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3 Top Stocks for Risk-Averse Investors

By Matthew DiLallo - Jul 18, 2017 at 1:30PM

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These three companies have strong financial profiles, relatively inexpensive valuations, and visible growth prospects.

Some investors just can't stomach losing a significant chunk of their net worth in a short period of time. However, instead of avoiding the market altogether to steer clear of that risk, a better option would be to invest in stocks that have lower risk profiles. Three options that risk-averse investors should love are TransCanada (TRP 1.77%), Brookfield Renewable Partners (BEP 0.32%), and Medical Properties Trust (MPW 0.00%). Not only do all three have rock-solid financials and pay a pretty compelling dividend, but each has visible growth prospects on the horizon that should enable investors to earn a solid return with less risk.

A pillar of strength

Canadian gas pipeline giant TransCanada operates a low-risk business model since regulated assets and long-term contracts support 95% of its annual EBITDA (earnings before interest, taxes, depreciation, and amortization). The company further minimizes risk by maintaining a top-tier balance sheet, complete with an 'A' credit rating and a low leverage ratio. In addition, TransCanada typically pays out less than half its cash flow in dividends, using the rest to help finance growth projects. Even with that low-end payout ratio for a pipeline company, TransCanada still yields a compelling 3.6%.

Safe and Risky signs.

Keep reading to learn more about these safer stocks. Image source: Getty Images.

TransCanada uses its retained cash flow and top-notch balance sheet to build and buy additional assets that generate stable earnings. In fact, the company currently has 25 billion Canadian dollars' ($19.7 billion) worth of growth projects underway, which should expand its cash flow at a healthy clip, enabling the company to increase the dividend by an 8% to 10% compound annual rate through 2020. 

Typically, a company growing that fast with such a sound financial profile would trade for a premium valuation. However, that's not the case at TransCanada, which only trades at a mid-teens multiple of its cash flow. While that doesn't make it the cheapest pipeline stock, the company does trade at a much lower valuation than the broader market, which fetches more than 25 times earnings these days.

A steady stream of growth

Hydropower company Brookfield Renewable Partners also has a very sound financial profile. For example, it too generates stable cash flow since long-term contracts underpin 92% of its funds from operations (FFO). Meanwhile, the company also has a solid balance sheet, including an investment grade credit rating backed by a low debt-to-capitalization ratio of 38%. Finally, the company has a conservative payout ratio of 70% of its annual FFO. These factors suggest that its 6.2% distribution is on rock-solid ground.

Because of its healthy finances, Brookfield Renewable Partners has high confidence that it can increase its payout by 5% to 9% annually over the long-term, driven primarily by the wind and hydro assets it has in development. Meanwhile, the company expects to use its balance sheet strength to invest $500 million-$600 million per year in acquiring additional assets, which could enable it to deliver double-digit annual growth. It's growth that investors can currently buy for a good price since Brookfield Renewable Partners trades at a discount compared to peers.

Compass with needle pointing to the word "opportunity."

Image source: Getty Images.

Healthy income you can bank on

Hospital property-owning REIT Medical Properties Trust shares many of the same risk-mitigating characteristics as Brookfield and TransCanada. For example, the company generates stable cash flow since virtually all its revenue comes from lease and mortgage payments. Meanwhile, the company ended the first quarter with a historically low leverage ratio of 4.5 times debt-to-EBITDA after completing an equity offering that further strengthened its sector leading balance sheet. For comparison's sake, leading healthcare REIT Welltower (WELL 0.79%) ended the same quarter with 5.26 times debt-to-EBITDA. Finally, the company only pays out about 70% of its cash flow in dividends, which is a stronger coverage ratio than Welltower since it paid out 83% of its earnings last quarter.

Medical Properties Trust doesn't have the visible organic growth pipelines of TransCanada or Brookfield Renewable Partners, though it still has growth on the horizon. That's because the company recently announced a deal to buy $1.4 billion in properties in a transaction that would be immediately accretive to FFO on a per share basis by about 7% while still maintaining its top-tier balance sheet. Further, given that hospital operators currently own the bulk of their real estate assets, the company believes it can continue buying $500 million to $1 billion of properties each year. 

Meanwhile, despite the company's excellent financial profile and healthy growth prospects, it trades at less than 10 times 2017 FFO guidance, which is embarrassingly cheap compared to Welltower's roughly 18 times FFO multiple. That's one reason why Medical Properties Trust yields an eye-catching 7.6% while Welltower's payout is a bit less impressive at 4.7%. 

Investor takeaway

These three stocks offer layer upon layer of risk protection, making them ideal for risk-averse investors. The most important factor is that secure contracts underpin more than 90% of their cash flow, which should enable these companies to generate stable income in any market condition. Meanwhile, they compliment that stability with conservative leverage and coverage ratios. Add in clearly visible growth prospects and below market valuations, and these three stocks should deliver solid risk-adjusted returns. 

Matt DiLallo owns shares of Brookfield Renewable Energy Partners and Medical Properties Trust. The Motley Fool recommends Welltower. The Motley Fool has a disclosure policy.

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Stocks Mentioned

TC Energy Corporation Stock Quote
TC Energy Corporation
$49.54 (1.77%) $0.86
Welltower Inc. Stock Quote
Welltower Inc.
$83.31 (0.79%) $0.65
Medical Properties Trust, Inc. Stock Quote
Medical Properties Trust, Inc.
$16.22 (0.00%) $0.00
Brookfield Renewable Partners L.P. Stock Quote
Brookfield Renewable Partners L.P.
$40.31 (0.32%) $0.13

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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