The bond market hasn’t been the greatest place to be for the average investor. Anyone who had invested in bonds is now seeing coupon values decline (especially on the longer-dated securities). A flight to safety should involve a mix of cash and stocks.
Investors should look to hold lower beta (beta is a measure of stock price volatility) names like The Coca-Cola Company (NYSE:KO), The Procter & Gamble Company (NYSE:PG), and Johnson & Johnson (NYSE:JNJ).
Th Federal Reserve has been increasing the size of its balance sheet through the purchase of bonds and mortgage backed securities for quite some time. Currently, the Federal Reserve has around $2 trillion in mortgaged back securities and Treasury securities.
The Federal Reserve had stated in a recent announcement that it may consider tapering of its bond purchase program towards the end of the year. This bond tapering is heavily dependent upon whether or not the economy can meet the short-term targets set by the Federal Reserve. The Federal Reserve will only end its quantitative easing bond purchase program if the economy were to grow in a 2.3% to 2.6% range, and if the PCE inflation were to reach 2%. For now, the economy isn’t generating that much inflation, or that much growth, but in the future, it eventually will. Because of this, bond investors are exiting in droves.
Right now, the Federal Reserve is purchasing $45 billion worth in longer-dated treasury bonds per month. Over the next five months, the Federal Reserve will buy $225 billion in bonds. All those bond investors who have sold their bond positions will most likely purchase stocks. The types of stocks that will be purchased will be the non-cyclical, low-beta, income earning stocks.
Currently, The Coca-Cola Company (NYSE:KO) has an 18.6 forward earnings multiple, Johnson & Johnson (NYSE:JNJ) has a 15.84 forward earnings multiple, and The Procter & Gamble Company (NYSE:PG) has a 19.10 forward earnings multiple. The earnings multiple of these three companies is higher than the S&P 500 forward P/E ratio of 14.6. The stocks are trading at a premium due to the overwhelming demand for safe stocks. Unlike other industry experts, I believe that the demand for these safe haven stocks will go even higher, driving the prices of these three companies to greater all-time-highs.
Investors will get a compelling mix of stock appreciation and dividend yields when buying these three companies.
Coca- Cola is projected to grow earnings by 8.3% per year over the next five years. The stock also compensates investors with a 2.79% dividend yield. The company’s growth will be driven by raising the prices on its Coke and chips products, increasing the area of distribution and introducing new bottled beverages (Diet Coke was a real hit remember?). Management remains optimistic of the company and believes in its 2020 vision of doubling system sales. If that is the case, then we can expect a consistent stream of revenue and net income growth.
The company has a large presence in emerging markets, and according to the World Bank, the GDP growth of emerging markets, excluding China and India, will be 4.5% over the course of 2014 and 2015. Based on macroeconomic indicators, and management's forecasts, we can assume that The Coca-Cola Company (NYSE:KO)’s growth will be on track.
The Procter & Gamble Company (NYSE:PG) is one of my most favorite investment opportunities right now. The company sells everything from Duracell batteries, Charmin paper, Gillette shaving cream, Tide laundry detergent, Dawn dish-washing detergent, etc. The company’s products are more recession proof than a can of Coke (but to be fair a can of The Coca-Cola Company (NYSE:KO) goes far).