It's still an open question whether stocks are heading into an extended bear market or if the severe pullback this summer from the highs in late April is a just correction phase in a larger bullish pattern.
What seems certain is there will be plenty of volatility to deal with before the quandary gets resolved, and that's got investors looking for stocks that will hold steady when the broad market starts to yo-yo.
"The question on most investors' minds these days is: 'If or when will this become a new bear market, and what can one do to combat this incessant volatility?'," writes Sam Stovall, chief equity strategist at Standard & Poor's, in commentary on Monday.
In an effort to answer that question, Stovall ran a screen to look for highly rated stocks with above-average dividend yields and reasonable valuations that tend to be less volatile than the broad market.
"Looking at volatility from a different perspective, we see that within the S&P 500, the stocks that pay a dividend recorded less of an average [year to date] decline than those that paid no dividend," he says.
"Also, dividend payers had a lower average beta and a higher average S&P Quality Ranking, implying that they showed a higher consistency of raising earnings and dividends in each of the past 10 years."
The concept of beta uses regression analysis to quantify how a stock reacts to market volatility. A level of 1 indicates the stock tends to move in tandem with the broad market, above 1 is more volatile and below 1 is less.
S&P's analysis also found companies in the S&P 500 that pay a dividend have posted an average year-to-date decline of 3.8 percent on a total return basis vs. 7.4 percent for companies that don't pay one.
To make the list, companies had to rank highly on S&P's proprietary STARS, Fair Value (at least 4 on a scale of 5 on both counts) and Quality Ranking (a minimum of A-) metrics.
In discussing each, the concentration will be on beta and dividend yield.
The stock with the lowest beta was Abbott Laboratories at 0.30. The drug maker's shares also have a healthy forward annual yield of 3.8 percent at current levels in the low $50s. The stock closed Monday at $50.75, down 21 cents.
Abbott has beaten Wall Street's earnings expectations in the past eight quarters but it's not really doing much more than that, typically coming in one cent ahead. Jefferies & Co. initiated coverage of the stock with a buy rating last week and a 12-month price target of $60, saying Abbott trades at an "unwarranted discount" to its peers.
"Fears of new competition to Humira are overdone, in our view, and have clouded investors' ability to appreciate the company's growth potential," the firm said on Sept. 20. "We see numerous R&D catalysts and above-consensus revenue and EPS projections which should unlock significant value over the next 12 months."
The other drug company on the list was Baxter International , checking in with a beta of 0.53 and a forward annual yield of 2.3 percent. The stock finished Monday at $54.33, up 1.6 percent, and has held up well so far in 2011, rising more than 6 percent.
Wall Street is pretty bullish on Baxter, with 14 of the 20 analysts covering the stock at either strong buy (6) or buy (8) with a median 12-month price target of $67 implying potential upside of 24 percent from current levels.
Big oil is also well represented with Chevron and Exxon Mobil . The stocks have betas of 0.77 and 0.51, respectively, with forward annual dividend yields of 3.4 percent and 2.7 percent.
Exxon shares closed Monday at $71.72, enjoying a 3 percent-plus bounce. The Dow component is an earnings juggernaut with net income seen topping $40 billion in 2011 on revenue of more than $470 billion. With a forward price-to-earnings multiple of 8X, the stock trades at a discount to the S&P 500, which is trading at around 12X.
Chevron is even cheaper with a forward P/E of 6.9X, and after closing Monday at $91.49, it's down a little over 1 percent year-to-date. Wall Street is very bullish on Chevron right now, with 19 of the 23 analysts covering the stock rating it at either strong buy (9) or buy (10).
Two big retail names also make the cut with Target and Wal-Mart coming in with betas of 0.91 and 0.32 respectively, and dividend yields of 2.3 percent and 2.9 percent.
Dow component Wal-Mart has topped out on growth in its U.S. stores for now, struggling to deliver same-store sales at its domestic locations, and its stock has stalled as well, falling 6 percent so far in 2011. The shares closed Monday at $51.83, up 2 percent.
Target has fared worse, however, with shares down nearly 20 percent this year, although the recent furious excitement about the launch of the Missoni line of products may be a sign of better things to come. The stock finished Monday at $50.62, up 3 percent.
The financial sector's representation consists of insurance giant Chubb and Paramus, N.J.-based bank holding company Hudson City Bancorp .
Chubb has a beta of 0.49 and a forward annual dividend yield of 2.6 percent, and the company has been on a roll of late, beating analyst expectations in eight straight quarters, including a 20%-plus beat in its fiscal second quarter ended in June.
Hurricane Irene, however, is expected to take a decent bite out of the company's third-quarter profits with Evercore Partners recently lowering its earnings estimate by 25 cents to 60 cents a share from 80 cents a share, putting Chubb's loss from the storm at around $350 million. Chubb shares closed Monday at $59.38, up 2.6 percent.
Hudson City's beta is at 0.64, according to S&P, while its forward annual yield is a whopping 5.8 percent at current levels, evidence of the stock's nearly 57 percent decline so far in 2011.
The company undertook a major restructuring of its balance sheet in the first quarter, posting a loss and lowering its dividend to the current quarterly payout of 8 cents a share from its prior level of 15 cents at that time as it continues to deal with non-performing loans.
Wall Street is skeptical, to say the least, with 20 of the 21 analysts covering Hudson City shares at hold (18) or underperform (20). The stock finished Monday at $5.81, up 3.4 percent.
Rounding out the list is Harris Corp. with a beta of 0.88 and a forward annual dividend yield of 3.2 percent. The Melbourne, Fla.-based communications equipment company is the only tech name on the list, and its stock has lost more than 20 percent year-to-date.
The company is slated to report its fiscal first-quarter results on Oct. 26, and the average estimate of analysts polled by Thomson Reuters is for earnings of $1.05 a share on revenue of $1.46 billion in the September-ended quarter.
Last time around, Harris delivered what it termed a "solid" in-line profit, and unveiled plans to return cash to shareholders in the form of a $1 billion buyback program and a 12% quarterly dividend boost to 28 cents a share. The shares settled at $36.28 on Monday, gaining 2.1 percent.
So there are a few names worth checking out as stocks wrestle with so much uncertainty.
While the jury is out on the current state of the market, Stovall notes that a bear market historically takes a while to reveal itself, with the 12 bear markets since 1946 taking an average of nine months for the S&P 500 to come down a full 20 percent.
He also observes the average bear market fell another 13 percent from that point, giving a clue to where the bottom may be if things do indeed take another turn for the worse.
"Therefore, if the current decline were to become another bear market and follow the historical pattern (and there's no guarantee it will), the S&P 500 will cross the 20 percent decline threshold by January 2012 (closing below 1091) and ultimately bottom in the low 900s by mid-2012," he writes.
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