When markets are rocking and rolling, pundits and soothsayers love to throw around the phrase, “priced for perfection”. This means that a company’s stock is priced correctly (usually too high) relative to its fundamental prospects.
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In my experience, that mindset always ends poorly. Because, as we all know, trees don’t grow to the sky.
Thinking about that takes me back to my teenage years when I was obsessed with collecting vinyl records. Columbia/CBS (now Sony music) had a merchandising strategy known as “The Nice Price”. Titles by the label’s critically-acclaimed but lower selling artists were priced at an attractive discount. The label’s monster hitmakers were sold at full price.
Ironically, I was more than surprised decades later when I sold my vinyl library and netted enough to buy, get this, a boat. It’s not a fifty-foot yacht with a helipad, but my boys and I have a helluva lot of fun running it through the coastal waters where we live.
After the 2018 market smackdown, tons of high-quality stocks have been marked down to "The Nice Price." We’re not talking about value traps. These are seasoned businesses with solid franchises and operating histories. Now is the time to start building your collection. Here are three of my favorites:
Royal Bank of Canada (NYSE: RY) -- Canada’s largest bank by market capitalization, RBC’s franchise stretches across five primary lines of business: Personal and Commercial Banking, Wealth Management, Insurance, Investor and Treasury Services and Capital Markets.
61% of the company’s revenues are generated in the Great White North with 23% coming from the United States and 16% international. But looking under the hood at the numbers is the best part.
With over $1.3 trillion in assets, RBC’s banking business boasts net revenue of $4.3 billion with net income of over $1.5 billion translating into an astonishing 35% margin for that business line. In all total, the company had delivered $57.38 billion in revenue with net income of $12.4 billion resulting in a 22% net margin which is about equal with its North American big bank peers.
But the company’s real prowess is delivering shareholder value. RBC has consistently earned return on equity (ROE) of 17%, beating its neighbors to the south by over 50%. The bank has paid continuous dividends since 1870 and has grown its dividend at an annual rate of 7% over the last decade. Shares currently trade at $68.62 with a forward PE of 10.3 and a 4.18% dividend yield.
AT&T (NYSE: T) – If phone company stocks were good enough for your grandparents, they should be good enough for you. But this isn’t your grandparent’s phone company. After being a monopoly only to be busted apart by the government, AT&T is the gargantuan, oligopoly it should be.
After expanding its broadband and wireless business over the last two decades, the company has turned its focus to the next phase of its masterplan: delivering content over its spectrum. Gobbling up DirecTV was the acquisition of an entertainment distribution platform. Its recently completed Time Warner purchase was the entertainment the company will distribute. Yes, “Aquaman” uses AT&T.
Sheer sizes brings in a lot of cash -- $15.5 billion in free cash flow and $33.5 billion in net income help the company comfortably pay its $2.04 per share common dividend. Shares are a bargain at $30.15 with a forward price/earnings (P/E) ratio of 8.5 and a fat 6.76% yield.
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International Business Machines (NYSE: IBM) – Where AT&T was your grandparents telecom stock, IBM filled the tech sleeve of their portfolio. Big Blue is still as high tech as they come, but punch cards are tens of thousands of miles in the rearview mirror.
Shedding the hardware business years ago to focus on services, the company focuses on its five core segments: Cognitive Solutions (artificial intelligence), Global Business Services, Technology Services, Cloud Platforms, Systems, and Global Finance.
Altogether, the company generates $80 billion in annual sales with $7 billion in free cash flow and a remarkable ROE of 29%, which is projected to grow at 12.5% over the next two years. Big Blue has also grown its common dividend at a 12% annual clip over the last five years.
Tech doesn’t get much higher than AI and cloud computing. The market is completely ignoring this name. Shares trade at $117 with a cheap forward P/E of 8.5 and an attractive 5.36% dividend yield.
Risks To Consider: Compared to the battered growth names, these stocks are dirt cheap. However, selling spasms in nasty bear markets show no mercy. Everyone is taken out and shot. Prices can go lower, and investors must prepare themselves for that possibility. But the collective yield of these stocks is well above the market average. Historically, nervous investors that need to own equities but are paring back their risk will gravitate towards value biased dividend payers. This should provide some cushion.
Action To Take: Weighted equally, these stocks trade at a 9.1 forward P/E, a 40% discount to the S&P 500’s forward P/E. With a blended dividend yield of 5.43% (152% over the index dividend yield), patient investors could see 15% or better total returns in 12 to 18 months if market conditions improve. Owning solid businesses at low prices with dependable dividend streams will provide some protection.