The big news on Friday, June 24 was that, in a historic referendum, Britain voted 51.8% to 48.2% to leave the European Union. This was a shock to the markets for many reasons, as they had largely priced in the remain vote to win. Most polling showed the remain camp had a small, but noticeable, majority. In addition, Britain leaving the EU places a great deal of uncertainty on the global markets. The fear is that other EU member nations may also decide to leave at some point in the future, now that there is a real precedent.
On Friday, the Dow Jones Industrial Average opened down 500 points. The biggest underperformers were banks and materials; however, there were some stocks increasing in value as the markets crashed. The utility, consumer staples, and real estate investment trust sectors strongly outperformed. Specifically, U.S. stocks within these industries that do not have international operations rose 2% or more, including Altria Group (MO ), Consolidated Edison (ED ), and HCP (HCP ).
Tobacco stocks were among the market’s best performers on Friday. Altria operates the flagship Marlboro brand in the U.S., and it owns a diversified business with other products including smokeless tobacco and wine and a large stake in SABMiller plc (SBMRY). Altria stock was up more than 2% in mid-day trading because the company does not have international operations. And Altria generates a high level of free cash flow and pays a high dividend.
Last year, Altria generated $5.58 billion of free cash flow, which was 22% of revenue. That is a very high level of free cash flow as a percentage of sales. With its huge cash flow, Altria returns a great deal of cash to shareholders, primarily through dividends. Altria has a stated dividend policy to distribute approximately 80% of its adjusted profit each year. Even better, Altria has raised its dividend 49 times in the past 46 years. Altria currently pays an annualized dividend of $2.28 per share, which amounts to a hefty 3.4% yield based on its current share price.
Separately, utilities are a good place to get defensive, as they are highly resistant to economic downturns. People will always need to keep the lights on, even during recession. And this is particularly true when it comes to the global economy, as utilities are contained entirely in the United States. In addition, regulated utilities are able to pass along annual rate hikes, which keeps their growth intact.
That is why Consolidated Edison is a good pick. ConEd is a regulated gas and electric utility. It serves more than 3 million customers, primarily in New York City. Last year, ConEd’s earnings rose 9% to $4.07 per share thanks to favorable rate rulings and cost controls. In February, ConEd raised its dividend 3%, to $2.68 per share. The stock has a 3.5% dividend yield. ConEd also has a stated dividend policy, which is to maintain a payout ratio of 60%-70% of its adjusted earnings.
Lastly, HCP is another good pick after the Brexit vote because it has nothing to do with the European economy. It is a REIT in the U.S., which owns and operates health care–related properties such as skilled nursing, hospitals, and medical laboratory facilities. Its cash flow has steadily risen in recent years and is poised for future growth because of the aging U.S. population. In 2015, which amounted to a very difficult year for the company because of a Department of Justice investigation into its major tenant ManorCare, HCP still grew 4% adjusted funds from operation, or FFO, to $3.16 per share. HCP generates more than enough cash flow to support its $2.30 per share annual dividend.
There is reason for investors to feel confident about HCP’s future, because it is adequately dealing with the ManorCare issue. ManorCare was charged with submitting false Medicare claims for services that, according to the Department of Justice, should not have been reimbursed. In response, HCP sold 50 HCR ManorCare non-strategic assets last year, with proceeds of $350 million. It continued to reduce its reliance on ManorCare when it announced it would spin off ManorCare into a separate publicly traded entity.
HCP is a Dividend Aristocrat, which is a group of S&P 500 companies that have raised their dividends for at least 25 consecutive years. HCP raised its dividend in 2016 by 1%, which marked its 31st annual dividend increase in a row. HCP happens to be the only REIT included on the Dividend Aristocrat list. Based on its June 23 closing price, HCP stock yields 6.7%; this is a huge dividend yield — more than three times the average S&P 500 yield.
The Bottom Line
What all three of these stocks have in common is that they are defensive in nature, pay high dividend yields, and are sufficiently insulated from geopolitical risk. None of these companies have any international operations, so they are not affected by Brexit. Their relative safety makes them attractive picks in times of elevated global risk