How to Protect Your Portfolio From Political Uncertainty
Oct 5th 2013 12:00PM
Updated Oct 5th 2013 12:02PM
Problems like the government shutdown and the debt ceiling limit are generating anxiety among investors lately. Unfortunately, nobody knows for sure how the situation will evolve, or what kind of impact it could have on the markets and the economy.
But the good news is that investors don't really need to accurately predict the markets to make sound investment decisions. As long as you buy high-quality companies and hold them for the long term, chances are your portfolio will deliver solid returns over the years, regardless of the short-term political noise.
These indestructible companies are strong enough to outperform the markets in the long term while at the same time providing tranquility and peace of mind knowing that your capital is well protected in case things turn for the worse over the next weeks or months.
A healthy dividend aristocrat
Dividend aristocrats are companies that have raised their dividends for 25 consecutive years or more. Among that select group, Johnson & Johnson stands out as a top-quality name thanks to its amazing track record of growing dividend payments for 51 consecutive years.
Johnson & Johnson yields 3% in dividends at current prices, and the dividend payout ratio is below 55% of earnings, so investors have good reasons to expect growing distributions in the coming years.
The company has a diversified business model with global presence and remarkable strengths in different areas. Brand power, economies of scale and abundant financial resources provide the company with rock-solid competitive advantages: Johnson & Johnson generates approximately 70% of sales from No. 1 or No. 2 global leadership positions in its respective markets.
The medical devices and diagnostics segment generates 40% of revenue, pharmaceuticals another 39% and the consumer segment brings in the remaining 21% of sales. The company is not immune to uncertainty regarding the implications of the health care reform or other regulatory factors, but its global reach and rock-solid competitive strengths make it a specially resilient company from a long-term point of view.
In addition to that, emerging markets still offer plenty of room for growth judging by recent financial performance: Johnson & Johnson delivered sales growth of 21% in Brazil, 19% in Russia, 15% in India and 11% in China in the first six months of the year versus the same period in 2012.
A smart company in a defensive sector
Discount retail is a defensive business, and Costco is a high-quality company with a smart business model in that segment. The company makes most of its profits from membership fees while selling its products at zero profit or even at a loss. This puts Costco in a very convenient position to compete against rivals like Wal-Mart and Target when it comes to prices, a key competitive factor in the industry.
Costco has a membership renewal rate above 85%, so customers seem to be quite pleased with the company and the benefits of shopping at Costco. Investors are not complaining either, earnings per share increased by 18.2% in the last quarter thanks to a 7% increase in same-store sales excluding the impact of changes in gasoline prices.
Wal-Mart, on the other hand, is not doing so well. The company reported a decline of 0.3% in U.S. same-store sales during the last quarter, while Sam's Club delivered an increase of 1.7% in same-store sales excluding fuel for the same period. Management expects comparable sales in the U.S. to remain flat in the current quarter, and comparable sales excluding fuel at Sam's Club are expected to be between flat and 2% higher.
Target reported earnings per share at the top end of the expected range for the last quarter, but U.S. comparable sales were softer than expected with an increase of 1.2%. Profit margins have been under pressure lately, and management adjusted expectations to the downside saying that earnings per share for 2013 are now forecasted to be near the low end of its previous guidance of between $4.70 and $4.90.
Both Target and Wal-Mart are blaming the economic environment for their disappointing results, and this makes Costco´s superior performance even more remarkable. If the company can thrive under challenging conditions for the sector, just imagine what it can achieve when the wind is blowing in a favorable direction.
Costco owns 627 warehouses, 449 of them in the United States, so it has ample room for expansion over the next years. The company has a high-quality management team and a smart business model. Neither political uncertainty nor even a full blown recession is going to derail Costco from its long-term growth trajectory.
It´s impossible to forecast with certainty what kind of effect the political noise may have on the economy or the markets. However, this uncertainty shouldn't stop you from making solid investment decisions. Companies like Johnson & Johnson and Costco provide both considerable potential for outperformance and the fundamental soundness to successfully go through rocky conditions if the situation gets more complicated.
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The article How to Protect Your Portfolio From Political Uncertainty originally appeared on Fool.com.Andrés Cardenal has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale and Johnson & Johnson. The Motley Fool owns shares of Costco Wholesale and Johnson & Johnson. 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.