The Bureau of Labor Statistics released February’s Consumer Price Index (CPI) data yesterday, which revealed headline inflation rose 0.4% over last month and 6% over the prior year. The elevated inflation data follows the hotter-than-expected jobs report from last month.
With the Federal Reserve committed to tackling inflation, interest rates are likely to be raised higher than previously anticipated.
The consecutive rate increases might push the economy into a recession. In this scenario, I think it could be wise for investors to buy blue-chip stocks The Coca-Cola Company (KO), McDonald's Corporation (MCD), and Caterpillar Inc. (CAT) to stabilize their portfolios.
Before discussing the fundamentals of these blue-chip stocks, let’s explore what’s keeping the market under pressure and why investing in these blue-chip stocks could help generate steady returns.
The 6% year-over-year rise in inflation last month marked the slowest annual increase in consumer prices since September 2021. However, the monthly core inflation came higher-than-estimates at 0.5% and rose 5.5% year-over-year in February.
Along with the high inflation, the jobs market continues to remain strong. Nonfarm payrolls rose by 311,000 in February, coming in higher than the 225,000 analysts’ estimates. The Fed looked set to hike the interest rate by 50 basis points next week until the sudden collapse of the Silicon Valley Bank (SVB).
Capital Economics’ deputy chief U.S. economist Andrew Hunter said, “The 0.5% rise in core consumer prices last month adds to the evidence that inflation remains stubbornly high, but the ongoing fallout from the SVB crisis over the coming days is still likely to have a bigger bearing on what happens at next week’s FOMC meeting.”
Although the Fed will likely opt for a smaller rate hike next week, the possibility of higher rate hikes later remains. This could lead to recession concerns fuelling further market turbulence.
Amid the expected uncertainty, investors could look to invest in fundamentally strong dividend-paying blue-chip stocks KO, MCD, and CAT to keep their portfolios safe and generate steady returns.
The Coca-Cola Company (KO)
Popular beverage company KO manufactures, markets, and sells various non-alcoholic beverages. The company provides sparkling soft drinks; flavored and enhanced water and sports drinks; juice, dairy, and plant-based beverages; tea and coffee; and energy drinks.
Over the last three years, KO’s dividend payouts have grown at a 3.2% CAGR. Its four-year average dividend yield is 3.05%, and its forward annual dividend of $1.84 per share translates to a 3.07% yield. It is expected to pay a quarterly dividend of $0.46 per share on April 3, 2023.
In terms of the trailing-12-month EBIT margin, KO's 28.49% is 273.1% higher than the 7.64% industry average. Its 10.29% trailing-12-month Return on Total Assets is 160.3% higher than the industry average of 3.95%. Likewise, its 18.17% trailing-12-month levered FCF margin is 619.2% higher than the industry average of 2.53%.
KO’s net operating revenues increased 7% year-over-year to $10.13 billion for the fourth quarter ended December 31, 2022. Its non-GAAP gross profit increased 6% year-over-year to $5.76 billion. The company’s non-GAAP operating income increased 10.9% year-over-year to $2.32 billion. Its non-GAAP net income and non-GAAP EPS came in at $1.94 billion and $0.45, respectively.
KO’s EPS and revenue for the quarter ending March 31, 2023, are expected to increase 1% and 2.9% year-over-year to $0.65 and $10.81 billion, respectively. The company has a commendable earnings surprise history, surpassing the consensus EPS estimates in each of the trailing four quarters.
Over the past year, the stock has gained 2.6% to close the last trading session at $60.03.
KO’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Within the A-rated Beverages industry, it is ranked #18 out of 36 stocks. It has a B grade for Stability, Sentiment, and Quality. Click here to see the additional POWR Ratings of KO for Growth, Value, and Momentum.
McDonald's Corporation (MCD)
Globally renowned fast-food franchise MCD, operates restaurants are known for their hamburgers and cheeseburgers, chicken sandwiches and nuggets, wraps, and fries, among other items.
Over the last three years, MCD’s dividend payouts have grown at a 6.4% CAGR. Its four-year average dividend yield is 2.26%, and its forward annual dividend of $6.08 per share translates to a 2.29% yield. It is expected to pay a quarterly dividend of $1.52 per share on March 15, 2023.
