5 "Necessity" Stocks That Could Protect Your Portfolio From Disaster
Jan 19th 2012 3:07PM
Updated Jan 19th 2012 3:08PM
The new year has started off with a bang for many stocks. The S&P 500 is up 4.4% through the first two weeks of 2012 and most earnings reports so far haven't disappointed.
Still, two weeks isn't going to make up for the fact that Europe's debt woes are anything but fixed. Greece continues to stymie any progress made on its behalf, and Italy's 10-year lending rate is dancing dangerously close to the 7% level again. Countless concerns about whether China can slow its economy in an orderly fashion and whether the U.S. can lower its unemployment rate meaningfully and spur growth are still unanswered.
With all of these worries present, it's easy to get drawn into the euphoria of a few good weeks, but it's also smart to remember that choosing the right stocks means not having to worry about these prolonged economic maelstroms.
Keeping that in mind, I sought to uncover five stocks that would stand the test of time whether the global economy was booming or in a deep recession -- and today I'll share them with you.
These five stocks all provide necessity goods to consumers. Arguably a few of you will find my definition of "necessity" a stretch, but given the impeccable track records of these five companies, I find it hard to argue against buying these five stocks. Not surprisingly, with near-guaranteed income, all five provide a solid dividend as well.
Here they are, in no particular order:
|Duke Energy (NYS: DUK)||Electricity||4.70%|
|American Water Works (NYS: AWK)||Water||2.90%|
|Chevron (NYS: CVX)||Oil||3.10%|
|Coca-Cola (NYS: KO)||Food||2.80%|
|Wal-Mart Stores (NYS: WMT)||Clothing||2.50%|
Source: Yahoo! Finance.
Arguably nothing is a necessity in this world outside of food and water, but electricity comes in very close behind those two. According to the U.S. Energy Information Administration, the average household used 11,496 kilowatt-hours' worth of electricity in 2010. This figure is only likely to go higher or, at worst, remain flat as everything in our lives becomes increasingly digitized and automated. Electrical usage is one of those necessities that doesn't budge very much whether or not the economy is booming or contracting, so utilities often make for excellent buy-and-hold investments -- and no utility speaks to me more than Duke Energy.
Duke Energy is still in the midst of a legal battle to acquire Progress Energy, which, if approved, would create the nation's largest electrical utility and save each company millions. Duke is all about consistency, with gross margin range bound between 62% and 65.5% over the past five years and operating margins at a record-high relative to the past decade. If not for Duke's spinoff of Spectra Energy, its former natural-gas business, in 2007, dividends would also be up in every year as well since 2005. With a real set-it-and-forget-it feel, Duke Energy has everything needed to let investors sleep better at night.
Water is a considerably more precious commodity than many give it credit for. Admittedly, it's not something we can reasonably transport for a profit yet, but water is finite and it's one of the basic necessities for survival. When thinking of a play on water, I continue to come back to my "10 Mid Caps to Rule Them All" choice, American Water Works.
American Water Works has made it clear that its strategy involves growing by acquisition, but don't think that means the company is a slouch in the growth department. Revenue has increased in every year since 2006 and operating margins are currently at record highs. The key to the company's success has been seeking out reasonable growth opportunities while also controlling expenses -- something it's perfected to an art form. Even better for those of you who like a healthy dividend, American Water Works' payout ratio is the lowest among the water utilities, leaving it plenty of room to grow.
I'm sure there are some of you out there who choose not to drive a car and think oil isn't a necessity. But remember that oil also factors into the production of plastics, foams, cosmetics, paints, and a wide array of other products. There's a very good chance you have a handful of oil-based products in your household right now, which makes it an excellent necessity candidate. When thinking of oil, most investors choose ExxonMobil; I prefer Chevron.
To me, it makes more sense on paper. Chevron boasts a lower forward P/E, price-to-book, and price-to-cash-flow while also yielding almost a full percentage point higher than ExxonMobil. Chevron simply delivers for its shareholders with healthy dividend increases and billions in operating profits each year. In 2010, Chevron produced more than $31 billion in operating cash flow, a driving force behind Chevron's dividend increases, which have grown by an average of 8.8% over the past decade. You may not like Big Oil companies, but that doesn't mean they can't pad your portfolio.
Next to water, food is the only other absolute necessity for survival, so we can reasonably expect spending in this segment to grow if not remain relatively consistent. With so many companies to choose from in the food sector, I tried to focus on the strength of a brand name and the desire of consumers to seek out that brand. This made Coca-Cola a no-brainer selection, even if its liquid portfolio of products is a tad bit of a stretch under the food category.
Voted as the top global brand name by Interbrand in 2011, beating out IBM and Microsoft, Coca-Cola is a model of consistency to which nearly all other companies are compared. The company has rewarded shareholders with 49 consecutive annual dividend increases and has tightly controlled its gross margin, which has been range-bound between 63% and 66% since 2002. Coca-Cola has the tools to grow globally and the deep pockets from its strong cash flow to make that happen. Best of all, Coca-Cola's low payout ratio of 34% practically ensures years of future dividend increases.
For the sake of argument, I'm going to call clothing a necessary item. That doesn't mean we as a society need to go out and buy top-notch brand names, but we need the basics to go about our daily lives. Even though I could easily have chosen to put Wal-Mart in the food category, the company makes a better fit in that "everything else" category.
If you really want consistency in the bottom line, look no further than Wal-Mart. Over the past 10 years and two recessions, Wal-Mart increased sales and profits in each year. Wal-Mart's brand name and deep pockets have allowed it to undercut nearly all of its competitors on everything from clothing to electronics. Perhaps not the most exciting stock over the past decade, Wal-Mart has rewarded shareholders with an average annual dividend increase of 18%. What Apple is to the technology space, Wal-Mart is to the retail sector.
There you have it, folks -- five companies that handle the basic necessities of life. Do you have a favorite of the bunch, or perhaps one I left out? Share it in the comments section below.
Also, if you're looking for more stellar companies to complement these five, I invite you to download a copy of our latest special report, "3 American Companies Set to Dominate the World." In this report you'll find three companies hand-picked by our analysts set to dominate the emerging markets -- and best of all, this report is completely free for a limited time, so don't miss out!
At the time this article was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of Coca-Cola, IBM, Microsoft, Wal-Mart, and Apple. Motley Fool newsletter services have recommended buying shares of Chevron, Coca-Cola, Microsoft, Wal-Mart, and Apple, as well as creating a bull call spread position in Microsoft and Apple, and creating a diagonal call position in Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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 that believes transparency is always a necessity when it comes to investing.
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