Investing in stocks involves risk, but smart investors manage that risk to identify stocks that have strong return potential with minimal chances of potential losses. That balance can result in market-beating returns over the long run without the same volatility you'll see in the overall market. Let's learn why Ford (NYSE:F), Procter & Gamble (NYSE:PG), and Consolidated Edison (NYSE:ED) deserve a closer look to see if they belong in your portfolio.
Rev up your engines with Ford
Dan Caplinger (Ford): One way to find top stocks with low risk is to look for companies that have solid prospects but that have had their share prices beaten down. Ford is a good example, with the automaker having gone through some recent challenges that have caused a dramatic downdraft for the stock over the past couple of years. Auto sales remain strong overall, but Ford has seen some difficulties with demand for some of its U.S. models, including the key F-150 pickup truck. In October, Ford had to idle four plants briefly in order to let demand catch up to inventory, and some worry that overall industry sales figures will have to fall from their recent heights in the years to come.
For Ford investors, however, the stock already incorporates a great deal of that downbeat view. Shares currently trade at just seven times trailing earnings, and even though analysts expect somewhat of an earnings pullback for 2017, they don't see any threat to single-digit forward earnings multiples for the foreseeable future. That's a margin of safety you just won't find in many places in the stock market right now. With the potential to surprise on the upside with unexpected gains if sales don't deteriorate, Ford has a lot going for it right now.
A leaner and meaner company
Daniel Miller (Procter & Gamble): It's very likely you're aware of Procter & Gamble. After all, it's one of the world's largest consumer product manufacturers with a slew of household names, including Tide laundry detergent, Gillette razors, Charmin toilet paper, Pantene Shampoo, just to name a few. In fact P&G owns 22 brands that generate more than $1 billion in annual sales. If you're looking for a stable company with a long list of products that are necessities, this is a one-stop shop for investors looking for little to no risk.
The good news for investors is that P&G is putting the finishing touches on slimming down its portfolio of products after entering too many markets in too many categories too quickly. It trimmed roughly 70% of its brands, now with only 65 of its best and most proven brands and reduced the categories it participates in by 60%. The strategy has been that as the company sheds under performing brands in more competitive categories its top-line growth would return. That was the case in the first quarter of fiscal 2017 as its total organic sales checked in at 3% with increases in 9 out of its 10 largest markets.
Another reason that makes P&G much less risky than many stocks is its dedication to returning massive value to shareholders through dividends and buybacks. During fiscal 2016 P&G returned $15.6 billion to shareholders, and it expects that to reach $22 billion during fiscal 2017, and up to a staggering $70 billion between fiscal 2016 and fiscal 2019. On top of that, management believes it can generate $10 billion in productivity savings between fiscal 2017 and fiscal 2021.
P&G is leaner and meaner than it has been in recent years, and its focus on trimming brands and costs will ensure that its top and bottom line will continue improving in the near-term, and its focus on returning huge sums of capital to shareholders makes this one of the lowest risk investments in the market.
A defensive stock to suit your risk profile
Neha Chamaria (Consolidated Edison): If you have a low appetite for risk, your best bet would be a defensive stock that can make you money regardless of the business cycle. One way to find such a stock is to look for companies that provide essentials, the demand for which doesn't ebb and flow with the economy. Utilities like Consolidated Edison is a perfect example.
Having been around for almost two centuries now, Con Ed provides electricity and gas to more than ten million people in New York City and Westchester County. As the industry is highly regulated and has strong barriers to entry, Con Ed doesn't have to worry much about competition. To top that, Con Ed's rates are decoupled, which means its revenues are predetermined and don't depend on sales volumes. That's undoubtedly a huge advantage as it eliminates much of the uncertainty associated with profits and operating cash flows. For Con Ed investors, that has translated into 42 consecutive years of dividend increases.
In short, two factors make Con Ed a low-risk stock: A stable, non-cyclical business and solid shareholder returns. If you're worried a regulated business might mean muted earnings growth, you can take heart in Con Ed's ongoing efforts to tap growth opportunities in non-utility and renewables, including battery storage, electric vehicles, solar, and wind. I believe this diversification should not only help Con Ed expand its customer base but also push its earnings higher in the years to come. Overall, Con Ed is the kind of stock that will let you sleep at night while it fills your coffers. Psst...the stock's dividend yield has consistently kept its head above the 3% mark in the past decade.
Dan Caplinger owns shares of Ford. Daniel Miller owns shares of Ford. Neha Chamaria has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Ford. The Motley Fool has a disclosure policy.