Three Defensive Blue Chips

By Chloe Lutts

Three Defensive Blue Chips

Brazilian Beer Drinkers

Scared Investors

I’m always noticing trends in the stocks recommended in the Dick Davis Digests. When markets are choppy, advisors recommend a lot of conservative stocks and value stocks that look like good bargains. Sectors like health care and technology and retail have phases as well, driven by news, economic reports and sentiment. And natural resources and gold have seen some of the biggest popularity booms recently, with interest spiking every time the international financial system takes a hit.

Every once in a while though, I find a cluster of stocks so closely related that it surprises me. Last week’s Dick Davis Dividend Digest featured just such a group.

In the August 19 issue of The Spear Report, Gregory Spear wrote about Brazil’s largest beer and soft drink company, Companhia de Bebidas Das Americas (ABV), better known as AmBev.

In the August 23 issue of Special Investment Situations, George Southerland recommended PepsiCo (PEP) as “an attractive refuge for investors in this troubled market.”

And Richard Young chose Coca-Cola (KO) as his top pick for the month in the September issue of Richard C. Young’s Intelligence Report.

Their similar products were what got my attention, but it turns out these companies have more in common than selling soda.

Each stock pays a regular dividend. KO and PEP are both dividend aristocrats, with 49 and 39 straight years of dividend increases, respectively. KO currently pays a quarterly dividend of 47 cents, for a yield of 2.7%, while PEP pays a 52-cent quarterly dividend, for a 3.4% annual yield. ABV, as a foreign stock trading as an American Depositary Receipt (ADR), pays less predictable dividends (as well as interest on capital distributions), but it has the highest yield of the three, at 4.4%.

All three stocks are also plays on emerging market consumers. Brazilian AmBev is the largest beer company in Latin America, and sells beverages in 14 countries. George Southerland wrote of PepsiCo, “The company generates 30% of sales in developing countries, more than any other major U.S. food or beverage producer with the probable exception of Coke, which doesn’t break out revenue by region.”

While the U.S. economy is showing weakness, emerging market consumers’ disposable incomes are still increasing as living standards improve. In his AmBev recommendation, Gregory Spear wrote, “Global demand for beer has grown at a 3.5% annual clip over the last five years, but beer consumption in emerging markets is increasing at twice that pace. A surging middle class and an increase in minimum wage are key catalysts in Brazil going forward. … Over the last eight years, 32 million Brazilians moved up from poverty to the beer-drinking middle class. Brazil is the world’s third largest market for beer after China and the U.S. The Brazilian beer market is growing at a 5% clip, a pace second only to China’s. Per capita beer consumption in Brazil is increasing 8% annually.”

A similar story is unfolding in the soft drink market. Richard Young writes: “In 2010, the average U.S. resident drank 394 servings of Coca-Cola Company products, while citizens of the world’s two most populated countries, India and China, drank only 11 and 34 servings each. If per capita consumption in China and India rose to the U.S. average of 394, sales volume at the Coca-Cola Company would increase by over 153%.”

The final thread tying Coke, Pepsi and AmBev together is investor perception. As well-established, dividend-paying consumer staples companies with exposure to international markets, all three are considered “defensive” and “conservative.”

A glance at the headlines of recent stories involving these companies turns up “Five Defensive Stocks for Safety and Protection,” “Five Stocks to Buy Regardless of Economic Status” and “Five Dividend Stocks to Hold Forever.” When investors start running scared, these are the stocks they run to. Coca-Cola and AmBev are showing especially strong relative strength against this unpleasant market; below is a chart of KO (blue), ABV (yellow) and the Dow Jones (red) over the past three months.

Chart for 9/13/11 issue
 
It’s clear that investors think of these blue chips as safe places to put their money when everything else seems to be crumbling. And seeing all three recommended in the same short time span tells me that Southerland, Spear and Young aren’t likely to be the only investing experts with this idea (and the charts confirm that). Below are the rest of their recommendations, as printed in the Digest:

The Coca-Cola Company (KO 69.43 NYSE – yield 2.70%) has paid a dividend every year since 1893 and increased its dividend for the last 49 years. Over the last decade, dividends have compounded at 9.35% annually. … Coke has used its powerful brand to stake claims in emerging countries like China and Russia, where, in the second quarter, volume increased by 24% and 17%, respectively. Coca-Cola’s potential for expansion overseas is nowhere near exhausted. Coke’s fastest-growing markets have low per capita serving consumption compared to the United States. In 2010, the average U.S. resident drank 394 servings of Coca-Cola Company products, while citizens of the world’s two most populated countries, India and China, drank only 11 and 34 servings each. If per capita consumption in China and India rose to the U.S. average of 394, sales volume at the Coca-Cola Company would increase by over 153%. … The cultivation of brand value and strong presence in emerging markets makes Coke my top pick this month. Buy KO today.”–Richard C. Young, Richard C. Young’s Intelligence Report, September 2011

Companhia de Bebidas Das Americas (ABV 33.43 NYSE – yield 4.40%), or AmBev, is a Sao Paulo-based beer and soft-drink company founded in 1888, two years after Coca-Cola (KO). Its market cap is about 2/3 the size of KO, but its stock has far outperformed KO over the past decade and ABV pays a much higher dividend. … AmBev’s 7,500 employees and 21 plants produce a wide variety of beverages, including soft drinks, teas and bottled water, but the company is known for its beer. AmBev is the largest beer company in Latin America and the largest retail-related company in Brazil. … Brazil is the world’s third largest market for beer after China and the U.S. The Brazilian beer market is growing at a 5% clip, a pace second only to China’s. … The company’s soft drink business is growing just as fast as beer. AmBev is a Pepsi licensee, but has its own guarana-based alternative energy-boosting soft drink. The guarana product is the #2 selling soft drink in Brazil after Coca-Cola and ranks in the top 15 soft drink brands in the world. Revenues for the most recent reported quarter increased 6.2% to $3.5 billion. … We think ABV has a very bright future. Buy and hold.”–Gregory Spear, The Spear Report, 8/19/11

“An attractive refuge for investors in this troubled market might be PepsiCo, Inc. (PEP 62.45 NYSE – yield 3.30%) with its dominant position in snack foods and strength in beverages. PepsiCo boasts 19 brands with $1 billion or more of annual sales, led by Pepsi-Cola, Mountain Dew, Lay’s potato chips, Gatorade and Tropicana juices. And the company generates 30% of sales in developing countries, more than any other major U.S. food or beverage producer with the probable exception of Coke, which doesn’t break out revenue by region. PEP reported EPS at $1.21 for Q2, up 10% from the prior year. … The shares now trade at 13.9 times projected profit of $4.46 a share and 12.7 times expected 2012 earnings of $4.87 per share. This multiple is a significant discount to that of Coke as well as food companies HJ Heinz (HNZ), Kraft (KFT) and General Mills (GIS). This discount appears unwarranted when considering PepsiCo’s long-term earnings outlook, growth potential in the developing world and the ownership of Frito-Lay, which controls over 60% of the domestic market for salty snacks. [PEP] also has a solid dividend, recently raised for the 39th straight year.”–George Southerland, Special Investment Situations, 8/23/11

Wishing you success in your investing and beyond,

Chloe Lutts
Editor of Investment of the Week

P.S. To learn more about top-rated dividend-paying stocks like the one mentioned above, check out Dick Davis Dividend Digest, where Chloe Lutts selects the very best recommendations from the top advisors on Wall Street each and every month. She reads hundreds of newsletters so you don’t have to, saving you time and money. Learn more today!

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