Over the past several years, large-cap stocks have been on a tear, with many large-cap indices showing a nearly doubling in total returns since 2012. And for good reason, since many of the best, most-dominant companies are the ones that already have an established market position and the resources that come along with scale.
While there's an argument to be made that many large-cap stocks are overvalued, there are still a handful of big companies worth owning. Our contributors offer up three -- Johnson & Johnson (JNJ +0.44%), Visa Inc (V 3.28%), and Walt Disney Co (DIS 2.46%) -- that they think are ideal large-cap stocks for your retirement.
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Keep reading to learn what sets these companies apart, and why retirement investors should consider them.
For a healthy portfolio
Demitri Kalogeropoulos (Johnson & Johnson): Johnson & Johnson's market capitalization is over $300 billion, but in some ways, the Dow giant's expansion opportunities are comparable to those usually reserved for smaller companies. For one, it enjoys a dominant position in a $6 trillion healthcare industry that has a long runway for growth -- both in aging rich economies like the U.S. and in emerging markets that are seeing their middle classes blossom.
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Second, Johnson & Johnson is really a collection of several businesses, each with its own attractive operating strengths. The pharmaceutical segment gets most of the attention, and for good reason. A massive pipeline of global blockbuster drugs helped produce a 7% spike in sales in that division last year. Johnson & Johnson's consumer segment's 1.5% decline looks worse in comparison, but that division still improved its sales trends sharply over the prior year and gained market share thanks to franchises like Listerine and Neutrogena. Finally, there's medical devices, which produces highly profitable products for surgeons and doctors. The segment was flat last year, but it's likely to speed up as the company doubles its product launches in 2017.
These diverse businesses benefit by being under the Johnson & Johnson umbrella, given that the company has the financial strength to devote over $9 billion each year into research and development. That how their innovative pipelines stay packed with improved intellectual property that keeps them a step ahead of smaller rivals. This simple formula has helped the stock outperform the broader market for decades, and it should serve investors well over the years ahead.
Giving credit where credit is due
Sean Williams (Visa): Adding large-cap stocks to your retirement portfolio shouldn't mean you have to add stodgy, slow-growth companies. One company that looks to bring some excitement to your retirement portfolio, and offers the expectation of long-term dividend growth, is payment processing facilitator Visa.
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Visa is a credit payment processing giant. According to WalletHub, it holds more than half (50.6%) of all U.S. market network purchase volume market share, which is nearly 28% higher than its next-closest competitor, which is American Express (AXP 2.32%). To add, the barrier to entry in payment facilitating is very high. It takes a lot of money and time to set up the network infrastructure necessary to process transactions and build rapport with merchants. That means Visa has a very well-defined, but small, group of competitors.
It's also important to point out that Visa, unlike some of its peers, such as AmEx, deal solely with transaction processing and aren't lenders. Though the lending aspect allows a company like American Express to double-dip with interest on its loans and payment processing fees, it also leaves AmEx exposed to delinquencies during inevitable recessions. With no exposure to delinquencies, recessions have far less of an impact on a global company like Visa.
Speaking of global opportunities, Visa's international growth potential is also massive, even if it's pretty reliant on domestic markets and developed countries to drive growth at the moment. Currently underdeveloped regions like Southeast Asia, Africa, and the Middle East offer double-digit percentage growth over the long run.
Even though Visa's current yield is less than 1%, the company has doubled its payout in less than four years and offers a low payout ratio of just 20% at the moment. Visa's capital expenses remain high as it establishes its presence in underdeveloped regions, but as its spending dips in the years and decades to come, once its infrastructure is in place, Visa's dividend could soar.
Don't let short-term disruptions make you miss the long-term value
Jason Hall (Disney): I won't beat around the bush: Disney's TV network business is hurting. People are cutting the cord, reducing the economic value for the House of Mouse's uber-profitable ESPN franchise of channels. And the timing couldn't be much worse, with ESPN's content costs steadily rising with each new major sports broadcasting right contract coming online. This led the cable networks segment to report a 3% decline in operating income last quarter, even with revenues up 2.7% on higher fees and advertising.
Image source: Disney.
But there's a big difference between a disruption in the format people use to consume content and a lack of interest in the content. And that's what keeps Disney as relevant an investment in a streaming world as it has been for years in the cable TV-driven media consumption model. Disney owns the most valuable collection of entertainment properties in the world. And there's no doubt the company will be able to monetize those properties, no matter how people's preferences for consumption change over time.
Disney already shows this in its current operating model, seeing strong growth at its theme parks and resorts more than make up for weakness in cable this past quarter, and operating income from its studios grow more than 20% as well.
Trading at 19 times earnings, Disney is fairly valued; it's maybe even a little cheap for such a high-quality company. Most importantly, its collection of content and properties are likely to have people paying to enjoy -- both in person and virtually -- for decades to come. A perfect stock for retirement investors.
