Earnings season is off to a strong start, and some of the best numbers are coming from the biggest companies in the market. As such, the S&P 500 is looking at finishing the month of July in positive territory.
The earnings power of large companies is quite substantial at the moment. A weak dollar benefits those companies doing business overseas. At the same time, valuations are low. The large-capitalization stocks are growing profits and doing so relatively safely. For whatever reason, the market has yet to fully value this earnings potential.
Today, then, investors can buy the safety of large-cap stocks without sacrificing the potential for significant gains. The best part is, while you wait for that appreciation, many of these big names pay a healthy dividend.
Here are five low-risk blue chips to consider for your portfolio:
Exxon Mobil
With oil hovering around $100, oil companies are printing cash. No wonder some leaders in Washington are targeting the industry for elimination of tax breaks. The rich do get richer. Exxon Mobil (NYSE:XOM) is up 16% in 2011, beating the market by a wide margin.
The company pays a dividend of 2.2%, and that’s likely to increase as Exxon profits from high oil prices. Analysts expect the company to make $8.69 per share in the current year. Given that Exxon has exceeded estimates in each of the past four quarters, it is likely it will do substantially better than that number.
Many expect crude prices to soften later in the year. If that doesn’t happen, expect Exxon to knock the cover off the ball from a profit perspective. Shares trade for less than 10 times current-year earnings estimates. I would be a buyer of this low-risk blue chip at these prices.
Coca-Cola
The beverage business is pretty simple, and Coca-Cola (NYSE:KO) is the dominant player in the space. It proved last week that it was performing better than rival Pepsi (NYSE:PEP) thanks to solid management decisions that helped the company navigate the recent inflationary spike in its raw material costs. Growth in overseas markets combined with increasing prices domestically helped the company exceed expectations in its latest quarterly report.
Shares of Coca-Cola are tracking closely to the overall market. The stock is up a solid 5% in 2011 and looking to appreciate further. The company pays a dividend of 2.7%. The total return for 2011, then, is likely to exceed double digits. Not a bad gain for a safe stock. Currently, shares of Coca-Cola trade for 18 times 2011 expected earnings.
I’d be a buyer, considering the stock is likely to deliver double-digit growth for the foreseeable future.
Phillip Morris
With the risk of litigation behind it, Phillip Morris (NYSE:PM) is free to pump out the cash. Despite the health hazard, smoking simply is a tough habit to break. In some markets, smoking is growing. Even domestically, look for smoking to show signs of a return given stresses caused by the economy. As a result of favorable operating conditions, Phillip Morris has gained an impressive 23% in 2011.
This classic low-risk blue-chip stock pays a dividend of 3.6%. I wouldn’t expect 20% gains in the stock from current levels, but consistent double-digit returns are going to be the norm with Phillip Morris. The stock is relatively recession-proof, making it unlikely you will get hurt owning this stock. Shares trade for a very modest 15 times earnings. Not bad for a company growing profits at a double-digit clip.
IBM
Big Blue is a stock that keeps on delivering. Not only is IBM (NYSE:IBM) a solid low-risk blue chip, but it is also a growth stock. Its mainframe and consulting business continue to grow impressively. With cloud computing, there is considerably more growth potential for IBM.
Shares of IBM have gained 25% so far this year and show no signs of slowing. In its most recently reported quarter, IBM made a profit of $3.09 per share. That beat estimates — as it has done for several quarters prior — by 6 cents per share. Despite the gains, shares still are cheap.
The average Wall Street estimate for earnings in the current year is $13.33. That number increases by 11% to $14.81 in 2012. Investors can buy that growth for less than 14 times estimated earnings. The company pays a smallish dividend of 1.6% that enhances the value of this low-priced blue-chip stock.
Apple
What more needs to be said about Apple (NASDAQ:AAPL)? The most closely watched and widely followed company in the stock market continues to crush earnings estimates. For a third straight quarter, the company beat expectations by more than a dollar per share. The most impressive result was just released for the second quarter of operations. Apple reported that it made $7.79 per share in profit. That beat estimates by darn near $2 per share.
The stock barely moved on the news, gaining less than 5% after the report was released. In the days since, shares of Apple have drifted higher and now trade above $400. Considering that we still are in the early stages of the smartphone and tablet computer revolution, the company is likely to continue its impressive performance.
Shares of Apple are cheap relative to cash on its balance sheet and operating growth potential yet to be tapped. Analysts are looking for the company to make $27.06 per share in the fiscal year ending Sept. 30, growing by 17% to $31.65 in the following year. You can buy that growth for less than 15 times earnings at current prices.
