The ongoing novel coronavirus outbreak is sending shockwaves through the markets, but investors shouldn't panic and sell all their stocks. Instead, they should keep a level head and focus on companies that are well-insulated from the headwinds and pay steady dividends to patient investors.
1. PMI: A tobacco giant with limited exposure to China
Philip Morris International, the tobacco giant that was spun off from Altria (NYSE:MO) nearly 12 years ago, generates all of its revenue overseas.
However, PMI doesn't generate significant revenue from China's tobacco market, which is controlled by the state-owned monopoly CNTC (China National Tobacco Company). Instead, it merely licenses its flagship brands, including Marlboro, to CNTC. Marlboro accounts for less than 1% of all cigarette sales in China, so PMI's licensing fees from those sales represent a tiny sliver of its total revenue.
PMI might not seem like a sound investment due to declining smoking rates worldwide. However, PMI is offsetting those declines by raising prices, cutting costs, and expanding its higher-growth iQOS business, which sells "heated" tobacco devices for heating tobacco sticks instead of burning them. That balancing act is working, and analysts expect its revenue and earnings to rise 5% and 8%, respectively, this year.
PMI's stock is cheap at 14 times forward earnings, and it pays a hefty forward dividend yield of 5.3%. It spent 78% of its free cash flow (FCF) on its dividend over the past 12 months, and it's raised its payout every year since its split with Altria. Those factors should all limit its downside potential during market downturns.
2. PepsiCo: A well-run packaged foods giant
PepsiCo's massive portfolio of drinks includes Pepsi, 7-Up, Mountain Dew, Tropicana, Gatorade, Lipton, and Aquafina. It also sells a wide range of packaged foods through its Frito-Lay and Quaker Foods brands.
PepsiCo generates less than 2% of its revenue from China, and CFO Hugh Johnston recently told CNBC that all but one of its Chinese plants have reopened. CEO Ramon Laguarta also stated that its Chinese business was "growing very well" during PepsiCo's last conference call in mid-February.
Like other packaged foods companies, PepsiCo struggled as consumers pivoted toward healthier foods and retailers launched more private label brands. Yet it countered those headwinds by acquiring and developing new brands, creating low-sugar and low-calorie versions of its top sodas, and raising prices to offset lower shipment volumes.
PepsiCo's strengths are offsetting its weaknesses, and it expects its organic sales to rise 4% and its "core" EPS (which lines up with its organic growth) to grow 7% in constant currency terms. PepsiCo spent nearly 98% of its FCF on its dividend over the past year, but it's consistently raised its payout annually for nearly five decades. PepsiCo's stock isn't cheap at 23 times forward earnings, but its reputation as a safe defensive stock arguably justifies that premium.
3. Clorox: Rising demand for cleaning products
Clorox has been struggling with soft demand for its household products, which include bags, wraps, grilling products, cat litter, and digestive health products. Its total international sales have also been declining. However, the coronavirus crisis could boost sales of its cleaning products, which generated over a third of its sales last quarter. That unit sells Clorox's bleach, cleaning wipes, and other home care and professional cleaning products.
That shift suggests that analysts' forecasts for Clorox's current fiscal year for flat revenue growth and a 2% earnings decline are likely too low. If those estimates rise, Clorox's forward P/E of 25 -- which is a bit frothy for a slow-growth stock -- could decline.
Clorox spent just 63% of its FCF on its dividend over the past 12 months. It's raised that dividend annually for over four decades and currently pays a decent forward yield of 2.6%. These factors should make Clorox a safe, albeit unexciting, stock to own until the coronavirus headwinds fade.