It’s often said that low risk implies lower returns. Depending on a risk appetite, some investors prefer safe stocks or low risk stocks. Even for an aggressive investor, it makes sense to have a certain weight in the portfolio in low beta stocks. In general, low beta stocks help in capital preservation when markets are down.
However, there is also a strong case that lower risk doesn’t have to mean low returns. In September 2013, a Harvard Business School study reported:
“From 1968 through 2012 in the U.S. equity market, portfolios of low-risk stocks deliver on the promise of lower risk as planned, but with surprisingly higher average returns. A dollar invested in the lowest risk portfolio grew to $81.66 while a dollar invested in the highest risk portfolio grew to only $9.76.”
Let’s talk about seven safe stocks to consider for investors who are allergic to volatility.
- Colgate-Palmolive (CL)
- Dollar General (DG)
- Target Corporation (TGT)
- AstraZeneca (AZN)
- Equinor (EQNR)
- Costco Wholesale (COST)
- Unilever (UL)
Of course, there are always out-performers among high-risk stocks. However, a portfolio of safe stocks might not significantly under-perform a portfolio of high-risk stocks in the long-term.
Forward annual dividend: $1.80
CL stock (CL) is a perfect fit for a portfolio of safe stocks. In addition to a low beta and the solid dividend, CL stock currently trades at a forward price-to-earnings ratio of 22.8, attractive given broader market valuations.
Key business segments for Colgate-Palmolive include home care, personal care, oral care and pet nutrition. Last year, the company delivered its best organic sales growth since fiscal year 2008. For the current year, the company has guided for 4% to 7% growth in net sales.
I like that this company has good regional diversification. North America constitutes just 22% of sales. High growth markets like Asia Pacific, Africa and Eurasia contributes to 23% of total sales. Emerging markets can continue to boost long-term growth in segments like oral and personal care.
Innovation is another key trigger for the company’s growth. For example, the company recently launched a special toothpaste for diabetics, in itself a big addressable market.
From a financial perspective, the company reported free cash flow (before dividends) of $2.8 billion in FY2019 and $3.3 billion last year. As FCF accelerates, the company is well positioned to de-leverage and pay higher dividends. As a matter of fact, the company has increased dividends for the last 58 years.
Forward annual dividend: $1.68
With a beta of just 0.55, DG stock (DG) is worth considering among safe stocks. The stock has also delivered healthy returns of 31% in the past year with a sustainable annual dividend to boot.
It’s important to note that the consumption sector is a key growth driver for the U.S. economy. As a discount retailer, Dollar General is well positioned to benefit from expansionary fiscal and monetary policies that support growth.
Recently, Dollar General reported strong results for the fourth quarter of 2020. The company’s net sales increased by 17.6%. Even for the full year, net sales growth was robust at 21.6%. Another key highlight was a 73.2% growth in operating cash flows to $3.9 billion.
Dollar General did disappoint on the guidance for the coming year. The company expects net sales to decline by 2%. However, CFRA analyst Camilla Yanushevsky believes that the company remains a top pick among general merchandisers. The analyst also sees stronger growth in the coming years with a “push into higher margin categories through DG Fresh, Fast Track, and DG Pickup.”
Therefore, any near-term weakness in DG stock would be a good accumulation opportunity.
Forward annual dividend: $2.72
TGT stock (TGT) has surged by 86% in the past year. Like most stocks with low volatility, TGT stock offers an attractive annual dividend of $2.72.
The upside in TGT stock in the last few quarters has been backed by positive fundamental developments. For FY2020, the company reported a 19.3% comparable store sales growth, driven by 7.2% growth in store comparable sales coupled with 145% growth in digital comparable sales.
Target hasn’t provided any sales guidance for 2021. However, it seems very likely that digital sales will continue to support comparable sales growth. It’s also worth noting that amidst the pandemic, the company also opened 30 new stores in FY2020. New stores will continue to boost same-day services like drive-up, shipments and order pick-up.
As a matter of fact, companies like Walmart (WMT) and Costco have also reported strong growth in digital sales. This trend is likely to sustain with the pandemic remaining a concern.
Overall, TGT stock still looks attractive at a forward P/E of 21.6. I will not be surprised if the stock upside sustains, as it’s likely that Target will continue to report healthy numbers.
Forward annual dividend: $1.40
Whenever I talk about low volatility or safe stocks, I want to talk about AstraZeneca (AZN).
