Three Solid Companies to Purchase in Shaky Markets

Jason is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The broader indices have gone through some choppy seas lately. After seven months of rising, the S&P 500 has fallen from 1650 to 1550 only to rally quickly back to the 1600 level.  The recent market volatility is most likely due to macro concerns that the Federal Reserve's quantitative easing program will be gradually discontinued. Interest rates and mortgage rates are slowly creeping higher and higher, inspiring a risk-off sell off. To make matters worse, China's economy is rapidly slowing as it has to deal with trouble in its shadow bank system and bad loans made by its major banks.

What should an investor do in these extremely volatile times? A timeless strategy is to buy stable companies that beat the market in bad times, and keep up with the market in good times. These companies may not be as flashy as Google or Apple, but they consistently raise their dividends year after year and have great ROI's.

Procter & Gamble

Procter and Gamble (NYSE: PG) is a diversified consumer products company. It sells everything from toothpaste to batteries and razor blades. Famous hedge fund manager Bill Ackman owns a significant portion of this stock, and recently successfully agitated for a new change of CEO. Considering that Bill Ackman did the same thing for Canadian Pacific railroad, and Canadian Pacific's stock price subsequently doubled the next year, the Ackman touch with P&G might be able work some wonders. Bill Ackman believes that the new CEO will be able to reduce Procter & Gamble's bloated overhead cost structure, raise organic revenue growth rate from the present 3% to 5%, and subsequently increase P&G's earnings power from the present $4 a share to $6 a share in fiscal year 2016. With a payout ratio of only 48%, Procter & Gamble's dividend should follow earnings and increase meaningfully as well.

Johnson & Johnson 

Johnson & Johnson (NYSE: JNJ) is a diversified healthcare company. It makes everything from Tylenol and Band-Aid to heart stents. The company has a large pipeline of new healthcare products and should benefit as baby boomers age. Analysts have an average price target of $89 or around 5% above current levels. In terms of finances, this company has paid a dividend every year since 1944 and has increased its dividend for 51 straight years.  Wall Street analysts are projecting that Johnson & Johnson's EPS will grow on average of 6.28% a year for the next 5 years. With a payout ratio of only 65%, Johnson and Johnson's 3.07% yield should follow course.  

McDonald's  

McDonald's (NYSE: MCD) is the world's preeminent fast food chain. It counts Warren Buffett as a significant investor. McDonald's outperformed the index in 2008 rising 7% when the S&P fell 38% and should do well in any type of correction. With China and India still growing and incomes rising significantly, McDonald's has the potential to maintain its steady pace of price appreciation.

With about 2000 restaurants in China and 250 in India, McDonald's has plenty of room to grow.  McDonald's is projected to open more than 200 this year alone in China. The company also has shown the potential to innovate. It was one of the very first investors of Red Box and also held a significant stake in Chipotle. With a projected next 5 year EPS growth of 8.6%, and a payout ratio of only 54%, McDonald's 3.6% dividend looks stable and likely to increase.

Conclusion

Investing in safe stodgy companies may not give eye popping returns, but they do generate decent income while allowing investors to sleep well at night. All three companies have pricing power, great brand names, and wide moats. They count some of the world's most successful investors as shareholders and have a long history of consistently paying and raising dividends. They all have dividend yields higher than the 10 year treasury and offer opportunity for principle appreciation. Investors in these three names should do well in both good times and bad.


Jason Bond has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson, McDonald's, and Procter & Gamble. The Motley Fool owns shares of Johnson & Johnson and McDonald's. 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!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure