Stocks are struggling to pick a direction today, with all eyes on the Fed after several months of heightened volatility in capital markets. Although the Fed has already paused its historic rate-hike campaign, a generally resilient U.S. economy has complicated the central bank's task as it attempts to rein in inflation.
While the major market benchmarks are still trading at a discount to their recent highs, it's an opportune time to consider adding some top-rated blue-chip stocks to your portfolio. The stocks highlighted here are the highest rated on the Dow Jones Industrial Average ($DOWI), and these well-established market veterans have all successfully navigated numerous business cycles - and offer shareholder value in the form of regular dividend payments, too.
Merck & Company
Founded way back in 1891, Merck & Company (MRK) is a true pharmaceutical giant, with a market cap of $264.55 billion - making it the fourth-largest pharma company in the world by market cap. The New-Jersey headquartered company has operations in 66 countries across the world, and was ranked 71st in last year's Fortune 500 list. Merck's primary operations are concentrated in the healthcare, life sciences, and electronics sectors.
Merck stock, which offers a dividend yield of 2.81%, is down 5.2% on a YTD basis.
In its latest results for the third quarter, Merck's revenues came in at about $16 billion, up 7% from the prior year. Similarly, EPS grew by 15% to $2.13, and surpassed the consensus estimate of $1.95. Impressively, the company's bottom line has topped expectations in each of the past five quarters.
Keytruda, its immuno-oncology drug, contributed heavily to overall sales at $6.3 billion for the quarter, up 17% YoY. The drug also received FDA approval for perioperative treatment of certain patients with NSCLC in combination with chemotherapy during the quarter.
To reduce its dependency on Keytruda, Merck is beefing up its other divisions. In particular, Merck has high hopes for its cardiovascular division to be a key revenue driver following its $11.5 billion buyout of Acceleron Pharma. With Acceleron's Sotatercept - an activin receptor type IIA-Fc (ActRIIA-Fc) fusion protein that is expected to receive approval in pulmonary arterial hypertension (PAH) early next year- now in its portfolio, Merck expects to drive more than $10 billion in revenues from its cardiovascular division by the middle of next decade. More recently, Citi analysts predicted $20 billion in peak revenue from Merck's Prometheus acquisition.
Analysts have an average rating of “Strong Buy” for Merck, with a mean target price of $126.47. This indicates an upside potential of nearly 23% from current levels. Out of 18 analysts covering the stock, 15 have a “Strong Buy” rating and three have a “Hold” rating.
UnitedHealth Group
Shifting from mega-cap pharma over to another massive healthcare name, we have insurance company UnitedHealth Group (UNH). Founded in 1977, UnitedHealth provides health insurance and other related products and services to individuals, employers, and government programs. It is the largest healthcare company in the world by revenue, and commands a substantial market cap of $497.17 billion.
UNH offers a dividend yield of 1.32% and is up 2.8% in 2023 so far.
UnitedHealth's Q3 earnings results, reported in mid-October, were stronger than expected. Revenues rose 14% to $92.4 billion, while EPS grew by 13.3% from the previous year to $6.56. EPS surpassed analysts' expectations of $6.33, continuing a trend of beating bottom-line estimates.
The insurance giant's vast distribution network (1.7 million healthcare professionals and 6,400 facilities in the U.S., plus a network of over 67,000 retail pharmacies for pharmacy care services), popularity of its products (UnitedHealth leads the insurance market by market share and by membership), and demographic tailwinds in the form of increased life expectancy all suggest there's room for continued growth in the years ahead.
Overall, analysts have a “Strong Buy” rating on the stock with a mean target price of $596.20 - indicating an upside potential of roughly 10.5% from current levels. Out of 20 analysts covering the stock, 17 have a “Strong Buy” rating, two have a “Moderate Buy” rating, and one has a “Hold” rating.
Microsoft
We wrap up our list with software giant Microsoft (MSFT). Microsoft, most popular for its Windows operating system for computers, has expanded its range of offerings over the years with productivity applications, video games, and a major investment in the artificial intelligence (AI) field via its stake in OpenAI. The company is also a major player in the enterprise cloud computing market with its Azure platform.
With a massive market cap of $2.69 trillion, Microsoft's share price has zoomed 52% so far this year, and currently offers a dividend yield of 0.75%.
Microsoft's latest results for fiscal Q1 were robust, fueled by strength in its cloud and AI businesses. The company reported revenues of $56.5 billion in the quarter, up 13% from the prior year. EPS jumped by 27.2% to $2.99, comfortably outpacing the consensus estimate of $2.65. Notably, the company's EPS has topped expectations in each of the past five quarters.
Long-term debt levels remained almost flat from the start of the year at about $42 billion. However, the company's cash balance ($80.4 billion) and cash flow from operations ($30.6 billion) improved significantly from the beginning of the year, providing the company with ample liquidity.
Following its multi-billion dollar investment in ChatGPT maker OpenAI, Microsoft has been steadily integrating AI into its suite of Office 365 products. This is expected to increase business productivity substantially for the existing user base of 345 million. Plus, its search engine Bing's integration with OpenAI's ChatGPT could result in it becoming a serious challenger to Google in the search engine market in the upcoming years.
In its latest earnings call, CEO Satya Nadella said that it has taken a “full stack approach” to develop its AI operations, which should allow Microsoft to scale efficiently as it continues to invest in the segment. Plus, a newly expanded partnership with software heavyweight Oracle (ORCL) should drive additional growth in its Azure business.
Analysts have deemed Microsoft stock a “Strong Buy” with a mean target price of $393.03 - denoting an upside potential of about 8.5% from current levels. Out of 36 analysts covering the stock, 30 have a “Strong Buy,” three have a “Moderate Buy,” and three have a “Hold” rating.
