Ask the Rational Investor: Finding Defensive Value Stocks
The first quarter of 2022 has been off to a wild start with the Federal Reserve now starting to address rising inflation and the Russian conflict in Ukraine.
Growth stocks with expensive valuations reacted to current events with fast price drops, correcting, in many cases, irrational valuations. Many of these companies had recently undergone initial public offerings with little revenue and no profit.
Over the last several years, defensive companies with long histories of profit and sales growth, and conservative balance sheets, have lagged their growth peers. This trend has likely ended as Federal Reserve Chairman Powell is widely expected to increase interest rates by at least 1.50% over the next twelve months.
Low-risk bonds will start offering a more attractive return and will compete with stocks for investment allocations. This trend is likely in the early phases and could easily last five to 10 years, or more.
What worked in the past is gradually shifting to more defensive, low-valuation companies less sensitive to rising interest rates; a focus on investments with stable and growing dividends, and balance sheets that can weather a recession.
Home Depot fits this description with a dividend yield of around 2.40% or $6.60 per share for the fiscal year 2022. Stock analysts expect Home Depot to grow its dividend to $9.60 per share by 2027, which seems reasonable considering the company’s profitability, stable sales growth, and defensive competitive position relative to e-commerce.
Another company highlighted in February 2021’s Ask the Rational Investor is United Parcel Service, led by Carol Tome, formerly the CFO of Home Depot. Since becoming CEO in June of 2020, UPS has improved financial performance and capital stewardship. We think improved profitability will continue over the next several years. Dividends along the way will provide a nice return of around 2.8% currently or $5.99 per share for 2022 and are expected to rise to $7.74 per share by 2026.
“Don’t fight the fed” may be more true in today’s world than it has been for many years in the past!
Sources: Company reports, Factset
Beese Fulmer Private Wealth Management was founded in 1980 and is one of Stark County’s oldest and largest investment management firms. The company serves high-net-worth individuals, families, and non-profits, and has been ranked as one of the largest money managers in Northeast Ohio.
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