How to Diversify Your Portfolio?
Beat the CPI: 7 Blue-Chip Stocks Growing Faster Than Inflation
Great Dividend Earning Stocks!
An investor is unlikely to beat inflation by simply holding funds in a bank account. In such a scenario, there will be a continued loss of purchasing power due to inflation increasing faster than average interest rates. Therefore, there needs to be diversification across asset classes. Within equities, quality growth stocks can provide robust returns. However, investors need to balance between growth and blue-chip stocks to lower the portfolio beta.
Blue-chip stocks might not deliver 10x or 20x returns in five years like some growth stocks. However, there are blue-chip ideas that can generate returns that consistently beat the rate of inflation. This article focuses on seven fundamentally strong blue-chip names with high cash flow potential. Further, these stocks seem attractively valued and the upside potential is meaningful from current levels.
Let’s discuss the reasons to be bullish on these blue-chip stocks to buy.
1. Lockheed Martin (LMT)
Overview: Lockheed Martin is a global aerospace, defense, and security company.
- Reasons to be Bullish:
- Order Backlog: As of March, Lockheed reported an order backlog of $159 billion, ensuring revenue and cash flow visibility.
- Free Cash Flow: The company has guided for free cash flow of $6.2 billion in 2024.
- Technological Investments: Investing in next-generation defense technologies like hypersonic systems and advanced microelectronics.
- International Collaborations: Working with 50 countries, which is expected to increase international revenue.
- Valuation: Attractive at a forward P/E of 17.8x with a dividend yield of 2.7%.
2. Chevron Corporation (CVX)
Overview: Chevron is a major integrated energy company involved in every aspect of the oil, natural gas, and geothermal energy industries.
- Reasons to be Bullish:
- Investment Grade Balance Sheet: Provides flexibility for aggressive investments.
- Low Break-even Oil Assets: Ensures robust operating and free cash flows even if oil prices are around $80 per barrel.
- Operating Cash Flow: Reported $35.6 billion in 2023.
- Dividend Yield: Offers a healthy dividend yield of 4.17%.
- Growth Prospects: Potential upside in oil prices, acquisition of Hess Corporation, and organic production growth.
3. Newmont Corporation (NEM)
Overview: Newmont is one of the world's largest gold mining companies.
- Reasons to be Bullish:
- High-Quality Assets: Portfolio of ten tier-one assets.
- Gold Reserves: 128 million ounces of gold reserves as of 2023.
- EBITDA: Reported adjusted EBITDA of $4.2 billion in 2023; expected to exceed $5 billion with higher gold prices and the acquisition of Newcrest Mining.
- Valuation: Undervalued at a forward P/E of 15.3x with a dividend yield of 2.4%.
4. Starbucks (SBUX)
Overview: Starbucks is a global coffeehouse chain.
- Reasons to be Bullish:
- Valuation Gap: After a 23% correction in the last 12 months, the stock seems to have bottomed out.
- Analyst Price Targets: The most bearish target is $77, with optimistic targets up to $112, implying significant upside potential.
- Dividend Yield: Offers a healthy dividend yield of 2.96%.
- Cash Flow: Continues to deliver robust cash flows despite recent revenue declines.
- Growth Prospects: Management remains optimistic on long-term outlook with growth potential in new markets.
5. Altria (MO)
Overview: Altria is a leading tobacco company.
- Reasons to be Bullish:
- Dividend Yield: Offers a robust dividend yield of 8.52%.
- Smokable Business: Remains the cash cow ensuring steady dividends.
- Non-Smokable Investments: Aggressive investment in non-smokable products, including the FDA-authorized menthol e-vapor product by NJOY.
- Market Share: Gaining market share in the oral tobacco category.
- Valuation: Undervalued levels with potential for healthy returns.
6. Merck (MRK)
Overview: Merck is a leading pharmaceutical company.
- Reasons to be Bullish:
- Late-Stage Clinical Development: 80 programs in the second phase and 30 in the third phase, providing revenue growth visibility.
- Oncology Pipeline: Expected opportunity of $20 billion in sales by mid-2035.
- Revenue Growth: Reported 9% sales growth year-over-year in Q1 2024.
- Earnings Growth: Non-GAAP EPS increased by 48% year-over-year.
- Valuation: Attractive at a forward P/E of 14.9x with a dividend yield of 2.41%.
7. Rio Tinto (RIO)
Overview: Rio Tinto is a leading global mining and metals company.
- Reasons to be Bullish:
- Valuation: Undervalued at a forward P/E of 9x with a dividend yield of 7.77%.
- Free Cash Flow: Delivered an average annual free cash flow of $10.6 billion in the last five years.
- Commodity Business: Iron ore remains the cash flow driver.
- Energy Transition Investments: Investing in metals supporting global energy transition, such as copper, aluminium, and lithium.
- Economic Outlook: Potential expansionary policies supporting global GDP growth.
Conclusion
Investing in blue-chip stocks provides a blend of stability, growth, and income, making them attractive options for beating inflation and achieving long-term financial goals. The seven stocks mentioned in this article—Lockheed Martin, Chevron Corporation, Newmont Corporation, Starbucks, Altria, Merck, and Rio Tinto—offer a combination of solid fundamentals, attractive valuations, and robust dividend yields. These factors make them compelling additions to a diversified investment portfolio aimed at outperforming inflation.