The reason? AZN stock has a beta of 0.16 and it offers a healthy dividend yield of 3.86%.
To add to the positives, the stock has moved higher by 22% in the last one-year. It’s likely that the positive momentum will sustain in the coming quarters.
As I write, AZN stock is trading 3% higher with U.S. Phase III trials demonstrating 79% efficacy. In the coming weeks, AstraZeneca is likely to receive U.S. Emergency Use Authorization. This is another potential stock upside catalyst. Recently, U.K. and European Union agencies also confirmed that the vaccine is “safe and effective.”
There are other reasons to be bullish on AstraZeneca when it comes to revenue and earnings growth. For FY2020, revenue growth from new medicines was 33% ($3.5 billion in incremental revenue on a y-o-y basis).
The company has a robust late-stage pipeline that’s likely to support revenue growth for the next few years. While the oncology segment has delivered healthy growth, the company intends to accelerate its expansion into immunology. AstraZeneca’s strong presence in emerging markets is also a key long-term growth catalyst.
Overall, the company is well positioned to deliver strong cash flows in the coming years. Steady growth coupled with healthy dividends and low beta makes AZN stock worth buying.
Forward annual dividend: $0.48
In general, stocks from cyclical industries are associated with higher volatility. However, there are few stocks in the energy sector that have a low beta. EQNR stock (EQNR) is among the safest, with a beta of 0.8.
Another reason for talking about an energy stock in the list of safe stocks is accelerating inflation. Bloomberg Intelligence data from 1992-2016 shows that for every 1% change in U.S. consumer price inflation, energy price has surged by over 25%. This makes EQNR stock an attractive bet in the current scenario.
Specific to Equinor, its core asset’s low break-even point is the single most important bullish factor. The company’s average break-even cost (across projects) is approximately $30 per barrel. At $50 per barrel oil, the company expects to generate $6 billion in free cash flows. With Brent currently above $60 per barrel, FCF visibility is robust.
It’s also worth noting that between the last year and FY2026, the company expects production growth at a CAGR of 3%. Even if oil trades sideways, the company is positioned to generate incremental cash flows.
EQNR stock also has an annual dividend of $0.48 and a dividend yield of 2.46%. With oil trending higher, it’s likely that dividends will increase.
Forward annual dividend: $2.80
In the consumer staples sector, COST stock (COST) is among those stocks to consider. The stock had touched a 52-week high of $387 and currently trades at $335. I see the correction as a good opportunity to buy shares.
In terms of cash flow stability, Costco reported 59.7-million-member households as of second quarter of 2021. With $3.7 billion in cash fees and steady growth in membership, the company has a clear cash flow visibility.
Strong top-line growth is another key reason to like the company. For Q2 2021, the company reported revenue growth of 14.7% on a YOY basis. It’s important to note that comparable store sales growth was robust at 12.9%.
Costco is also at an early stage of expansion in China. Home to 1.3 billion people, that is a big addressable market. If warehouse expansion is aggressive in the coming years, the country will support top-line and membership growth.
Talking about value creation, Costco initiated dividends in May 2004. Over these years, dividends have grown at a CAGR of 13%. Currently, the stock offers an annualized dividend of $2.80.
Forward annual dividend: $1.91
The last name on our list of safe stocks has a beta of just 0.11. In addition, the stock has a healthy dividend yield of 3.7%. These two factors alone are reason enough to consider UL stock (UL).
For FY2020, the company reported a total turnover of 50.7 billion euros with underlying sales growth (USG) of 1.9%. It’s important to note that the company’s home care segment reported 4.5% USG. Given the Covid-19 pandemic, home care and personal care segment growth is likely to remain strong.
Another important point to note is that the company’s e-commerce sales was 9% of total sales. However, the ecommerce segment registered 61% YOY growth. In the United States, e-commerce sales growth was 123%. Unilever is trying to build omnichannel sales capability, which is likely to be fruitful in the coming years.
Product innovation is another factor that’s liable to boost growth. Unilever is making inroads in the functional nutrition and healthy eating segment. With the company reshaping its portfolio to suit changing consumer demands, growth is likely to remain steady.
For FY2020, Unilever reported free cash flow of 7.7 billion euros. Strong FCF provides flexibility for dividend growth and investment in product innovation. UL stock has trended higher by 17% in the last one-year. With a strong brand presence, growth in emerging markets and increasing omni-channel capabilities, Unilever stock is likely to remain in an uptrend.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
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