Concerns about the potential for an economic slowdown have led many to seek out investments that can weather the storm. Ahead of key inflation data due this week, investors feeling uneasy about the market’s unpredictability can find a relative safe haven in defensive stocks. These stocks, typically found in sectors like consumer staples, healthcare, and utilities, are known for their resilience and ability to provide steady returns even when the broader market is under pressure.
Moreover, Wells Fargo analyst Christopher P. Harvey noted that stocks from the aforementioned sectors have historically outperformed heading into Fed accommodation periods with rate cuts. Harvey stated that he expects this group to perform strongly leading up to the anticipated September easing.
In this article, we highlight three defensive stock picks that stand out: Mondelez International (MDLZ), Abbott Laboratories (ABT), and Atmos Energy Corporation (ATO). Each of these stocks not only provides a layer of defense against market volatility, but also offers potential for growth and income, making them attractive options for risk-averse investors.
1. Mondelez International
Mondelez International Inc. (MDLZ), founded in 2000 with historical roots dating back to 1923, is a $93.5 billion market cap American multinational company specializing in confectionery, snack foods, and beverages. It provides enjoyable snacks to consumers worldwide through high-quality branded products such as Cadbury, Oreo, and Ritz.
Shares of Mondelez International have lost 3.7% on a year-to-date basis, but have regained some ground from their mid-July lows.
On July 23, Mondelez International announced that Filippo Catalano would join the company as Chief Information and Digital Officer. Reporting directly to Dirk Van de Put, Chair and Chief Executive Officer, Catalano will take charge of expediting the company's global technology transformation to fuel long-term growth. He is set to join the organization later this year.
Mondelez boasts a strong record of dividend growth, having increased its dividend for 10 consecutive years, significantly surpassing the sector median of 2 years. On July 30, the company announced an 11% increase in its quarterly cash dividend to $0.47 per share, payable to shareholders on Oct. 14.
MDLZ's annualized dividend of $1.88 per share results in a dividend yield of 2.70%, which is approximately in line with the sector median of 2.89%. With a moderate payout ratio of 48.99%, this healthy dividend effectively balances retaining earnings for growth while rewarding shareholders with cash. Additionally, Mondelez has a 10-year dividend CAGR of 11.74%, which substantially exceeds the sector median of 5.40%.
In the first half of 2024, the company distributed $2.2 billion to shareholders through cash dividends and share repurchases.
Mondelez International reported its financial results for the second quarter of fiscal 2024 on July 30. The company’s net revenues fell 2.0% year-over-year to $8.34 billion, as a 2.5% increase in organic net revenue was outweighed by negative currency impacts and the effects of the 2023 divestiture of the developed market gum business. As a result, the top line missed the consensus estimates by $110 million. In terms of geographic segments, the net revenue decline in the second quarter was primarily driven by a 3.4% drop in North America, a 1.8% decline in Europe, and a 1.4% decrease in Asia, the Middle East, and Africa - with Latin America being the exception, posting a 0.3% increase. In emerging markets, sales decreased by 1.4%, while in developed markets, they fell by 2.3%.
As the cost of sales rose by nearly 8%, the gross profit margin contracted 590 basis points to 33.5%, and the operating income margin decreased by 660 basis points to 10.2%. Nevertheless, adjusted EPS increased 25% year-over-year on a constant currency basis to $0.86 for the quarter, fueled by robust operating gains, reduced interest expenses, and a decrease in outstanding shares, beating analysts’ expectations by $0.08.
For fiscal 2024, management anticipates organic net revenue growth to be at the upper end of the 3% to 5% range and expects adjusted EPS growth in the high single digits. They also project free cash flow to exceed $3.5 billion.
Analysts tracking the company project a 9.72% year-over-year rise in its profit to $3.50 per share for fiscal 2024. Additionally, Wall Street expects MDLZ’s revenue to increase by 1.71% year-over-year to $36.63 billion in fiscal 2024.
In terms of valuation, the stock is currently trading at 19.96 times the consensus earnings estimate for 2024, which exceeds the sector median of 17.31x but is below its five-year average of 21.29x. Additionally, the company’s forward price/cash flow ratio stands at 17.97x, significantly under its five-year average of 20.96x. The valuation below historical levels is primarily due to investor concerns over rising cocoa prices. Should cocoa prices (CCU24) stabilize in the upcoming quarters, it could enable the stock to revert to its historical valuation levels.
