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6 Low-Volatility Stocks for Rising Volatility - 14313 views
MILLBURN, N.J. (Stockpickr) -- Last week the markets endured a historical bout of volatility as global indices plunged around the world. Fears persisted as we entered the weekend only to be exacerbated by the Friday evening announcement that Standard & Poor’s downgraded the long-term debt of the U.S. from AAA to AA+. Volatility surged as market participants bought insurance protection and began to panic.
Volatility can be measured in several ways:
1. Implied Volatility: This is the volatility level which is used to price individual stock and index options.
2. Historical Volatility: This measures the realized or actual volatility of an individual stock or index over a defined period of time
3. Volatility Index: This is a weighted average of implied volatilities for several index options for a particular index. The most popular volatility index is the S&P 500 Volatility Index, or the VIX.
Historical volatilities for seemingly all stocks rose dramatically over the course of the last week and month. The VIX index rose to 32 from 25.25 in just one week and averaged 27.1 over that period of time. The realized volatility for the VIX was 53.23 during that week. Historically, over the long term, the VIX has an average of about 20 with a standard deviation of about 8. Over the past year, the VIX has averaged 19.54 with a standard deviation of 3.17 and realized volatility of 11.92.
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Low-volatility stocks will offer less risk and growth potential to investors while usually paying above-market dividends. With that in mind, here are
six low-volatility stocks to consider in the current high-volatility environment. These stocks are drawn from several industry groups, including consumer products, beverages and snacks, pharmaceuticals and medical devices, retail, electric utilities and financial services. The result is a diversified low-volatility portfolio with above-market dividend yields.
Procter & Gamble
Procter & Gamble (PG) is a global consumer goods company that makes many household products sold under brand names such as Gillette, Crest, Head & Shoulders, Pantene, Cover Girl, Duracell, Tide and Oral-B. For nearly 200 years, Procter & Gamble has produced products that people can find in their bathrooms.
Sales for the company consistently grow in the mid-single-digit percentages. Should the economy head into a new recession or if interest rates rise, the company’s sales are not likely to feel any adverse effect. Procter & Gamble's one-year realized volatility of 11.34 is lower than that of competitors Kimberly-Clark (KMB), at 12.77, and Colgate-Palmolive (CL), at 14.62.
I could have easily included Kimberly-Clark in this portfolio as the company pays a dividend yield of 4.37%, but Proctor and Gamble sports the stronger balance sheet of the two.
Procter & Gamble is one of Warren Buffett's top 10 dividend stocks.
PepsiCo (PEP) is a global beverage and snack company headed up by Indra Nooyi, one of the top female CEOs in corporate America today. As a result of her leadership, I also included Pepsico in my recent portfolio A Racing Stable of Stocks.
Pepsico sells branded products such as Pepsi, Mountain Dew, Gatorade, Tropicana, Quaker Oats and Frito-Lay. Within the last year, it repurchased its bottling operations and the Wimm-Bill-Dann beverage company in Russia.
I chose Pepsi over Coca-Cola (KO) for this portfolio for three reasons:
1. Coca-Cola has slightly higher historical volatility.
2. Pepsico’s 3.2% dividend is greater than the Coca-Cola's 2.82%.
3. Pepsico has a global snack business, featuring Frito-Lay, whereas Coca Cola is strictly a beverage company.
Pepsi and Coca-Cola were also recently featured in "2 Pair Trades of Giant Competitors."
Johnson & Johnson
Johnson & Johnson (JNJ) is another company that produces products you can find in your bathroom, but its products also go beyond that into the medicine cabinet with pharmaceuticals and hospitals with medical devices.
Like P&G, J&J consistently grows income in the mid-single-digit percentages. Not only does Johnson & Johnson have a more diverse portfolio of products and businesses than pure pharmaceutical peers, but it also has a far more stable stock price with lower historic one-year volatility of 12.61 than that of such as Merck (MRK), at 17.27, Pfizer (PFE), at 19.19, and Eli Lilly (LLY), at 15.25.
In the world of retail, Wal-Mart (WMT) is king. Despite it’s nearly $180 billion market cap, the company continues to grow sales in the 4% to 5% range and earnings in the 9% to 10% range consistently on an annual basis.
With Wal-Mart, you won’t get the explosive growth of a high-end retailer such as Polo Ralph Lauren (RL), Coach (COH) or Tiffany (TIF), but you also won’t suffer from the high levels of volatility that those luxury retailers have exhibited over the past year (32.31 at Ralph Lauren, 29.49 at Coach and 29.29 at Tiffany.
In fact, compared with its closet peer, Target (THT), Wal-Mart also comes out ahead. Target’s one-year historic volatility of 20.76 is higher than Wal-Mart's 2.64, and its 2.5% dividend is lower than Wal-Mart's 2.9%.
Southern Company (CO) provides electric services to customers in the southeastern region, in the states of Georgia, Florida, Mississippi and Alabama. Southern is the quintessential widow and orphan stock, providing investors with consistent above-market dividend payouts.
Annual earnings of 6% to 7% and sales growth of 3% to 5%, because they are tied in to population growth and regulatory oversight, are low but stable. Cash flow generation is strong enough to pay the current dividend, which tends to get an annual boost of about 7 cents, or just under 4%.
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The stability of the company’s business model and geographic location coupled with its 4.7% dividend yield make Southern Company a perfect low-volatility stock investment. It's one-year realized volatility is lower compared with that of various public utility peers, such as Exelon (EXC) at 15.73, PG&E (PCG) at 17.06, Pepco (POM) at 14.82 and American Electric Power (AEP) at 14.01. I excluded Duke Energy (DUK) and Progress Energy (PGN) from the analysis because their stock prices have been stabilized for several months as a result of their pending merger.
A close second to Southern Company is Con Edison (ED), with a one-year realized volatility of 11.3 and a dividend yield of 4.51%, which could be included in this portfolio as well.
Chubb (CB) is a global property and casualty insurance company, servicing both commercial and personal customers with products such as automobile, homeowners, workers compensation, property and professional liability coverage.
Financial services companies, especially insurance, can be high-risk businesses, but Chubb is a low-risk player in that high-risk world. You can credit that to a conservative approach to risk and balance sheet management. According to Risk Metrics, Chubb rates low risk across three corporate governance categories and at a medium risk level for a fourth category.
The market recognizes this in Chubb and has awarded it with much lower one-year realized volatility of 14.14 than peers such as Allstate (ALL) at 22.68, MetLife at 28.31, Lincoln National (LNC) at 33.36, Progressive (PGR) at 19.2, Prudential (PRU) at 26.83 and American International Group (AIG) at 36.90.
Chubb is one of the 2011 Dividend Aristocrats, stocks that have raised their dividends consistently for at least 25 years.
-- Written by Scott Rothbort in Millburn, N.J.
At the time of publication, author was long PEP, SO, ED, COH, EXC, POM, DUG, PGN and LNC.
Scott Rothbort has over 25 years of experience in the financial services industry. He is the founder and president of LakeView Asset Management, a registered investment advisor specializing in customized separate account management for high net worth individuals. In addition, he is the founder of TheFinanceProfessor.com, an educational social networking site, and publisher of The LakeView Restaurant & Food Chain Report. Rothbort is also a professor of finance at Seton Hall University's Stillman School of Business.