The Safest Stock To Own In Any Market

Wednesday, September 16, 2015 - 12:30pm

by Jim Nelson

Investors are worried... rightfully so.

The Federal Reserve meets this week to decide whether or not they should raise interest rates. No matter who you talk to, everyone has a guess as to what they will decide.

But how that decision will actually affect stocks is less clear.

Personally, I don't believe any decision will send the U.S. markets into another 2008-2009 scenario. However, as the saying goes: "Plan for the worst. Hope for the best."

By studying which companies fared the best during the Great Recession, we can get an idea of which ones are best equipped to carry us through any future turmoil.

Specifically, I'm looking for the companies that maintained or even grew their dividends through the 2008 and 2009 downturn -- one of the greatest indicators of a company's fiscal health and management confidence.

How To Avoid The Mt. Everest Of Dividend Cuts
Companies rely on their shareholders for a number of reasons. But the most important reason why a company needs investors to own and hold its stock is so that it can go to the equity market (issue new shares) when it needs to raise capital.

And the quickest way for a company to lose its shareholders' confidence -- and therefore that market from which to draw on -- is by cutting its dividend.

So when a company cuts its distribution amount, you know it is in trouble. This single chart, I believe, is the clearest picture of just how bad things got during the 2008-09 financial collapse:

It shows the total number of dividend cuts from all U.S. stocks that traded on a major exchange from 2006 to 2012. That Mt. Everest in the middle was the Great Recession.

Almost all sectors were hit. And many of the premier dividend paying stocks were also hit. Companies that have been paying for decades, and in some cases, even over a century, were forced to cut their dividends -- Citigroup (NYSE: C), General Electric (NYSE: GE) and Dow Chemicals (NYSE: DOW), to name a few.

But one sector that came through relatively unscathed: Pharmaceuticals.

That makes sense, doesn't it? People complain -- again, rightfully so -- that their medication costs way too much and that their insurance doesn't cover something they need. But in the end, they will do whatever it takes to get that prescription filled.

Companies like Merck & Co., Inc. (NYSE: MRK) and Eli Lilly and Co. (NYSE: LLY) were able to maintain their quarterly payments throughout that mountain of red, up above.

Others even prospered and grew their payments, like AstraZeneca plc (NYSE: AZN) and Novartis AG (NYSE: NVS).

The only large exception was Pfizer Inc. (NYSE: PFE). The drug giant cut its payment in half in 2009. But it had nothing to do with the crashing stocks around it, or the credit crunch most companies were dealing with.

In fact, Pfizer was deemed so safe that it was able to obtain funding for one of the largest acquisitions in history at that time. Just as the absolute bottom of the market was falling out of every other sector, Pfizer paid Wyeth $68 billion for its product pipeline. That was in January 2009, one of the worst months on record.

Of course, 2008 and 2009 are not 2015. So will we see the same performance again... even if doomsayers are right and stocks do take a bad turn?

Not necessarily.

The biggest concern most drug companies face is patent expirations, otherwise known as patent cliffs. When a drug is approved by the FDA, the company that developed it is now has the opportunity to produce it exclusively for a number of years. However, when the patent expires, other drug companies can produce and market generic versions, which typically sends the price of the drug down cutting into margins and revenue.

Judging each individual pharmaceutical company takes a bit of digging and analysis. But there is one that outshined all others in the previous recession, and I believe it should easily repeat that performance if we enter another bear market.

The Best Stock To Own No Matter What The Market Does From Here
As one of the largest companies in the world, Johnson & Johnson (NYSE: JNJ) is a leader in the drug business, with products like REMICADE (a treatment for Crohn's disease), STELARA (treats a type of arthritis) and PREZISTA (a treatment for HIV).

But it doesn't rely on the income from individual drugs like most of its competition does. It also sells well-known brand names such as Band-Aids, Listerine and Tylenol. And that says nothing of its huge medical devices segment.

In total, less than 45% of its revenue comes from drugs. So when a patent expires, JNJ's revenue doesn't take as large of a hit as competitors Merck and Pfizer.

Plus, products like Band-Aids and Tylenol are about as recession resistant as they come. People still cut themselves and get headaches just as often when stocks are falling as they do in bull markets.

We only have to look at J&J's performance last time to see the proof of it.

From 2006 to 2012, Johnson & Johnson raised its dividend 79%. And it was able to consistently increase its quarterly payments each and every year... while the rest of the market was cutting theirs like they had an infectious disease.

JNJ Kept Raising Dividends Through The Great Recession

 

Equally important to this discussion is whether J&J offers an opportunity to the upside… more than just being a sturdy stock to own in bear markets.

In short, it does…

By looking at Johnson & Johnson's price-to-earnings ratio we can see just how cheap it is right now. With steady income growth, and a flat stock chart over the last two years, JNJ's P/E ratio has fallen from 23 to just 16.5.

The last time Johnson & Johnson's stock was trading at 16.5 times its earnings (at the beginning of 2012), it jumped from $65 to $108.

JNJ's Price And P/E Say It's A Good Buy

So worst case scenario: you can count on a fast-growing dividend from a safe blue chip. It currently pays a 3.2% dividend yield that is growing at high-single-digit-rates.

Best case scenario: investors realize it is cheap… giving you a large return ON TOP OF your fast-growing dividend. A repeat of 2012-2015 would net you a 66.2% capital gain plus those dividends.

Risks To Consider: Even with J&J's strong past performance, diverse streams of income and safe dividend, earnings could slow. Even large, safe drug companies like Johnson & Johnson face some reduced consumer spending issues if the economy's recovery grinds down to a crawl on higher interest rates.

Action To Take: Consider adding Johnson & Johnson (NYSE: JNJ) to your portfolio as both a bear market hedge and as a potential double-digit winner if the bull market picks up steam again.

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Jim Nelson does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.