Analysts have a consensus rating of “Strong Buy” on Mondelez stock, with a mean target price of $78.00, which indicates an upside potential of about 12% from the stock’s Friday close. Out of 21 analysts covering the stock, 19 analysts recommend a “Strong Buy,” one advises a “Moderate Buy” rating, and one recommends a “Hold.”
2. Abbott Laboratories
Abbott Laboratories (ABT) is a global healthcare and medical devices company. Founded in 1888, this healthcare giant boasts a market capitalization of over $189 billion, and employs more than 110,000 individuals.
Shares of Abbott Laboratories have fallen 1.8% on a year-to-date basis, underperforming the broader market.
On August 7, Abbott announced a global partnership with Medtronic (MDT) to develop an integrated continuous glucose monitoring system. This system will utilize Abbott’s advanced FreeStyle Libre technology and integrate with Medtronic’s automated insulin delivery and smart insulin pen systems. The combination of Abbott's CGM sensor and Medtronic's AID algorithms will allow for automatic insulin adjustments to maintain glucose levels. Designed to be compatible solely with Medtronic devices, the CGM sensor will be developed by Abbott and marketed by Medtronic.
Abbott Laboratories holds the status of Dividend King, having raised its dividends annually for over 50 consecutive years. It is important to note that the company’s dividend reduction in 2013 was due to the spin-off of AbbVie (ABBV). Following this, both Abbott Laboratories and AbbVie have consistently increased their dividends annually.
In mid-December 2023, Abbott Laboratories raised its quarterly dividend per share by nearly 8% to the current rate of $0.55. Shares of ABT currently yield a dividend of 2.02%, surpassing the sector median of 1.46%. The company also features a 10-year dividend growth rate of 10.44%, considerably above the sector median of 6.11%. Finally, the sustainability of ABT’s dividends is evident from its moderate dividend payout ratio of 48.54%, suggesting the company can maintain its current high-single-digit dividend growth rate.
On July 18, Abbott Laboratories posted better-than-expected Q2 results and raised its full-year guidance. The company’s total sales grew 4.0% year-over-year to $10.4 billion for the quarter, led by its MedTech division, which produced $4.7 billion in sales, approximately 10% growth year-over-year. This was significantly bolstered by its diabetes segment, contributing $1.6 billion, marking a growth of about 16% year-over-year.
However, its diagnostics division saw a roughly 5% decrease year-over-year, contributing $2.2 billion in sales to the top line as global COVID-19 testing sales dropped by around 61% year-over-year. Simultaneously, Abbott's nutrition businesses generated $2.2 billion in sales, reflecting about a 4% year-over-year growth, while its pharmaceutical segment remained stable, generating $1.3 billion in sales.
Abbott’s adjusted earnings per share increased 6% year-over-year to $1.14 during the quarter, surpassing the consensus estimate of $1.10, as its gross margin expanded to approximately 51% from around 50% in the same quarter last year. The company’s gross margin expansion resulted from effective supply chain management, reduced commodity costs, and a favorable sales mix.
In the first half of 2024, Abbott unveiled 10 new growth opportunities emerging from its highly productive R&D pipeline, encompassing a mix of new product approvals and new treatment indications.
Overall, the company is making significant strides in gross margin initiatives and, more importantly, maintains a highly productive pipeline, positioning it well to deliver strong results for the rest of the year.
Looking forward, based on robust performance in Q2 and confidence in future prospects, management raised its full-year guidance. The company revised its adjusted earnings per share forecast upward to $4.61-$4.71, reflecting an increase from the guidance range provided in April. The company also raised the midpoint of its 2024 organic growth guidance for ex-COVID testing sales to 9.75% from the previously projected 9.25%. Lastly, the company projected third-quarter adjusted earnings per share to be in the range of $1.18 to $1.22.
Based on Wall Street projections, ABT is anticipated to see a 4.07% year-over-year increase in revenue to $41.74 billion for fiscal 2024, with earnings expected to grow by 4.95% year-over-year to $4.66 per share.
