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Following Standard and Poor’s downgrade of the United States’ credit rating, the Dow Jones Industrial Average saw three consecutive days of 500-plus point gains and losses. Such volatility can unsettle even the hardiest of investors and times like these remind us just how unpredictable equity markets can be. Selling often begets more selling, with investors scrambling to get rid of their shares at any price, but that doesn’t mean that sensible investing should be thrown to the wind. By taking a closer look at one’s current holdings and focusing on a few industry-leading names, investors can better prepare themselves for the inevitable market downturns. Here we present three potential candidates.

In narrowing our selection to three stocks, we made sure a number of stringent quantitative and qualitative criteria were met. First, we looked for stocks that Value Line believes are poised to outperform the broader market over the next six to 12 months. In addition, the stocks had to be ranked Above Average or better by Value Line’s proprietary Safety Ranking System. Next, we required that our stocks have at least a 10-year history of stable and increasing dividend payments, with a current yield of at least 2.5%. To ensure relative price stability, we required the stocks to have betas of less than 1.00, meaning the stocks are generally less volatile than the market overall. The stocks also had to trade at price-to-earnings ratios that were either below or very close to their long-term historical averages, thus allowing for significant price appreciation once the economy gains a firmer footing. (The Value Line Page provides up to 16 years of historical price-to-earnings data, allowing investors to easily compare current and historic ratios.) Finally, the company had to have at least a 10% annual rate of earnings growth over the last five years. Not surprisingly, only 12 stocks were able to meet each of these criteria all at once. As far as qualitative characteristics, our analysts reviewed the chosen companies’ business models to determine if they could withstand the test of time or if there was a possibility that the businesses could face obsolescence in the next five to ten years.

Exxon Mobil Corp (XOM - Free Exxon Mobil Stock Report) is not only the world’s largest oil and gas corporation, but as of this writing, it is the largest publicly traded company of any kind. A direct descendent of John D. Rockefeller’s  Standard Oil Company, Exxon Mobil continues to thrive over 100 years later and will probably continue to do so for the next century unless a suitable replacement for oil is found. The company has been raking in record profits over the last several years, with earnings growing at 10% annually.

The new millennium brought with it a fundamental shift in oil prices. For the 30 years, between 1970 and 2000, crude oil held at under $30 a barrel (excluding a brief spike during the oil embargo of the late 1970s). However, post-2002 crude prices exploded, eventually surpassing the $150 a barrel mark. Although prices have come down some of late due to a weaker-than-expected global economic recovery, it is unlikely that we will see the prices of yesteryear. Increased worldwide energy consumption, fueled by China’s and other emerging markets’ insatiable appetite for oil, suggests that the new oil regime is here to stay and that Exxon’s profits will continue to expand.

In the meantime, the company offers a healthy dividend of $1.88 a share, yielding (2.7%). With $7.59 in earnings per share for the trailing twelve months, Exxon Mobil is trading at a trailing price-to-earnings ratio of 9.3. Although that represents a slight premium to rivals Chevron (CVX - Free Chevron Stock Report) and BP Plc (BP), we believe it is well deserved. Exxon doesn’t have the legal woes of BP and is a more diversified company than Chevron. Its substantial natural gas operations mean that the stock is not as closely tied to the price of crude as that of rivals. Also, should the price of natural gas increase significantly in the future, a move Exxon is betting on, the top and bottom-lines should move in similar fashion. Exxon currently trades at a price-to-earnings multiple of 9.4, compared to its historical average of about 15.

Telefonica, S.A. (TEF), headquartered in Madrid, Spain, is a telecommunications giant that provides telephone, mobile, internet, data, and entertainment services primarily in Spain, Portugal, and Latin America. Lately, the company has been expanding its services in Europe and increasing activity in Latin America, where demand for wireless data and internet services is growing rapidly. Earnings grew by more than 24% a year over the last five years. Growth is expected to moderate significantly over the next half decade, but shareholders should be well compensated by Telefonica’s hefty dividend yield of nearly 9%, one of the highest payouts in the sector. 

Recently, shares of Spain-based Telefonica have not performed well due to declining revenues in economically battered Spain and worries that the country might default on its sovereign debt. However, investors’ concerns may be overblown here. Only 30% of the company’s revenues are generated in Spain, with the rest coming from other parts of Europe and Latin America, where revenues are still growing in the double-digits. Should Spain default, Telefonica would  suffer, along with most other stocks with exposure to that region, but currently the stock has been sufficiently discounted to at least partially reflect this worst-case scenario. At 6.3 times trailing twelve-month earnings, these ADR’s seem attractively priced.

British American Tobacco (BTI) is one of the largest tobacco companies in the world, with a market cap of $88 billion. Its global portfolio of brands includes names like Kent, Dunhill, Lucky Strike, and Paul Mall, which the company sells in more than 180 markets around the world. Tobacco companies have long been considered to be defensive in nature, because of their stable cash flows, healthy dividend payouts, and relative insulation from market downturns. Although industry volumes have been declining for the better part of the last decade, BTI has managed to achieve solid top-line growth over the last several years, by increasing prices and lifting its market share in regions where the tobacco market is still growing.

The company competes toe-to-toe with Philip Morris International (PM), which is another solid choice for income-oriented investors. However, for this report we chose British American because the company beat Philip Morris when it came to earnings growth and dividend growth over the last five years. BTI has a current dividend yield of around 3.8%, which is slightly higher than PM’s 3.7% yield. Moreover, BTI has increased its dividend by 16% annually over the last 10 years, making it a strong candidate for inclusion in any dividend portfolio. Investors should note that the dividend is only paid out twice a year in May and September, instead of quarterly. As far as sustainability, we acknowledge that smoking is on the decline, and that’s a good thing, but it will probably be a very long time before British American stops raking in massive profits.

These three names should provide investors with a good starting point for finding quality companies, trading at reasonable valuations that are also able to withstand a little market turbulence.


At the time of this article’s writing, the author did not have positions in any of the companies mentioned.