In terms of the trailing-12-month EBIT margin, MCD’s 44.62% is 479.2% higher than the 7.70% industry average. Its 56.97% trailing-12-month gross profit margin is 62.8% higher than the industry average of 35%. Likewise, its 22.75% trailing-12-month levered FCF margin is significantly higher than the industry average of 1.52%.
On December 15, 2022, MCD and all five members of the restaurant chain's North American Logistics Council (NALC) signed agreements with Enel North America to purchase renewable energy and the associated renewable energy certificates (RECs) from Enel Green Power's Blue Jay solar project. This should help MCD achieve its sustainability goals.
SVP and Chief Supply Chain Officer, North America, at MCD, Bob Stewart, said, "This deal is a unique example of how McDonald's and its logistics partners are combining efforts to leverage their reach and scale to tackle supply chain emissions together. We are excited about our collective potential to help address climate change and drive continuous improvement."
MCD's operating income for the fiscal fourth quarter that ended December 31, 2022, increased 7.7% year-over-year to $2.58 billion. Its non-GAAP net income increased 13.3% year-over-year to $1.90 billion. Additionally, non-GAAP EPS came in at $2.59, representing a 16.1% increase from the prior-year quarter.
Analysts expect MCD’s EPS for the quarter ending March 31, 2023, to increase 1.2% year-over-year to $2.31. Its revenue for the quarter ending June 30, 2023, is expected to increase 6.5% year-over-year to $6.09 billion. It has a creditable earnings surprise history, surpassing the consensus EPS estimates in each of the trailing four quarters.
Over the past year, the stock has gained 17.6% to close the last trading session at $265.90.
MCD’s POWR Ratings reflect its positive prospects. The stock has an overall rating of B, equating to Buy in our proprietary rating system. Within the B-rated Restaurants industry, it is ranked #9 out of 46 stocks. It has an A grade for Quality and a B for Stability and Sentiment.
Beyond what we stated above, we have also given MCD grades for Growth, Value, and Momentum. Get all MCD ratings here.
Caterpillar Inc. (CAT)
CAT manufactures and sells construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. The company operates through five segments, Construction Industries, Resource Industries, Energy & Transportation, Financial Products, and All Other.
Over the last three years, CAT’s dividend payouts have grown at a 6% CAGR. Its four-year average dividend yield is 2.43%, and its forward annual dividend of $4.80 per share translates to a 2.13% yield. It paid a quarterly dividend of $1.20 per share on February 17, 2023.
In terms of the trailing-12-month EBIT margin, CAT’s 16.42% is 70.6% higher than the 9.62% industry average. Its 11.28% trailing-12-month Net Income Margin is 72.8% higher than the industry average of 6.53%. Likewise, its 41.45% trailing-12-month Return on Common Equity is 199.7% higher than the industry average of 13.83%.
On December 15, 2022, CAT announced a collaboration with Luck Stone, the nation's largest family-owned and operated producer of crushed stone, sand, and gravel.
President of Resource Industries at CAT, Denise Johnson, said, "Caterpillar has a long-standing relationship with Luck Stone, and we look forward to working together to bring the demonstrated benefits of increased safety and productivity to the quarry industry."
CAT’s sales and revenues for the fiscal fourth quarter ended December 31, 2022, have increased 20.3% year-over-year to $16.60 billion. Additionally, its adjusted EPS came in at $3.86, representing a 43.5% increase from the prior-year quarter.
CAT's EPS and revenue for the quarter ending March 31, 2023, are expected to increase 30% and 11.3% year-over-year to $3.74 and $15.12 billion, respectively. It has an impressive earnings surprise history, surpassing the consensus EPS estimates in three of the trailing four quarters. Over the past six months, the stock has gained 22.2% to close the last trading session at $225.67.
CAT’s strong outlook is reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy. It is ranked #15 out of 79 stocks in the A-rated Industrial - Machinery industry. Moreover, it has a B grade for Growth and Momentum.
To access the other ratings of CAT for Value, Stability, Sentiment, and Quality, click here.
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KO shares were trading at $59.36 per share on Wednesday morning, down $0.67 (-1.12%). Year-to-date, KO has declined -6.68%, versus a 0.76% rise in the benchmark S&P 500 index during the same period.
About the Author: Malaika Alphonsus
Malaika's passion for writing and interest in financial markets led her to pursue a career in investment research. With a degree in Economics and Psychology, she intends to assist investors in making informed investment decisions.
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