Mar 9, 2022
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The yield on the 10-year U.S. Treasury note has dipped to 1.847% over the past month — a signal that the Fed might hold back on interest rate increases.
But according to Morgan Stanley, the recent drop in Treasury yields is simply the result of investors fleeing to safe assets in light of the Russia-Ukraine crisis. In other words, the Wall Street behemoth doesn’t believe the Fed is backing off from its hawkish stance at all.
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And that doesn’t bode well for the stock market.
“Downside risk remains most acute over the next 6-8 weeks,” Morgan analysts write in a note to investors. “We are firmly in the grasp of a bear market that is incomplete in both time and price.”
In order to deal with the uncertainty, the bank advises taking a defense-first approach.
“We recommend staying defensively oriented by running less risk than normal and searching for companies with superior operational efficiency and earnings stability,” the analysts say, adding that “any relief should be sold.”
In that context, here are three defensive plays that look particularly attractive to Morgan Stanley.
Coca-Cola (KO)
You don’t need to be a Wall Street analyst to see why Coca-Cola could be a great stock to own in turbulent times. Whether the market is rallying or plunging, a can of Coke is still affordable to most people.
Factor in the strength from its iconic brand portfolio — includes the likes of Sprite, Minute Maid, Vitamin Water and Powerade — and the fact that its products are sold in more than 200 countries, and it’s clear that the business model can thrive through thick and thin.
In Q4, the beverage giant’s net revenue grew 10% year over year, driven by a 9% increase in global unit case volume.
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Last month, the company announced its 60th consecutive annual dividend increase, boosting its quarterly payout to 44 cents per share. The stock now yields an attractive 3%.
On Feb. 8, Morgan Stanley analyst Dara Mohsenian raised his price target on Coca-Cola from $65 to $71 while maintaining an overweight rating. The price target implies a potential upside of 20% from current levels.
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Procter & Gamble (PG)
Procter & Gamble is another defensive stock that has the ability to deliver cash returns to investors in different economic environments.
Last April, P&G’s board of directors announced a 10% increase to its quarterly payout, marking the company’s 65th consecutive annual dividend hike. The stock currently offers an annual dividend yield of 2.3%.
It’s not difficult to understand why the company is able to maintain such a streak.
P&G is a consumer staples giant with a portfolio of trusted brands like Bounty paper towels, Crest toothpaste, Gillette razor blades and Tide detergent. These are products that households buy on a regular basis, regardless of what the economy is doing.
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The business is growing, too. In the December quarter, P&G’s net sales totaled $21 billion, up 6% from a year ago.
Mohsenian raised his price target on P&G from $161 to $177 in January – roughly 20% above where the stock sits today. P&G is the analyst’s favorite company in the household products space and he maintains an overweight rating on the stock.
American Electric Power (AEP)
Investing in utility stocks is a tried and true way of recession-proofing a portfolio. No matter how many times the Fed raises interest rates — and how bad the next bear market turns out to be — people will still need to heat their homes and turn on the lights.
Morgan Stanley maintains an overweight rating on regulated electricity giant American Electric Power. By operating the nation’s largest electricity transmission system and over 224,000 miles of distribution lines, AEP delivers power to 5.5 million customers in 11 states.
In Q4 of 2021, the company generated operating earnings of 98 cents per share, up 13% year over year. Management also raised its full-year guidance, and now expects to deliver $4.87 to $5.07 per share in 2022 operating earnings. AEP’s operating earnings clocked in at $4.74 per share in 2021.
Strong utility businesses are typically well-positioned to pay steadily growing dividends, and that’s exactly what management has been doing. Over the past five years, AEP’s per-share quarterly dividend payout has increased by 32%. The stock currently yields a solid 3.2%.
Morgan Stanley has a price target of $105 on AEP shares, implying upside of about 10.5% from current prices.
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Jing is an investment reporter for MoneyWise. He is an avid advocate of investing for passive income. Despite the ups and downs he’s been through with the markets, Jing believes that you can generate a steadily increasing income stream by investing in high quality companies.
