Blue Chips: How They’re Looking in This Market
Just like the U.S. economy, not all companies are experiencing the same level of business activity. However, among blue chips, there remain a number of great companies that are trading right around their all-time highs, and the kicker is that their stock market valuations are very reasonable.
Consider, for example, The Clorox Company (NYSE/CLX), a blue chip founded in 1913. This consumer goods company sells a number of household brand names in what are mature but stable businesses. Some of the company’s brands include “Pine-Sol” cleaner, “Kingsford” charcoal, “Brita” water filtration products, “Glad” plastic bags, and “Burt’s Bees” skin care products. Clorox is a blue chip company with an excellent long-term track record on the stock market. The company’s recent stock chart is below.
Chart courtesy of www.StockCharts.com
Clorox just reported its financial results for its fiscal first quarter of 2013, ended September 30, 2012. According to the company, it generated three percent in sales growth for the quarter, with a gross margin of 42.9%, up from 41.8%. Net earnings were $133.0 million, or $1.01 per diluted share, compared to $130.0 million, or $0.98 per diluted share. Of course, this might not seem like enough growth to even warrant consideration by stock market investors. But, when you consider the company’s $0.64-per-share quarterly dividend (providing a current dividend yield of 3.5%), the fact that the company has increased its annual dividend each year for the last 11 years, and the idea that the U.S. economy is not growing faster than the rate of inflation, a stable blue chip like Clorox doesn’t sound all that bad.
What we’ve seen over the last dozen years or so since the technology bubble burst is a migration on the part of stock market investors to more stable blue chip stocks that offer higher dividends. This migration to blue chips was particularly evident after the most recent financial crisis. Companies like Caterpillar Inc. (NYSE/CAT), The Walt Disney Company (NYSE/DIS), International Business Machines Corporation (NYSE/IBM), and Automatic Data Processing, Inc. (NASDAQ/ADP; NYSE/ADP) have recovered strongly on the stock market. (See “Want a Stock Hitting a Record High? Bring on the Dish Soap.”)
While I’m not particularly enthusiastic about corporate earnings growth in 2013, I believe that the stock market is appropriately valued giving current earnings and the outlook. And because of this, I don’t expect the stock market to come crashing down on its own. What I’d like to see is a meaningful price correction on the stock market to provide a more attractive buying opportunity in select blue chips.
Near-term difficulty in both the U.S. and the global economy will be related to sovereign debt. Corporations are doing their part for stock market investors, and this is why the outlook for a number of brand-name blue chip companies continues to be good. Large companies are still reticent to spend their cash hoards, but with a little more stability in the world, in terms of sovereign debt, incomes, and consumer spending, I think the corporate floodgates will soon open. We’re not on the cusp of a new business cycle yet, but it’s getting closer.