Despite the S&P 500’s recent rally back to flat after being down over 10% earlier this year, there are still some very attractive blue chip companies trading at a discount. We consider all of the stocks on our list to be blue chip companies because of their reputation for quality and their ability to operate profitably in good times and in bad. All the stocks on our list also offer decent dividends and the opportunity for very significant long-term price appreciation. Without further ado, here is our list of ten blue chip stocks worth considering.
10. Allergan Preferred (6.4% yield)
Allergan (AGN and AGN-A) is a rapidly growing, highly profitable, specialized pharmaceutical company that is currently trading at an attractive price. One of its main competitive advantages is that it is located in business-friendly Ireland and therefore pays a very low tax rate. Until last week, Allergan had planned to combine with US pharmaceuticals company Pfizer, but the US Department of Treasury announced new rules that essential put the kibosh on this corporate inversion. Allergan stock (both the common and preferred) declined very sharply following the new rules, and we believe this creates an even more attractive investment opportunity than it was already. We like the common and the preferred, but only the preferred shares pay a dividend. Series A offers a 6.4% yield, and will likely be converted to common stock in March of 2018. You can read our more detailed note on Allergan here.
9. Wells Fargo (3.2% dividend yield)
Wells Fargo (WFC) is down over 13% this year, while the Financials sector ETF is down only 7%, and the overall market (S&P 500) is essentially flat. We believe Wells Fargo has sold off more than it should have for a variety of reasons. For starters, WFC is less sensitive to interest rates, and it should not have sold off as much as some other banks when the Fed recently tamed its expectations for future interest rate hikes. Additionally, WFC inappropriately sold off as many investors reacted fearfully to recent news stories about energy sector exposure, analyst ratings, and new retirement account regulations. We believe these events, combined with WFC’s strong financial position and big 3.2% dividend yield, make now an excellent buying opportunity for long-term investors. You can read our full Wells Fargo report here.
8. HCP, Inc (6.6% dividend yield)
HCP, Inc (HCP) is a Real Estate Investment Trust (REIT) with a big 6.6% dividend yield. It is considered by many to be a blue chip REIT because it has increased its annual dividends for over 30 years in a row. It operates in the healthcare industry with investments in senior housing, post-acute/skilled nursing, life science, medical office and hospital. HCP is still down 10% year-to-date (the S&P 500 is essentially flat), but it was down over 30% earlier this year. HCP is dealing with challenges going forward as skilled nursing operators are dealing with declines in occupancy (post acute/skilled nursing represents 23% of HCP’s portfolio). We haven’t completed a deep dive of HCP, but there was an excellent write-up last week by Brad Thomas where he rates it a “BUY.” You can view his article here.
7. Phillips 66 (2.6% dividend yield)
Phillips 66 (PSX) is the most diverse of the major refining companies, but it still gets lumped in and trades along with other less diverse refiners like Valero and Tesoro. We believe Phillips 66 deserves a different valuation multiple based on its significant chemicals and midstream businesses, and the stock should trade higher than it does. We also believe this cash-rich company will continue to consistently raise its dividend, and will eventually trade at a much higher price that it does now. Our previous report on Phillips 66 is from late 2015, but the thesis still holds. You can view the report here.
6. IBM (3.4% dividend yield)
International Business Machines (IBM) is out of favor with many investors, but it remains enormously profitable. The narrative against the company decries it as a financially engineered dinosaur with declining legacy business and a foolish cloud-computing strategy. Since we put out our first report in favor of IBM back in late 2015 the stock has significantly outperformed the market. However, we believe this stock has a lot more room to run (i.e. upside potential) before it’s anywhere near its intrinsic value. You can read our most recent free IBM report here (it’s from late 2015, but the thesis still holds).