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Fear returned for overseas investors this week as US equities fell further on Monday; the Nasdaq and the S&P 500 indexes ended the day at their lowest closing levels in more than a year.
Volatility in energy markets amid concerns about global oversupply, dragged down housing stocks – the 3.5% drop by the Philadelphia Housing Sector Index brought the index to its lowest closing level in more than a year – alongside telecoms, internet, biotechnology, computer hardware and banking stocks which also saw significant weakness.
The latest US economy data did not help matters. The US employment figures show that 151,000 jobs were created for the first month of 2016, below the market’s expectations of 190,000.
“Overall, these numbers are not a disaster but merely confirm a moderation of US economic activity,” Helal Miah, investment research analyst at The Share Centre says.
Amid rising concerns about global growth, Russ Koesterich, global chief investment strategist for BlackRock thinks as central banks are struggling to stimulate growth, markets are likely to remain volatile. Since no asset class has distinguished itself year-to-date, he suggests investors should focus on income paying stocks.
“Seeking income sources that can provide at least some cushion when the markets are gyrating. Specifically, stocks that are currently providing a mid-single-digit yield with more modest volatility,” he said.
These three US stocks, could well fit the bull as are all yielding a minimum of 4%, they were identified as paying above market average yield using Morningstar Select.
Philip Morris International (PM)
Philip Morris International is the world’s second-largest tobacco company. It is the largest publicly traded tobacco company in the world, with 28% global market share, excluding China and the US. The firm through its subsidiaries manufactures and sells cigarettes and other tobacco products in markets outside the United States of America. It owns seven of the leading 15 international brands. Marlboro, the company's flagship brand, accounted for about one third of total volume in 2014. The stock now yields at 4.5%. It is a fairly value stock.
Philip Morris’ industry fundamentals and manufacturers' cash flows remain stable despite the recent economic volatility, Morningstar analyst Philip Gorham says. Therefore the stock has a low Morningstar’s uncertainty rating.
The strength of the company’s product portfolio makes the firm the price leader in many international markets, Gorham says. Tobacco brands' intellectual property has created a loyalty among tobacco users toward the brands they enjoy.
In spite of the government regulation, the ban on advertising in fact helps to keep market shares stable and new entrants out, Gorham says. Also the company's platform of total tobacco products and e-cigarettes gives it economies of scope and scale that make it difficult for new entrants to gain the critical mass of volume necessary to compete.
Philip Morris International’s fourth-quarter business performance indicates that industry fundamentals are still strong. Philip Morris' profitability in emerging markets is a key differentiator against its competitors, and it has a strong presence in Asia. The advantage of selling in emerging markets is that volumes are in some cases, increasing.
Emerson Electric (EMR)
Emerson Electric is engaged in designing and supplying products and technology, and delivering engineering services and solutions in industrial, commercial and consumer markets. Primary products include motors, drives, actuators, valves, switches, test equipment, air conditioning compressors, electric tools, and home storage solutions. The stock now yields at 4%.
Emerson's exposure to the energy and oil crisis is mitigated by a diverse set of businesses and customers, reducing volatility to cash flow, Morningstar analyst Barbara Noverini says. It is proved by relatively steady returns on invested capital over the years.
Strong activity in U.S. construction markets benefited Emerson’s Climate and Commercial and Residential Solutions segments, which Noverini believes can support stronger underlying sales growth as the year progresses.
Also management is prepared to flex up restructuring programs should conditions weaken in Emerson's oil and gas-related businesses. Noverini expects improving sales in Emerson's residential, commercial, and consumer-focused businesses will also provide some counterbalance throughout fiscal 2016.
Mattel Inc (MAT)
Mattel designs, manufactures, and markets toy products through sales to its wholesale customers and directly to retail consumers. The products include fashion dolls, infant and preschool products, toy cars, and electrical vehicles, among others. Mattel's portfolio includes Barbie, Hot Wheels, Fisher-Price, and American Girl. In addition, it manufactures toy products for all segments internally and through outside manufacturers. The stock yields at 4.7%.
With a mature domestic toy market and foreign exchange headwinds, top-line growth has been difficult to achieve, despite opportunities in underpenetrated emerging markets, Morningstar analyst Jamie Katz says.
However, being one of the largest players in the toy industry, Mattel remains one of the preferred licensing partners with entertainment companies in movies and television. In addition, Mattel's three biggest outlets still represent 35% of sales, generating concerns about pricing power and profit margin that the firm can negotiate with key distributors. Mattel has some of the most popular toys in the industry.
Likewise, Katz feels more confident about prospects for the business now that a leadership team has been appointed and a new capital allocation plan has been articulated, along with firm financial goals.
Free cash flow that had been consistent made the firm friendly to income investors in the past, and management remains focused on maintaining its dividend after reinvesting in the business, says Katz.
Also, Mattel finally has a digital plan that includes strategic relationships with Google, Toy Talk, YouTube, Nickelodeon, and others, increasing brand visibility across multiple channels. This should help stem losses to other digital toy manufacturers and its peers.
But Katz thinks the full recovery will take a few more quarters as he expects global demand to grow moderately longer term.
