I mentioned in a recent column that I think we're nearing the end of the current bull market. After all, a big first-half selloff is keeping the averages down for the year to date, the Federal Reserve is raising rates and the potential for economic shocks is increasing (largely thanks to escalating trade tensions). During these times, investors should consider selling positions with large gains and shifting assets into more conservative, established companies -- like the four below.
All four of these names have very strong cash flows that allow them to not only pay better than 3% dividends, but also to buy back stock. Two are consumer staples, a sector that's been the S&P 500's second-best performer over the past month (up 3.83%). The others are in health care, which has been the S&P 500's No. 3 best sector (+3%) during the past month. Here they are, listed in alphabetical order:
I don't know if there's a more quintessential American company than Coca-Cola -- a brand that's virtually intertwined with American cultural history. While the company's gross revenue has declined from $46.8 billion in 2013 to just $35.4 billion in 2017, KO still has tremendous cash flow and generates EBITDA equal to 25%-30% of gross revenue.
Coke currently yields 3.49%, has a 75.4% payout ratio and has raised its dividend for 55 consecutive years. The company has also purchased nearly $20 billion of its own stock since 2013 while paying out $28.4 billion in dividends.
KO is currently about halfway between its 52-week low and high, with the stock's price above its 200-day exponential moving average.
Merck & Co. (MRK)
Merck has been a powerhouse drug company for more than 50 years. It currently yields 3.05% and has a 45% payout ratio, although MRK has only raised its dividend for six consecutive years. And while gross revenue has declined slightly over the past 5 years -- falling from $44 billion in 2013 to $40 billion in 2017 -- MRK generates EBITDA equal to about 30% of gross revenue.
The pharmaceuticals giant also has great cash flow. Since 2013, MRK has purchased $26 million of its own stock and paid out nearly $20 billion in dividends. The stock has been in rally mode since late March, and is currently trading near its 52-week high.
Like Coca-Cola, PepsiCo is a part of U.S. culture, selling famous soft drinks like Pepsi and Mountain Dew, as well as snacks such a Doritos and Lay's potato chips.
Action Alerts PLUS holding PEP currently yields 3.29%, has a very safe 65.2% payout ratio and has increased its dividend for 45 straight years. Yes, gross revenue has fallen to $63 billion in 2017 from $66 billion in 2013, but PepsiCo's EBITDA equals nearly 20% of gross revenue.
Its cash flow is also impossibly strong, allowing the company to buy back nearly $18 billion of stock over the past five years while paying out nearly $20 billion in dividends.
PEP is currently trading about two-thirds of the way between its 52-week high and low, with the stock's price above its 200-day EMA.
PFE is another stalwart U.S. drug manufacturer. Its gross revenue has risen from $51 billion in 2013 to $52 billion as of 2017, and it has the best free-cash flow of the all four of these stocks, with an EBITDA/gross revenue percentage in the high 30s.
That's allowed the company to buy back a whopping $37.5 billion stock and pay out nearly $35 billion in dividends since 2013. Pfizer currently has a 3.62% yield and a 45.9% payout ratio, although the company has only increased its dividend for the past eight years.
Lastly, the stock is near its 52-week high, with rising momentum.
The Bottom Line
All four names above pay shareholders handsomely in the form of dividends and share buybacks (which help to put a floor underneath stock prices). Each also has a beta below 1.0, which means it's less volatile than the S&P 500.
This combination of features makes all four of these stocks great choices for income investors.
(This article was sent July 16 to subscribers of TheStreet's Income Seeker, a product presenting the world of opportunities in fixed income and dividend stocks. Click here to learn more about Income Seeker and to receive articles like this each day from Nick McCullum, Hale Stewart, Peter Tchir, Jonathan Heller and others.)