Global financial markets have recently rebounded following a rollercoaster ride earlier this month, with the S&P 500 enjoying one of its longest winning streaks since November last year. This resurgence is largely fueled by renewed optimism for an economic soft landing following July’s better-than-expected retail sales and consumer inflation data, which helped alleviate earlier fears of an economic slowdown.
However, with an election looming and escalating geopolitical tensions, there is likely to be more volatility in the upcoming months. That said, leading investment bank Morgan Stanley (MS) is advising investors to focus on defensive stocks, anticipating ongoing market turbulence until there's clearer evidence of sustained growth or a Federal Reserve policy shift. The firm's note suggests that current stock valuations are high and already reflect optimal growth scenarios, adding to the uncertainty.
To navigate this environment, the bank recommends focusing on defensive sectors such as utilities, healthcare, consumer staples, and a few select areas of real estate. These sectors historically outperform during periods of economic uncertainty and tend to provide stability and reliable dividend income. Keeping this in mind, here are three “Buy”-rated defensive dividend stocks from Morgan Stanley's latest recommendations.
Dividend Stock #1: AbbVie
Commanding a massive market cap of roughly $348 billion, Illinois-based AbbVie Inc. (ABBV) is a pharmaceutical powerhouse known for developing innovative drugs in specialized therapeutic areas such as immunology, oncology, and neuroscience. The drug manufacturer’s star product, Humira, is a blockbuster injectable that has transformed the landscape of autoimmune disease treatment. Other key drugs in AbbVie’s portfolio include Venclexta, Vraylar, Skyrizi, and Rinvoq.
Shares of this pharma giant have climbed 30.3% over the past 52 weeks and 26.2% on a YTD basis, overshadowing the broader S&P 500 Index’s ($SPX) 28.1% gain over the past 52 weeks and 17.4% return on a YTD basis.
Since its inception in 2013, AbbVie has increased its dividend by over 285%, reflecting a powerful commitment to boosting shareholder returns. As a Dividend Aristocrat with over 25 years of steady dividend growth and a healthy payout ratio of 56.47%, AbbVie exemplifies reliability and financial strength.
On Aug.15, the company paid its shareholders a quarterly dividend of $1.55 per share. Plus, its annualized dividend of $6.20 per share offers a solid dividend yield of 3.15%.
In addition to its highly appealing dividend yield, ABBV stock is priced at 17.83 times forward earnings, which is lower than the healthcare sector median.
Shares of the pharmaceutical powerhouse closed up more than 3% on July 25 after its Q2 earnings results, which exceeded Wall Street’s top- and bottom-line predictions. Despite a notable 30% year-over-year drop in global sales of AbbVie’s blockbuster drug, Humira, as a result of competition from cheaper biosimilars, revenue rose 4.3% annually to $14.5 billion, slightly beating estimates of $14 billion.
This top-line growth was driven by stellar gains from Skyrizi and Rinvoq, highlighting the company’s effective transition to its expanding drug pipeline. Skyrizi’s global revenue skyrocketed to $2.7 billion, up 44.8% year over year, while global revenue from Rinvoq surged to $1.4 billion, marking a remarkable 55.8% annual jump. On an adjusted basis, the company earned $2.65 per share, outpacing Wall Street’s forecast by a 3.1% margin.
Management raised its adjusted EPS guidance for fiscal 2024, now anticipating a range between $10.71 and $10.91. Analysts tracking AbbVie project the company’s profit to shrink slightly in fiscal 2024 before rising 11.3% year over year to $12.09 per share in fiscal 2025.
Morgan Stanley has spotlighted AbbVie as a prime pick for healthcare exposure, praising its diverse drug pipeline that has propelled the company beyond industry averages in revenue and EPS growth.
With the stock outperforming the broader market so far this year, the investment bank is bullish, holding an “Overweight” rating and setting a price target of $211 per share. This suggests AbbVie could still climb 7.7% from current levels, making it a standout choice in any interest rate environment.
Overall, ABBV stock has a consensus “Moderate Buy” rating. Out of the 22 analysts offering recommendations, 13 suggest a “Strong Buy,” two advise a “Moderate Buy,” and the remaining seven give a “Hold” rating.
While the stock presently trades flat with its average analyst price target of $195, the Street-high price target of $218 suggests that ABBV could rally as much as 11.2% from current levels.
Dividend Stock #2: Northrop Grumman
Valued at roughly $74.7 billion by market cap, Virginia-based Northrop Grumman Corporation (NOC) is a global giant in aerospace and defense, committed to advancing global security. With more than 550 facilities across all 50 U.S. states and 25-plus countries, the company designs, develops, and supports cutting-edge products that connect, advance, and protect the U.S. and its allies.
Shares of this defense contractor have gained nearly 17.6% over the past 52 weeks and 8.1% on a YTD basis.
On June 12, Northrop Grumman paid its shareholders a dividend of $2.06 per share, representing a solid 10% boost. This 21st consecutive annual dividend hike underscores the company’s unwavering commitment to shareholder value. CEO Kathy Warden attributed the latest increase to the firm’s strategic investments and robust cash flows.
