Stocks that offer more safety.
The S&P 500 index officially transitioned to a bear market earlier this month, and the unpredictability of the coronavirus outbreak has resulted in unprecedented market volatility. Even top Wall Street analysts aren't quite sure how severe the economic fallout from COVID-19 will ultimately be. With so much uncertainty in the market, investors can find safety in dependable, reliable stocks. Morningstar maintains a cash cow list of stocks with positive free cash flow growth over the past five years and cash balances of at least 5% of total assets. Here are eight cash cow stocks to buy, according to Morningstar.
Coca-Cola Co. (ticker: KO)
When it comes to consistency and reliability, soda giant Coca-Cola is about as good as it gets. Analyst Nicholas Johnson says Coca-Cola's initial 2020 guidance of 5% organic revenue growth and 8% operating income growth was in line with its long-term goals. Johnson says Coca-Cola has massive market share and scale advantages over its largest competitors in the global nonalcoholic, ready-to-drink beverage market. He also says Coca-Cola maintains a healthy operating leverage and should continue to benefit from operational optimization. Morningstar has a "buy" rating and $57 fair value estimate for KO stock.
Merck & Co. (MRK)
Merck is one of the world's largest drug makers. Analyst Damien Conover says the underperformance of Democratic presidential candidate Bernie Sanders in recent primaries has reduced the risk of an unpredictable overhaul of the U.S. health care system, including a potential crackdown on drug pricing. Now that former Vice President Joe Biden is likely to be the nominee, Conover says the most likely change to drug policy will be the Prescription Drug Pricing Reduction Act, which he says still has a less than 50% chance of passage. Morningstar has a "buy" rating and $103 fair value estimate for Merck.
Bank of America Corp. (BAC)
Bank of America and other bank stocks have taken a huge hit so far in 2020 due to concerns that an economic slowdown could weigh on loan and deposit growth. In addition, the Federal Reserve's emergency 0.5-percentage-point interest rate cut in March squeezes banks' net interest margins. Fortunately, post-financial crisis regulations have forced banks to beef up their balance sheets, allowing them more financial flexibility to weather the downturn. Analyst Eric Compton says Bank of America is particularly well-positioned given its expanding product offerings. Morningstar has a "buy" rating and $32 fair value estimate for BAC stock.
Cisco Systems (CSCO)
Analyst Mark Cash says Cisco's product ecosystem, ranging from switches to data analytics, should maintain value even in a highly competitive market. There's no question Cisco's hardware business is facing a secular headwind due to the business world transitioning computer workloads to the cloud. However, Cash says Cisco's Catalyst 9000 has been the company's most successful switching product launch in history. More importantly, its subscription-only sales model is a signal that Cisco management understands the importance of transitioning to recurring revenue streams. Morningstar has a "buy" rating and $48 fair value estimate for CSCO stock.
Salesforce.com is a top provider of on-demand customer relationship management software. Analyst Dan Romanoff says investors should focus on buying software stocks with wide competitive moats and high-quality businesses throughout the market downturn, and Salesforce is at the top of that list. He says Salesforce is one of the best growth stories in software. Even though revenue growth will likely fall to less than 20% in the next several years, Romanoff says expanding margins should help the company maintain earnings growth of more than 20%. Morningstar has a "buy" rating and $202 fair value estimate for CRM stock.
Philip Morris International (PM)
Philip Morris holds nearly a 30% market share of the international cigarette and heated tobacco markets. Analyst Philip Gorham says Philip Morris has established a critical first-mover advantage in heated tobacco, a potential high-growth market that could offset a secular decline in cigarettes. Gorham says investments in the Unsmoke campaign should pay off, and heated tobacco is the best approach to try to win over international adult smokers. He says the next-generation tobacco market will involve a wider range of products and higher customer acquisition costs. Morningstar has a "buy" rating and $102 fair value estimate for PM stock.
Honeywell International (HON)
Honeywell is a diversified global technology and manufacturing company that supplies avionics, power and control systems to the aerospace industry. Analyst Joshua Aguilar says Honeywell is a perfect stock for his Warren Buffett-inspired "Buy America" investing theme. Buffett is well-known for buying stocks that have strong business fundamentals during times of panic and fear in the market. Aguilar says Honeywell is the perfect "Buy America" stock because of its track record of success and its favorable positioning in high-growth markets such as e-commerce and industrial automation. Morningstar has a "buy" rating and $188 fair value estimate for HON stock.
United Technologies Corp. (UTX)
United Technologies is a U.S. industrial conglomerate that manufactures products such as aircraft engines, aerospace systems, HVAC units and elevators. Aguilar says United Technologies is another great "Buy America" stock pick. He says management's decision to spin off both its Otis (elevator) and Carrier (commercial and residential HVAC) businesses will unlock shareholder value. The company remaining following the 2018 merger with Rockwell Collins and the two spin-offs will leave United with an unparalleled aerospace portfolio, Aguilar says. Morningstar has a "buy" rating and $159 fair value estimate for UTX stock.
Reliable cash cow stocks to buy now:
-- Coca-Cola Co. (KO)
-- Merck & Co. (MRK)
-- Bank of America Corp. (BAC)
-- Cisco Systems (CSCO)
-- Salesforce.com (CRM)
-- Philip Morris International (PM)
-- Honeywell International (HON)
-- United Technologies Corp. (UTX)
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