4 Stocks Safer Than Treasuries

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Lisa Springer

NEW YORK ( StreetAuthority) -- Since July 22, a global market rout has caused -- almost daily -- price swings of up to 300 basis points in the S&P 500. Such market volatility and fears of an imminent recession have triggered a "flight to quality" that has even the most stalwart investors seeking safe havens.

At one time, U.S. Treasuries were considered the ultimate in safe investing, mainly because of the U.S.'s "AAA" credit rating. The "AAA" rating is reserved for bond issuers with pristine balance sheets and is an extremely rare status. Only a few countries and companies qualify for this distinction, which is as close as you can get to guaranteed creditworthiness.

Unfortunately, since Standard & Poor's downgraded the U.S credit rating from "AAA" to "AA+" in the beginning of August, U.S. Treasuries have lost some of their luster. But despite this tough economic market, there are still a handful of "AAA"-rated companies whose stocks are worth owning for their safety and credit stability.

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The fact that there are only a few names with the "perfect" credit rating is not only a sign that no new companies have been added to the prestigious "AAA" list in years, but also that several have been downgraded. Standard & Poor's lowered Berkshire Hathaway ( BRK-B) to "AA+" in August, and did the same with General Electric ( GE) and Pfizer ( PFE) two years ago. Today, the number of "AAA"-rated companies in the S&P stands at just four.

And in this uncertain market, these are exactly the type of stocks I'm looking for.
  • Also see: StreetAuthority co-founder Paul Tracy calls these kinds of stocks "forever" stocks. Watch this special presentation to learn more.
  • Below are the four companies in the S&P that hold the coveted "AAA" rating. They may just be the safest stocks in the world...

    1. Johnson & Johnson ( JNJ)

    Yield: 4%

    This diversified consumer health care giant has posted 27 straight years of earnings increases and 49 consecutive years of dividend hikes. In the past five years, sales have increased 4% annually to $61.6 billion, while earnings per share have grown 7% each year to $4.76 and dividends have risen 11% a year to $2.28 per share.

    Johnson and Johnson

    Product recalls of Tylenol and Motrin tarnished the company's reputation last year, but Johnson & Johnson appears to be on the rebound. The firm is benefiting from international expansion and a strong pharmaceutical pipeline, including Zytiga, a prostate-cancer treatment, and Xarelto, for stroke prevention. During the second quarter of 2011, Johnson & Johnson's sales improved 8.3% to $16.6 billion compared with the year-ago period, while earnings improved 5.8% year-over-year to $3.5 billion, or $1.28 per share.

    Johnson & Johnson's financial strength is unsurpassed. The company has nearly $30 billion in cash, while debt sits at only $19 billion. Dividend payout ratio is conservative at 52%. The company trades at the same price-to-earnings ratio as the S&P (15), but offers a much better yield -- 3.6% compared with the index's 2.0% yield.

    2. Microsoft ( MSFT)

    Yield: 3%

    Microsoft's Windows software powers 90% of the world's computers. In addition to a dominant brand, Microsoft boasts a top-notch balance sheet and performance metrics any CEO would envy. Five-year growth in earnings has averaged 18% a year, and Microsoft's return on equity of 45% is twice the S&P's 26%.

    Microsoft's financials are solid. Revenue rose 12% in fiscal year 2011 (ended June 30) to $70 billion, compared with $62 billion in the prior year. EPS improved 28% year-over-year to $2.69. Like many large companies during this uncertain environment, Microsoft is also sitting on a lot of cash. But the numbers are staggering: Microsoft has $50 billion in cash on hand, generates $27 billion in annual cash flow and has only $13 billion in debt. This company isn't going anywhere any time soon.

    Microsoft began paying dividends eight years ago, having raised them six times since then. A 25% increase in September put the dividend at an annual rate of 80 cents. The payout ratio of 23% leaves plenty of room for dividend growth. Microsoft shares trade at a P/E ratio of 10, roughly half its five-year high of 21.

    3. Exxon Mobil ( XOM)

    Yield: 3%

    Exxon is the world's largest oil and gas company, with resources exceeding 80 billion barrels. The cyclical nature of the oil business is reflected in Exxon's financial results. After rising only 2% in five years, Exxon's earnings jumped 58% in 2010 to $30.5 billion, from $19.3 billion a year earlier. This year has been just as profitable. In the first half of 2011, earnings climbed 54% to $21.3 billion year-over-year, while EPS improved 47% to $4.32 per share.

    Strong cash flow has allowed Exxon to raise dividends 28 years in a row, including a 7% increase in April to a $1.88 annual rate. Exxon's June balance sheet shows $10 billion of cash and $16.5 billion of debt, representing just 10% of equity. The stock's dividend payout ratio is 24%, while the yield is 2.6% based on the new rate.

    4. Automatic Data Processing ( ADP)

    Yield: 3%

    ADP provides back-office services such as payroll processing, tax and benefits administration, and human-resource services. The company has a great competitive moat; once a client is onboard, switching costs are huge, so client retention rates are upward of 90%.

    In the past five years, ADP has grown EPS 12% a year to $2.52 in fiscal 2011 (ended June 30). The balance sheet is also solid. ADP sits on $1.8 billion of cash and has virtually no debt, enabling it to pay out 56% of earnings as dividends. In addition, dividends have improved for 36 consecutive years. The last increase was in November 2010, when ADP raised payments 6% to a $1.44 annual rate, so another hike is likely before year-end. ADP trades at a P/E ratio of 19 and yields 2.9%.

    Risks to consider: Exxon's earnings are cyclical, while Johnson & Johnson has been hurt by product recalls. However, all of these stocks have stockpiles of cash, low debt and superior records of dividend growth.

    Action to take --> All four of these companies are exceptionally creditworthy, which means they can meet their financial obligations with no trouble. They are also the only four names still standing in Standard & Poor's select list of "AAA" ratings. My top pick is Microsoft because of its consistent high EPS growth and low P/E ratio. But any of these four names are attractive, based on their combination of safety and high yields.

    Disclosure: Neither L. Springer nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

    Also see:
    2 Dividend Stocks for a Global Megatrend
    3 Small Stocks with 7%-Plus Dividends
    12 Companies that Could Go Bankrupt Very Soon

    This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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