The past nine years have truly been incredible for long-term investors. Sure, we endured the steepest bear market decline we'd seen since the early 1930s, but we also subsequently witnessed an approximate quadrupling in the iconic Dow Jones Industrial Average and broad-based S&P 500 over this nine-year stretch.
Yet as investors, we also know that nothing goes up forever. Both the Dow and S&P 500 underwent their first corrections -- i.e., a loss of at least 10% from a recent high -- in two years in February. What's more, the Federal Reserve is in the midst of tightening its monetary policy. In plainer terms, interest rates are on the rise, which has a tendency to slow down demand for the relatively cheap loans that have been fueling corporate expansion and acquisitions. A rising rate environment has historically been bad news for the stock market, more often than not.
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Boring stocks can make for great investments during turbulent times
So, what's this mean for investors? It suggests the possibility that higher-growth, buzzier stocks, such as the FANG stocks, which have been go-to investments for years, might struggle to outperform if the U.S. economy slows or the stock market stalls. If a slowdown in growth is on the way -- and make no mistake, peaks and troughs in the economic growth cycle are inevitable -- the most lucrative investments could turn out to be "boring stocks" with time-tested business models.
What makes a stock boring? Ultimately, that definition is fluid and up to each individual investor. I'd personally define a boring business model as one that lacks flash and surprises. You as the investor know exactly what to expect year in and year out, with slow but steady growth being delivered on the top and bottom lines. Boring stocks also tend to offer above-average dividend yields, since their businesses are mature and often lack the ability to grow beyond the mid-single-digits from one year to the next, even with substantial reinvestment.
These boring stocks are often forgotten when the stock market is off to the races as their returns struggle to match the numbers from buzzier names like Facebook or Amazon, which offer a stronger growth rate. Yet, boring stocks tend to be less volatile during corrections and bear markets thanks to their steadier business models and predictable cash flow. They're arguably the truest examples of set-it-and-forget-it investments.
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Are these time-tested stocks right for you?
Right now, four of these so-called boring stocks are valued at fundamental levels we haven't seen in years. Might these stocks be the key to thriving during the next bear market?
AT&T
Telecom and content provider AT&T (T +1.21%) dove more than 4% -- a big move for this low-volatility stock -- last week after its first-quarter results modestly missed expectations. While the company has been adding postpaid wireless subscribers and grown its DirecTV streaming service, it's still witnessed a small decline in linear video subscribers as telecom peers have looked to undercut its pricing.
Yet, following its post-earnings decline, AT&T's forward P/E of 9.5 would be its lowest level since 2010. It's also now sporting a delectable and sustainable 6% dividend yield, which is close to three times the average yield of the S&P 500. Reinvesting this dividend, assuming a static share price, would double your money in about 12 years.
AT&T certainly doesn't offer flash, but it controls about a third of domestic wireless market share, and it has worked to grow DirecTV's streaming business following its acquisition of the satellite content provider in 2015. Further, investments being made in next-generation 5G wireless networks could provide the next long-term growth spark for AT&T.
Image source: Procter & Gamble.
Procter & Gamble
Procter & Gamble (PG +0.03%), the company behind Tide detergent and Crest toothpaste, among dozens of other owned brand-name consumer products, has struggled in recent quarters as online competitors like Amazon eat into traditional brick-and-mortar businesses and pressure the pricing of brand-name goods. As a result, P&G's forward P/E of 16.2 is a low point over the past two years, while its price-to-sales ratio is now at a five-year low. It's also sporting a superior 3.8% yield.
But don't think this king of consumer goods is sitting idly by while sales grew by 1% on an organic basis in the recently reported third quarter. The company plans to focus on cost-cutting initiatives that'll allow it to be price-competitive with online retailers, as well as on emphasizing the quality of its brands. This shouldn't be too difficult given that no company spends more on annual advertising than Procter & Gamble.
The company also recently announced the acquisition of Merck KGaA's Consumer Health Care business. In doing so, it'll add faster-growing over-the-counter healthcare products, while at the same time broadening its geographic reach. There's nothing flashy about P&G's business model, but it certainly is consistent.
Image source: Getty Images.
Philip Morris International
Another brand-name company that recently went up in smoke is tobacco products maker Philip Morris International (PM +1.55%). The company suffered through its worst day in history two weeks ago after describing sales of its iQOS heated-tobacco system in Japan as having "plateaued." With traditional tobacco product sales challenged in a number of developed markets, this heated-tobacco system has been viewed as a next-generation growth driver for Philip Morris International.
Following the company's worst single-day performance since its split from Altria in 2008, it's now valued at a forward P/E of 15.4 and a price-to-sales ratio of 4.3, both of which are lows not seen since 2010. Further, its dividend yield of 5.2% more than doubles the average yield for S&P 500 stocks.
While slowing iQOS growth in Japan isn't something investors should overlook, it's also important to keep in mind that Philip Morris International sells its tobacco products in dozens of countries around the globe. Even if it's facing growth concerns in developed markets, emerging markets like India and China offer channels for traditional combustible tobacco product growth. When added to the potential to expand iQOS into other developed countries (beyond just Japan), as well as Philip Morris' tobacco pricing power, it becomes evident that this tobacco giant isn't going anywhere anytime soon.
Image source: IBM.
IBM
Even IBM (IBM 0.56%) could find itself in the "boring is beautiful" discussion. IBM's latest quarterly results sent its shares tumbling after its full-year guidance, which called for at least $13.80 in full-year EPS, failed to impress Wall Street, which is already calling for $13.83 in full-year EPS.
IBM has been weighed down for years by its legacy systems, which have ceded way to mobile and cloud computing. As a result, the company's forward P/E of 10.6 is about as low as it's been since 2015. The recent decline has also pushed IBM's dividend yield back above 4%.
What's important for investors to realize, here, is that IBM has placed a lot of emphasis on next-generation technology. The company's cloud segment generated $17.7 billion in sales over the trailing-12-month period, up 22% year over year, and it now represents more than 20% of total annual revenue. It's also been a leader in blockchain development, which could be a major growth driver within the next five years. Once again, IBM offers little to no pizzazz, but it does bring consistent cash flow and a healthy dividend to the table.
All four of these businesses may be boring, but they just might hold the keys to outperforming in a turbulent market.
