broader market, and the dividends were still being paid. Ecolab currently yields 1.10% -- not as strong as Procter & Gamble or Johnson & Johnson. Ecolab relied more on debt to fuel growth, sporting a debt-to-equity ratio of 1.0.
All three companies offer solid long-term investments, but if you’re looking for a defensive play and they’re all equally resilient, then it would make sense to opt for higher yields and better debt management with Procter & Gamble and Johnson & Johnson. It would be difficult to go wrong either way.
If you're on the lookout for high-yielding stocks, The Motley Fool has compiled a special free report outlining our nine top dependable dividend-paying stocks. It's called "Secure Your Future With 9 Rock-Solid Dividend Stocks." You can access your copy today at no cost! Just click here.
Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson and Procter & Gamble. The Motley Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!