Rock-Solid Stocks for a Tempestuous Time

 | Nov 13, 2012 | 7:15 AM EST
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 Near-term market volatility is likely to increase as the end of 2012 looms, along with the "fiscal cliff" -- the assortment of tax increases and budget cuts scheduled to take place in early 2013. Ultimately, we expect Congress will act to soften the impact of these events, but the terms and timing of this resolution are unknown at present. If resolution is delayed, it is likely to inflict damage upon the economy. Certainly, a delay will mean more cyclical swings are in store for businesses.

One way to navigate these surging seas is to own stable companies with low-volatility stocks. Two companies of this nature that we like are Coca-Cola and Kimberly-Clark. Both stocks should provide reasonable upside over time, and, importantly, lower volatility for your portfolio and attractive current income while you wait out the storm.

Coca-Cola (KO) is the premiere global beverage manufacturer whose brands include Coke, perhaps the world's most iconic soft drink, along with Diet Coke, Powerade and Dasani. The company has consistently produced steady revenue and earnings growth, even amid the uncertain global economy of the past three years. Its success is attributable to emerging-market growth as well as market-share gains in the key developed markets of North America and Europe.

During the most recent quarter, KO delivered solid earnings of $0.51 in line with consensus expectations. Revenues were driven by a broad-based 4% growth in unit case volume. Management affirmed the guidance for the year, even with the tougher macro concerns across North American, European and emerging-world economies.

We think there is much to like about KO, including its stable revenue and earnings growth prospects, together with a healthy and growing dividend, currently at 2.8%. Equally impressive is the fact that the dividend payout ratio is only 35%, and the company boasts a strong AA investment grade credit rating.

For the past decade, KO has consistently grown revenues 11% per year and earnings 9% per year. The stock is currently trading in line with its long-term historical valuation level at 18 times 2012 earnings of $2.00. The company has raised the dividend every year for the past 10 years, with an average dividend increase of 9.5%. We expect KO to continue to boost dividends in line with its long-term growth rate of 9% to 10% per year, reflecting continued emerging-market penetration.

The bottom line is that KO makes an excellent anchor for any portfolio,  particularly where stability is key.

As mentioned, we also like Kimberly-Clark (KMB), a leading international consumer products manufacturer with popular brands such as Huggies diapers, Scott paper products, and Kleenex tissues. The company has generated very steady revenue and earnings growth over the past five years. Its revenues and earnings continue to improve due to the rapid acceptance of the Huggies, Scott, and Kleenex brands in the emerging markets of Asia, Latin America, Africa and the Middle East.

During the recent quarter, Kimberly-Clark earned $1.34, a penny above consensus. While this was a smaller beat and a slowdown in the positive momentum of the last few quarters, management did affirm its guidance for the full year. Nevertheless, the stock has given back some of its 2012 gains.

We continue to recommend KMB because of its consistent revenues and earnings profile. The stock also has a safe and above average dividend yield of 3.6%, a payout ratio of less than 60%, and a strong AA investment-grade credit rating. The company has consistently grown revenues, earnings and dividends 5% to 7% per year for the past decade, and has also raised its dividend each year for the past decade.

While likely to provide less capital appreciation going forward because of its valuation at 16 times earnings (a 5% premium to its typical P/E), KMB should provide bedrock support in any choppy environment.

We expect both stocks to provide safe harbor in the developing fiscal storm.

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