Northrop Grumman’s annualized $8.24 per share payout translates to a 1.63% dividend yield. Furthermore, the company maintains a healthy payout ratio of 30.27%, highlighting its ability to balance rewarding shareholders while sustaining growth.
From a valuation perspective, the stock is trading at 20.03 times forward earnings and 1.89 times sales, representing a modest discount to some of its aerospace and defense industry peers, such as RTX Corporation (RTX) and Lockheed Martin Corporation (LMT).
Northrop Grumman’s shares popped 6.4% on July 25 after the company announced its better-than-expected Q2 earnings results. Total sales for the quarter soared 7% annually to $10.2 billion, narrowly edging past estimates. This impressive growth was driven by robust performance in the Aeronautics and Defense segments, highlighting ongoing strong demand for Northrop Grumman’s cutting-edge products and services.
The company’s earnings of $6.36 per share showed an impressive annual growth of 19%, and topped forecasts by a 6.9% margin. During the quarter, NOC generated a free cash flow of approximately $1.1 billion, marking a staggering 80% improvement from the year-ago quarter’s $615 million, driven by a significant boost in operating cash flow.
Supported by increasing global orders for the company’s products and effective business execution, management raised its fiscal 2024 sales and EPS guidance. Sales for the entire year are now projected to range between $41 billion and $41.4 billion, while adjusted EPS is expected to arrive between $24.90 and $25.30. Additionally, free cash flow is forecasted to land between $2.3 billion and $2.7 billion.
Analysts tracking Northrop Grumman project the company’s profit to reach $25.15 per share in fiscal 2024, up nearly 8% year over year, and grow another 10.3% to $27.74 per share in fiscal 2025.
While the firm’s modest gains over the past year have not kept up with its sector peers, Northrop Grumman has caught Morgan Stanley's eye as an undervalued gem poised for long-term growth in the industrial sector. The brokerage firm has an “Overweight” rating on NOC, paired with a target price of $592, which points to a potential upside of 17% from current price levels.
NOC stock has a consensus “Moderate Buy” rating overall. Out of the 18 analysts covering the stock, seven suggest a “Strong Buy,” nine advise a “Hold,” and the remaining two have a “Strong Sell” rating.
The average analyst price target of $519.28 indicates 2.6% potential upside from the current price levels. However, the Street-high price target of $605 suggests that NOC could rally as much as 19.5% from here.
Dividend Stock #3: Public Service Enterprise Group
Founded in 1903, New Jersey-based Public Service Enterprise Group Incorporated (PEG) is a diversified energy leader with a market cap of roughly $40.2 billion. Through its key subsidiaries, the company supplies electricity, manages gas supply obligations, and ensures reliable transmission and distribution of energy.
As a leader in clean energy, PEG is committed to providing sustainable and dependable energy solutions to a diverse customer base, ranging from residential consumers to large industrial and commercial entities.
PEG stock has rallied 32.3% over the past 52 weeks and 31.6% on a YTD basis, sailing past the SPX’s performance during both time frames.
On July 15, the company announced a quarterly dividend of $0.60 per share, set to be distributed to its shareholders on or before Sept. 30. This brings its annualized dividend to $2.40 per share, resulting in an attractive 2.97% dividend yield. With a payout ratio of 69.98% and a 12-year history of consistent dividend hikes, Public Service Enterprise demonstrates a solid commitment to rewarding its shareholders.
Despite delivering mixed Q2 earnings results on July 30, shares of Public Service Enterprise surged more than 2% in the subsequent trading session. Operating revenues for the quarter edged up to $2.4 billion, exceeding Wall Street’s predictions by a solid 11.8% margin. However, adjusted EPS of $0.63 fell short of expectations, and marked a 10% decline compared to the same period last year.
Commenting on the Q2 performance, CEO Ralph LaRossa said, “PSEG Power successfully completed the scheduled refueling outage at our 100%-owned Hope Creek nuclear unit and continues to pursue multiple growth opportunities that include capacity uprates, hydrogen pilots, and potential sales to data centers – consistent with our efforts to increase the predictability of our business and align with state economic development goals.”
Management reaffirmed its fiscal 2024 adjusted EPS guidance at $3.60 to $3.70, and the company also upheld its five-year adjusted EPS growth outlook of 5% to 7% through fiscal 2028. Analysts tracking Public Service Enterprise expect the company’s profit to increase 5.8% year over year to $3.68 per share in fiscal 2024 and rise another 10.1% to $4.05 per share in fiscal 2025.
Morgan Stanley has spotlighted this utility giant for its high return on equity (ROE) and above-average growth potential. The investment bank holds an “Overweight” rating and a price target of $78 per share. Notably, PEG stock has already surpassed this target.
Overall, PEG has a consensus “Moderate Buy” rating. Out of the 17 analysts covering the stock, nine suggest a “Strong Buy,” one advocates a “Moderate Buy,” and the remaining seven recommend a “Hold” rating.
PEG stock is trading nearly flat with its average analyst price target of $80.60. However, the Street-high price target of $89 suggests the PEG could rally as much as 10.6% from here.
On the date of publication, Anushka Mukherji did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
