Buying and holding solid stocks is the best way to predictably create wealth over the long term. But finding the stocks with the highest chance to increase in value while minimizing risk -- both key goals of conservative investors -- is easier said than done.
To that end, one effective method is to focus on stocks that are undervalued relative to their worth. So we asked three top Motley Fool investors to each choose a value stock that conservative investors can appreciate. Read on to learn why they chose Disney (DIS -0.62%), LyondellBasell (LYB -1.48%), and Pfizer (PFE 1.28%)
An unmatched entertainment leader
Steve Symington (Disney): Shares of Walt Disney currently trade at just 19.3 times trailing 12-month earnings and 16.9 times this year's estimates. Both are modestly below Disney's respective five-year averages, and they represent what I believe is an attractive entry point for investors looking to open or add to a position in the world-leading entertainment conglomerate.
To be sure, Disney not only benefits from its namesake channels, movie studios, and parks and resorts, but also has repeatedly proven its ability to make the most of its astute acquisitions of Pixar, Marvel Entertainment, and Lucasfilm. That's not to mention its ownership of ABC, 50% of A&E Networks, and an 80% stake in ESPN. Disney also aims to return around 20% of the cash it generates to shareholders through dividends and stock repurchases, with the former equating to a healthy 1.53% annual yield at today's prices.
More recently, of course, Disney stock rose after it announced a mammoth $52.4 billion all-stock deal to acquire most of the assets of Twenty-First Century Fox (FOX) (FOXA). Assuming the deal closes as expected by the middle of 2018, that will mean Disney also owns National Geographic, FX Networks, Fox Sports Regional Networks, a controlling stake in Hulu, a 39% stake in European Satellite provider Sky, Star in India, and the rights to blockbuster properties including Avatar, X-Men, Fantastic Four, and Deadpool.
The larger stake in Hulu also gives Disney the scale it will need to more effectively implement plans for an ESPN-branded streaming service next year, followed by a Disney- and Pixar-branded streaming service in 2019.
All told, I think conservative investors who buy now and watch Disney's plans come to fruition over the next few years will be handsomely rewarded in the process.
A value-priced chemical giant
John Bromels (LyondellBasell) There are some chemical companies you've heard of and others you haven't. Most of you have probably heard of 3M's Scotch tape or DowDuPont's Corian countertops or Tyvek construction wrap. But if you're a conservative investor looking for a great value stock in the chemical industry, you might consider a company whose products you've never heard of, LyondellBasell.
While LyondellBasell is young and small compared to century-old 3M and DowDuPont, its $41.8 billion market cap still makes it one of the biggest chemical companies in the U.S. And instead of brand-name chemical products, LyondellBasell makes basic industrial chemicals like denatured alcohol, hydrogen peroxide, ethanol, and methanol. The company also refines fuel and manufactures some plastics. This diverse "nuts and bolts" portfolio helps keep demand steady even as individual industries ebb and flow.
Here's the best part for value investors: LyondellBasell's dividend yield, currently about 3.4%, is best-in-class, and its forward P/E ratio of about 10 times expected earnings is much lower than DowDuPont's 17 times or 3M's 26 times. Even better, while the stock's price has risen consistently over the last five years -- up 97.1% -- it hasn't grown as fast as its larger peers. This "slow and steady" performance should satisfy conservative investors for years to come.
A longtime big pharma winner
Keith Speights (Pfizer): Conservative investors tend to like stocks that have proven they can survive and thrive over a long period of time. Pfizer certainly meets that qualification, with the company's roots going back all the way to 1849 when two cousins founded Charles Pfizer and Company. Since then, Pfizer has grown to become the world's largest pharmaceutical company in terms of prescription drug sales. Pfizer's market cap now tops $200 billion.
Even better news for conservative investors is that Pfizer stock is valued attractively. The drugmaker's shares currently trade at only 13 times expected earnings. That forward earnings multiple is well below that of the S&P 500 index and below the average of healthcare stocks in the S&P 500.
In addition to its relatively low valuation, Pfizer also pays out one of the best dividends in the healthcare sector. The company's dividend currently yields north of 3.6%. Pfizer has steadily increased its dividend in recent years, and the company's executives continue to rank dividend payouts at the top of capital allocation priorities.
Pfizer won't generate awe-inspiring growth, but the big pharma's future potential looks pretty good. Wall Street analysts project that Pfizer will increase earnings by around 6% annually in the coming years, well above the company's earnings growth over the past five years. Pfizer has several strong current products, particularly blood thinner Eliquis and cancer drug Ibrance, along with a deep pipeline, which should drive earnings higher in the future.
The bottom line
There's no way to guarantee that Disney, LyondellBasell, or Pfizer will continue to beat the market from here. But we're also talking about longtime industry leaders with a history of rewarding investors with both capital returns and good old-fashioned share price appreciation. Coupled with their attractive valuations right now, it's clear that conservative investors would do well to give these three strong businesses a closer look.