The escalation of tensions in the Middle East is the latest in a series of global headlines to send investors reeling. With high volatility in oil prices, more troubling news out of China's property sector, and the Federal Reserve standing firm on its “higher for longer” stance, many high-profile market-watchers are now warning that the elements are in place for a potential recession.
So, what can investors do to protect their portfolios in this environment? Typically, “safe havens” during periods of macroeconomic turmoil can be found in sectors that experience steady demand - such as utilities, consumer staples, and healthcare - and offer reliable dividend yields to shareholders.
Here, we'll take a look at three top-quality stocks from traditionally defensive sectors that offer attractive dividend yields - and have plenty of upside to offer, according to analysts.
Sempra
Utilities are a classic pick to withstand any economic cycle, and we start off our list with energy services holding company Sempra (SRE). Founded in 1998 and based out of California, Sempra delivers essential energy services to over 40 million customers in California, Texas, Mexico, and the LNG export market.
The company currently commands a market cap of $43.1 billion and offers a dividend yield of 3.44%. Moreover, Sempra has been raising its dividend consecutively for 12 years.
Sempra stock is down 9% on a YTD basis, but has returned 112% over the last decade.
Sempra reported Q2 revenues of $3.33 billion, down 6% year over year, while EPS of $1.88 surpassed the consensus estimate. SRE has consistently beaten Wall Street's EPS estimates in each of its last four quarterly reports.
Meanwhile, an interesting development that can aid Sempra is the rising population in the key market of Texas. According to the U.S. Census Bureau, the population of Texas is currently growing at a 1.57% annual rate and the state is expected to continue to grow for at least the remainder of this decade. Since Sempra is the largest utility provider in the state through its Oncor subsidiary, some of the population growth will be in its service territory, which bodes well for the company in the long run.
Overall, analysts remain optimistic about the stock, assigning it a “Moderate Buy” rating and a mean target price of $90.09. This indicates an upside potential of about 31% from current levels. Out of 13 analysts covering the stock, 6 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, and 6 have a “Hold” rating.
McDonald's
Next up on our list is the world's largest restaurant chain, McDonald's. McDonald's (MCD) has been around since 1940 and serves over 69 million customers daily in more than 100 countries. One of the most recognizable brands in the world, the company's restaurants serve a variety of value-priced food and beverages.
Commanding a market cap of $182.13 billion, McDonald's has a dividend yield of 2.43%. Notably, McDonald's has raised its dividend consistently over the past 47 years, making it a Dividend Aristocrat.
Shares of McDonald's are down 3% in 2023 so far, but MCD is up about 20% in the last three years.
McDonald's posted strong numbers for its second quarter. Revenues came in at $6.5 billion, up 14% from the prior year. Meanwhile, EPS almost doubled to $3.15 when compared to the year-ago period, and comfortably topped the consensus estimate of $2.78. In fact, the company's EPS has surpassed Street expectations in each of the past five quarters.
Notably, the company's recent decision to hike royalty fees by 25% for new locations in the U.S. and Canada is expected to be a key revenue driver for the company in the long run. With 1,900 new locations likely to come up this year, the additional revenues from the hike in royalty fees are going to be substantial. Moreover, McDonald's is bulking up its digital capabilities, with a 2025 revenue target of $43 billion from this channel.
Analysts remain upbeat about McDonald's stock, which has an average rating of “Moderate Buy” and a mean target price of $328.07. This denotes an upside potential of roughly 30% from current levels. Out of 28 analysts covering the stock, 18 have a “Strong Buy” rating, 3 have a “Moderate Buy” rating, and 7 have a “Hold” rating.
Abbott Laboratories
We conclude our list with pharmaceutical giant Abbott Laboratories (ABT). Established in 1888, Abbott is a global healthcare company that develops, manufactures, and sells a broad range of pharmaceutical and medical device products.
The company currently commands a mammoth market cap of $167.91 billion and offers a dividend yield of 2.07%. Abbott has been raising dividends consecutively for 51 years, making it a Dividend King.
Abbott's share price is down roughly 10% on a YTD basis.
Abbott's EPS for Q2 2023 came in at $1.08, down 24.5% from the year-ago period - but better than the average analyst estimate of $1.05. Notably, the company's EPS has beaten expectations in each of the past five quarters. Meanwhile, revenues fell 11.4% to about $10 billion.
The tough comparison in quarterly revenues can be attributed to the waning of COVID-19 and related demand for its BinaxNOW COVID-19 test. However, its three other segments of nutrition, pharmaceuticals, and medical devices all posted net sales growth from the year-ago period, which is an encouraging sign.
Analysts have a “Strong Buy” rating for Abbott stock, with a mean target price of $122.88. This indicates an upside potential of about 26% from current levels. Out of 18 analysts covering the stock, 12 have a “Strong Buy” rating, 2 have a “Moderate Buy” rating, and 4 have a “Hold” rating.
