Three All-Weather Blue-Chips for Stability

 | Jan 08, 2013 | 9:30 AM EST  | Comments
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pep

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pg

Readers might recall that we have been advocates of a barbell equity strategy, balancing growth-oriented undervalued situations with all-weather, dividend-oriented blue chips. As we start the year, we believe that 2013 should be another solid year for stocks. Nevertheless, because we expect some bumps along the road and continued volatility, the barbell strategy still makes great sense, especially after the strong start to the year for some of the more economically sensitive businesses. 

While these all-weather names have not had the same kind of relief rally that the more economically sensitive stocks have enjoyed so far this year, they too are beneficiaries of the tax agreement, especially since the new dividend tax is much less punitive than many had feared. As such, we believe these all-weather stocks will be an important part of balancing a portfolio for the volatility that the current earnings season, the debt-ceiling battle and other macro issues might bring, and they should provide some healthy income and appreciation this year.

Three iconic companies that have good and growing income streams, improving prospects, sell at reasonable valuations and lagged the market over the past year are Coca-Cola (KO), PepsiCo (PEP) and Procter & Gamble (PG). We believe that all three are due for a catch-up and should provide good balance and stability for investors' portfolios this year.

Coca-Cola continues to generate steady revenue, earnings and market-share growth through its ongoing expansion into emerging markets and new product categories. Case volumes have steadily grown 5% to 9% per year in India, China, Brazil, Africa and Eastern Europe. The stock trades slightly below its long-term valuation multiple at 17x earnings, with a below-market beta of .60 and a 2.7% dividend yield. Coke should generate a steady return in 2013 with below-market volatility.

In the past few quarters, PepsiCo has surprised investors with its steady revenue and earnings growth, growing out of a broad cost-restructuring program and expansion into emerging markets. Management has cut more than $500 million in costs and reinvested the money into new products, advertising campaigns and distribution strategies, which have provided incremental revenue and earnings growth.

The company also continues to benefit from continued emerging-market expansion into Asia, Africa and Latin America. The stock trades slightly below its long-term valuation multiple at 15.9x earnings, with a below market beta of .60 and a 3.1% dividend yield. PepsiCo should also generate a steady return for investors in 2013 with below-market volatility.

Finally, Procter & Gamble should be a steady rudder in 2013, given its continued emerging-market penetration, portfolio pruning and restructuring activities. Management has had to work harder than its peers over the past year to reduce costs and re-price key product lines. However, it should be rewarded for its efforts, as its turnaround strategies should enhance earnings in 2013. The company is also benefiting from robust emerging-market growth rates. The stock trades slightly below its long-term valuation multiple at 17.4x earnings, with a below-market beta of .60 and a 3.3% dividend yield. Procter & Gamble should generate steady returns with below-market volatility this year.

Again, these recommendations are not designed for "lights out" results. Rather, they should produce attractive returns, while muting some of the market swings that we expect this year.

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