I’m not talking about NCAA basketball. March madness is here and everyone is filling out their brackets. You may not correctly pick the final four teams in the tournament (if you are as terrible at picking teams as I am, your bracket may be out of the race way before the final four even starts), but you can hedge a potential heart-breaking loss by investing in another “final four” that have already won. When S&P downgraded the United States a couple of summers ago, there were four companies that still managed to maintain an AAA rating. These companies can still claim AAA status today, and could be good investments to maintain capital while collecting yield– especially if the dreaded market correction ever materializes.
The largest company on the market
The largest company in terms of market cap at the time of writing is Exxon Mobil Corporation (NYSE:XOM). Exxon is trading at a low 9 times earnings, which is about equal to its closest competitor, Chevron.
Exxon lags significantly behind Chevron in the dividend department, however, yielding around 2.5% to Chevron’s 3%. Exxon seems to favor buybacks way more than Chevron, so this should also be factored into the equation. A dividend increase might be around the corner for Exxon Mobil Corporation (NYSE:XOM) shareholders as well. The company certainly has a track record of doing so:
Another recent positive for the company is a large amount of insider buying. Vice President and Controller Patrick T. Mulva recently bought 11,000 shares at a price of around $89.00 per share. That’s a big chunk of change from somebody who is “kind of a big deal” within the company.
A software giant on sale?
Another giant company with a coveted AAA rating is Microsoft Corporation (NASDAQ:MSFT) . Microsoft has sat range-bound for a decade, and most investors dislike management. Microsoft has been shrinking its share float significantly over the years, however, while also increasing earnings per share. This has led to a compression of its P/E ratio that is rarely noted by Microsoft Corporation (NASDAQ:MSFT) bears:
As can be seen, a $30 share of Microsoft Corporation (NASDAQ:MSFT) today is way cheaper than a $30 share was in 2004. Not only that, the cash-loaded company has been increasing its dividend, and now offers investors well over 3%. Something has got to give eventually, right? The increase in earnings is also expected to continue, by the way, leaving Microsoft priced at a lowly 9 times earnings going forward.
A highly rated “Big Pharma” stock
The third company to make the list is Johnson & Johnson (NYSE:JNJ). With a P/E of around 20 and a string of pestering lawsuits attached to its name, the company looks a little expensive at today’s levels. Warren Buffett recently sold off a huge chunk of his position in the company as well. Priced at only around 13-14X earnings going forward, with a current dividend yielding over 3%, the company looks a little more attractive for the long-term. Johnson & Johnson is also notorious for generating massive free cash flow. If this stock dips from near-term headwinds, buying it up would probably be a good idea. I plan to. The dip may not come for awhile, however, with the current QE party going on and the market rallying.
Getting to be a little too pricey?
The last company on the list also appears to be the most expensive. Automatic Data Processing (NASDAQ:ADP) is trading at about 22 times trailing earnings and 20 times forward earnings. The company pays out a dividend yielding around 2.7%, which, with the exception of Exxon, isn’t as attractive as the cheaper stocks mentioned above. The company’s CEO, Carlos A Rodriguez, recently dumped 53,100 shares. This doesn’t necessarily mean you should sell, too, if you already own this great company, but opening a position in it now might not be such a good idea due to its current pricey valuations. A recovering economy should help the business services company pick up some steam.
While the company has gotten pricier in terms of P/E, earnings have been increasing lately, and an increasing dividend from a rock-solid company is always encouraging.
The bottom line
Investing in this “final four” portfolio will give an investor exposure to technology, medical, oil and gas, and business services through four AAA rated companies. These companies are also great candidates if you’re looking for solid stocks that increase dividends consistently — in good times and bad. Exxon and Microsoft look fairly valued, and perhaps even cheap, hitting record highs even in a rising market. Both stocks are lagging in capital appreciation, but may provide more safety with their financial stability and healthy, safe dividends if an inevitable correction occurs. Johnson & Johnson and Automatic Data Processing currently look a little too expensive for my liking, but would make great long-term investments, should they come down to more reasonable levels.
The article Investing In The Final Four originally appeared on Fool.com and was written by Joseph Harry.
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