As investors our goal is to make money, of course. I believe that the most important way to make money is not to lose it. For example, if you lost 50% in one year it would take a 100% gain the next year to get you back to break-even (and you would have just wasted two years of potential compounding returns).
Many people will tell you they have a method of timing the market, but please do not ever believe them. Instead of timing the market we should make sure to put a layer of security stocks in our portfolios, stocks like Kimberly Clark (NYSE:KMB) and Colgate-Palmolive (NYSE:CL). As you can see below, holding on to these two companies during the last recession would have really helped your portfolio.
Kimberly Clark sells its products through many different brand names that include Kotex, Kleenex, Huggies, Scott, and plenty more. You also probably have several Colgate-Palmolive brands in your house at this moment. The company sells its products under brand names like Colgate and Palmolive of course, as well as AJAX, Irish Springs, Softsoap, Hill's pet food, and more.
I consider these stocks defensive because no matter what the broad economy is doing you will always brush your teeth, wash your hands, use the restroom, et cetera.
To illustrate this, Kimberly Clark posted revenues of $18.2 billion, $19.4 billion, and $19.1 billion in 2007, 2008, and 2009, respectively. Over the same time period Colgate-Palmolive posted revenues of $13.7 billion, $15.3 billion, and $15.3 billion. Overall the recession did not significantly impact the top lines of either Kimberly Clark or Colgate-Palmolive, especially in comparison with the results from some other S&P 500 companies.
The fact that these companies can grow their top lines when other companies can't is great, but we should still consider factors besides sales if we are considering investing in a company for many years to come.
Both of these companies appear to have very solid operations. Both Kimberly Clark and Colgate-Palmolive had net profit margins of over 10% in the last year and they have had very stable margins for the previous ten years. Stable margins show us that a company is likely well-run and that it employs a strong business model. High margins give companies a little bit of wiggle room for the occasional mishap. This means that high margins can protect a company's earnings from an internal operations blunder or lawsuit, which are bound to happen from time to time.
Neither of these companies has the burden of a large interest expense from its debt, either. Kimberly Clark had an EBITDA of over 14 times its interest expense last year and Colgate-Palmolive had over 32 times its interest expense in EBITDA. EBITDA, or earnings before interest, taxes, depreciation, and amortization, is not a GAAP-reported measure. However, this measure gives us a clearer view of a company's internal operations by stripping out some accounting procedures that do not affect the actual operations of the business, which is why it is helpful to look at this measure.
The big picture
Neither of these companies promises investors huge growth or astronomical returns. Investing in these two, however, will let you own pieces of two steady businesses that have proven themselves over time and will help you relieve some of the downside risk in your portfolio.
Kimberly Clark and Colgate-Palmolive are also both members of the S&P 500 Dividend Aristocrat Index, which means that they have raised their dividends each year for at least the last 25 years. Kimberly Clark and Colgate-Palmolive currently pay their investors annual dividend yields of 3.1% and 2.2%, respectively.
As said earlier, it is nearly impossible to time the market, yet millions and millions of people attempt to do this. With the market hitting new highs on a pretty regular basis recently, there has been plenty of doom and gloom talk on the television, Internet, and newspapers. Instead of getting caught up in this and worrying, it is better to make sure that our portfolios are stocked full of excellent companies that won't be particularly bothered by what the rest of the market is doing.