For the last 128 years, the iconic Dow Jones Industrial Average (^DJI) has served as the premier health barometer for Wall Street. What began as a 12-stock index that primarily contained industrial companies has transformed into a 30-component index comprised of time-tested, multinational businesses that have consistently delivered for investors over the long run.
While most Dow Jones stocks aren’t going to rival the growth potential seen from innovative juggernauts like Nvidia and Broadcom, many are well-positioned to make their shareholders richer over time. As we turn the page to the second half of 2024, three magnificent businesses among the Dow’s 30 components stand out as no-brainer buys.
Coca-Cola
The first amazing Dow stock that opportunistic investors can confidently add to their portfolios for the second half of 2024 is none other than beverage goliath Coca-Cola (KO).
Arguably the biggest concern for consumer staples stocks like Coca-Cola is the adverse impact above-average inflation could have on purchasing power. Stubbornly high shelter expenses have provided an unwanted boost to the U.S. core inflation rate. If consumers have less disposable income to put to work, it could lead to a recession and poor short-term operating results for consumer-facing businesses.
The good news for Coca-Cola is that it sells a basic necessity item. No matter how well or poorly the U.S. or global economy is performing, consumers are going to purchase beverages. It just so happens that Coca-Cola has more than two dozen brands globally that are generating at least $1 billion in annual sales.
What’s more, Coca-Cola’s geographic diversity is a competitive edge that virtually no other consumer staples company can match. With the exception of Cuba, North Korea, and Russia, it has ongoing operations in every other country. This leads to predictable operating cash flow in developed countries, as well as needle-moving organic growth in emerging markets.
Branding is another key catalyst for Coca-Cola. Kantar’s annually released “Brand Footprint” report notes that Coke was the most-chosen brand by consumers from retail shelves for a 12th consecutive year. This is a testament to the company’s top-tier marketing and provides further evidence that basic-necessity goods can thrive in virtually any economic climate.
The company has been willing to embrace digital-media advertising and artificial intelligence (AI) to tailor its message(s) to a younger audience. Meanwhile, Coca-Cola has more than a century of history it can lean on to continually engage with its mature consumers.
Although Coca-Cola isn’t going to blow your socks off from a growth perspective, its business is transparent and predictable. To boot, its forward price-to-earnings (P/E) ratio of less than 21 marks an 11% discount to its average forward earnings multiple over the last half-decade.
Johnson & Johnson
A second magnificent Dow stock that makes for a no-brainer addition to investors’ portfolios for the second half of 2024 (and likely well beyond) is healthcare conglomerate Johnson & Johnson (JNJ).
“J&J,” as Johnson & Johnson is more commonly known, has decisively been left in the dust by the current bull market. The clear-cut reason for its underperformance almost certainly has to do with outstanding litigation regarding its now-discontinued talcum-based baby powder.
In the neighborhood of 100,000 lawsuits allege that J&J’s talc-based powder causes cancer. Two previous attempts by J&J to settle this collective litigation were thrown out in court.
Although Wall Street and investors loathe legal uncertainty, the important thing to recognize is that Johnson & Johnson has the financial means to cover an eventual settlement. It’s one of only two publicly traded companies to bear the highest possible credit rating (AAA) from Standard & Poor’s. J&J’s bountiful operating cash flow and cash on hand will more than cover any potential financial judgment.
The fuel behind Johnson & Johnson’s steady operating earnings growth is its pharmaceutical segment. Management has been shifting focus to this higher-growth and juicier margin division for more than a decade. J&J is investing big bucks into novel research and has demonstrated a willingness to collaborate on potential blockbuster therapies.
In addition to its core drug division, Johnson & Johnson has a world-leading medical-device segment. While medical technologies have been somewhat commoditized, an aging domestic and global population, coupled with improving access to preventative medical care, should act as a long-term catalyst for this segment.
Another reason prospective investors can trust J&J to deliver for investors is continuity in its C-suite. Since being founded 138 years ago, J&J has only had 10 CEOs, including current chief Joaquin Duato. Minimal turnover at the top means the company’s various growth initiatives have the proper oversight from start to finish.
Mirroring Coca-Cola, Johnson & Johnson’s stock is also historically cheap. Based on Wall Street’s consensus earnings-per-share (EPS) estimate for 2025, J&J is trading at a forward P/E of 13.6, which represents a 15% discount to its average forward P/E ratio over the trailing-five-year period.
Amazon
The third magnificent Dow Jones Industrial Average stock that makes for a no-brainer buy in the second half of 2024 is e-commerce colossus Amazon (AMZN).
The clearest headwind for current and prospective Amazon investors is the likelihood of a U.S. recession taking shape in the not-too-distant future. Although U.S. economic data has remained relatively strong, select predictive metrics, such as the first meaningful decline in U.S. M2 money supply since the Great Depression, portend upcoming trouble for the economy. Since Amazon generates a good chunk of its revenue from its online marketplace, some investors believe a recession would clobber its stock.
While recessions can be scary, the important thing to remember is that they’re also short-lived. In the 78-plus years since World War II ended, 9 out of 12 U.S. recessions were resolved in less than 12 months. This means consumer-facing companies, like Amazon, are standing in the proverbial sun far more often than navigating choppy waters.
Furthermore, Amazon’s operating cash flow has very little to do with its market-leading e-commerce segment. Though its online marketplace is responsible for driving close to 2.5 billion people to its website each month, Amazon’s ancillary operating segments handle most of the heavy lifting.
No operating segment is more vital to Amazon’s long-term growth potential or its cash-flow generation than Amazon Web Services (AWS). As the world’s leading cloud infrastructure services platform (based on spending), AWS is currently pacing more than $100 billion in annual run-rate sales.
What’s incredible about this revenue figure is that enterprise cloud-service spending is still in the process of ramping up. With cloud-service margins easily topping e-commerce margins, it should come as no surprise that AWS is consistently responsible for 50% to 100% of Amazon’s quarterly operating income.
Subscription services and advertising services are doing their part, as well. Attracting 2.5 billion visitors each month has aided Amazon’s ad-pricing power. Meanwhile, having the exclusive rights to Thursday Night Football, along with an expansive content library, is a boon to the company’s Prime subscription.
To round things out, Amazon, like Coca-Cola and Johnson & Johnson, is historically inexpensive. But whereas the traditional P/E ratio works great for evaluating mature businesses, it’s not particularly useful with fast-growing companies (like Amazon) that are reinvesting a substantial portion of their cash flow. This is what makes operating cash flow such a vital metric when evaluating hypergrowth stocks.
Amazon is currently valued at 13.4 times Wall Street’s consensus cash-flow estimate for the company in 2025. That’s a mammoth discount to its average cash-flow multiple of 22.1 over the last five years and the median year-end multiple of 30 that investors gladly paid to own Amazon stock throughout the 2010s.
— Sean Williams
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Source: The Motley Fool