In terms of valuation, the stock is trading at 23.32 times forward earnings, which is above the sector median of 20.82x, yet below its five-year average of 25.20x. Overall, this represents a reasonable earnings multiple for a high-quality dividend stock. Additionally, ABT’s forward price-to-sales ratio stands at 4.53x, which is slightly below its five-year average of 4.84x.
Analysts have deemed Abbott Laboratories stock a “Strong Buy,” with a mean target price of $124.84, which indicates an upside potential of about 15% from Friday’s closing price. Out of 21 analysts offering recommendations for the stock, 14 recommend a “Strong Buy,” two advise a “Moderate Buy” rating, and the remaining five have a “Hold” rating.
3. Atmos Energy Corporation
Valued at a market cap of around $20 billion, Atmos Energy (ATO) is the largest natural gas-only local distribution company in the United States. ATO provides services to over 3 million customers across 1,400 communities in eight states, including Virginia, Kentucky, Tennessee, Mississippi, Louisiana, Texas, Nebraska, and Colorado.
Shares of Atmos Energy have gained 10.5% on a year-to-date basis.
On Aug. 9, Wells Fargo raised its price target on Atmos Energy to $145 from $132. A Wells Fargo analyst noted that Atmos posted strong Q3 results, and indicated performance toward the high end of its 2024 guidance range. The firm maintained an “Overweight” rating, citing solid execution, steady growth, and a strong balance sheet.
Atmos Energy’s 39-year streak of dividend growth qualifies it as a Dividend Aristocrat. On Aug. 7, ATO declared a quarterly dividend of $0.805 per share, marking its 163rd consecutive quarterly dividend, payable to its shareholders on Sept. 9. ATO’s annualized dividend of $3.22 equates to a forward yield of 2.51%, which is nevertheless lower than the sector median of 3.80%.
ATO compensates for its lower yield with a robust rate of dividend growth. The company’s dividend has grown at a CAGR of 8.07% over the past decade, surpassing the sector median of 5.17%. Moreover, its moderate payout ratio of 46.33% supports the potential for similar dividend growth in the future.
Atmos Energy recently reported results for the third quarter of fiscal 2024. In Q3, its total revenues grew 5.9% year-over-year to $701.5 million, which fell short of the consensus by $115.4 million. ATO’s net income from the Distribution segment increased to $66 million from $60 million in the previous year. Atmos benefited from a $31 million gain from rate increases and $5 million from customer growth, partially offset by $15 million in operating cost increases and $15 million in depreciation related to its expanding capital expenditures.
Atmos’ Pipeline and Storage unit reported earnings of $100 million for the quarter, an increase from $78 million in the previous year. This unit gained $16 million from increased utility rates and $15 million from improved system utilization, driven by higher peak day demand than the previous year due to elevated temperatures, where natural gas frequently serves as the marginal supply input for utilities. As a result, Atmos Energy’s adjusted earnings per share came in at $1.08, topping expectations by $0.03.
Notably, Atmos has allocated $2.1 billion towards capital expenditures in the fiscal year to date, with 82% of this investment dedicated to safety and reliability, and 14% aimed at accommodating customer growth.
Atmos’ financial position continued to remain strong. It ended the third fiscal quarter with an equity capitalization rate of 61% and around $4.3 billion in liquidity.
For fiscal 2024, management reiterated its guidance and expects to achieve the upper end of its $6.70 to $6.80 earnings per share guidance. Additionally, capital expenditures are projected to be around $3.1 billion.
Analysts tracking the company forecast an 11.31% year-over-year rise in earnings to $6.79 per share for fiscal 2024 while expecting revenue to increase 4.84% year-over-year to $4.48 billion.
In terms of valuation, the stock is trading at 18.85 times forward earnings, which is above the sector median of 16.91x, but slightly below its own five-year average of 19.81x.
Atmos Energy stock has a consensus “Moderate Buy” rating. Out of the nine analysts covering ATO, 4 recommend a “Strong Buy,” one advises a “Moderate Buy,” and the remaining four have a “Hold” rating. The stock trades roughly in line with its mean price target of $130.00, but the Street-high target price of $138.00 suggests an upside potential of about 8%.
