With inflation still elevated, the Fed raised interest rates again despite the turmoil in the financial system. Therefore, recession fears resurface on Wall Street. Amid the uncertain macroeconomic backdrop, quality large-cap stocks Taiwan Semiconductor Manufacturing Company Limited (TSM), Johnson & Johnson (JNJ), and Merck & Co., Inc. (MRK) could be wise investments for generating stable returns.
According to Bank of America’s fund manager survey, the probability of a recession is back on the rise for the first time since November 2022. Approximately 42% of fund managers expect a recession within the next 12 months, an increase from 24% in February. Also, Goldman Sachs Group’s Chief Economist Jan Hatzius sees a 35% chance of a recession in a year, up from the 25% forecasted previously.
Despite the banking crisis, the Federal Reserve approved another 25-basis-point interest-rate increase yesterday, taking its benchmark funds rate to a range between 4.75% and 5%, the highest level since late 2007. This decision marks the Fed’s ninth consecutive rate hike.
However, the Fed indicated that rate increases are nearing an end. New projections showed that almost all 18 officials who participated in the meeting estimate the fed-funds rate to increase to at least 5.1%, implying one more 25-bps hike and no rate cuts this year.
Amid a highly uncertain market backdrop, investing in shares of large-cap companies is always wise because of their stability. Large-cap stocks are blue-chip companies that usually generate steady revenue and earnings regardless of economic cycles. A steady cash flow helps many large-cap companies pay steady or increasing dividends.
Let’s discuss why TSM, JNJ, and MRK could be ideal investments now.
Taiwan Semiconductor Manufacturing Company Limited (TSM)
With a $480.34 billion market cap, TSM manufactures, tests, markets, and sells integrated circuits and other semiconductor devices internationally. Its products are used in mobile devices, automotive electronics, high-performance computing, and the internet of things (IoT) markets. It is headquartered in Hsinchu City, Taiwan.
On February 15, 2023, TSM announced that its board approved a capital injection plan of approximately $3.5 billion for TSM Arizona. The company in December more than tripled its planned investment at its Arizona plant to $40 million, among the largest foreign investments in U.S. history. The company could benefit significantly from the expansion of its business operations.
On December 29, 2022, TSM announced that its 3nm technology had achieved volume production with good yields and held a topping ceremony for its Fab 18 Phase 8 facility. The company estimates 3nm technology to create end products with a market value of $1.50 trillion within five years of achieving volume production.
TSM’s net revenue increased 42.8% year-over-year to $19.93 billion in the fourth quarter that ended December 31, 2022. Its gross profit rose 68.7% from the year-ago value to $12.40 billion. The company income from operations came in at $10.36 billion, up 77.8% year-over-year.
In addition, net income attributable to shareholders of the parent increased 78% from the prior-year period to $9.43 billion, and its earnings per share were $0.36, an increase of 78% year-over-year.
TSM pays a $1.79 per share dividend annually, translating to a 1.94% yield on the current price. Its four-year average dividend yield is 2.42%. The company’s dividend payouts have grown at a 9.3% CAGR over the past five years.
Analysts expect TSM’s revenue to increase 20% year-over-year to $90.89 billion for the fiscal year ending December 2024. The company’s EPS for the same period is expected to rise 22.8% from the previous year to $6.88. Moreover, TSM has an impressive earnings surprise history as it surpassed the consensus EPS estimates in all four trailing quarters.
The stock has gained 6.1% over the past month and 22.5% over the past six months to close the last trading session at $92.62. Its 24-month beta is 0.96.
TSM’s promising fundamentals are apparent in its POWR Ratings. The stock has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
TSM has an A grade for Quality and a B for Sentiment and Momentum. In the B-rated 91-stock Semiconductor & Wireless Chip industry, it is ranked #22.
Click here to see the other ratings of TSM for Growth, Value, and Stability.
Johnson & Johnson (JNJ)
JNJ researches, develops, manufactures, markets, and sells a diverse range of products in the healthcare field globally. The company operates through three segments, Consumer Health; Pharmaceutical; and MedTech. It has a market capitalization of $471.25 billion.
On December 22, 2022, JNJ completed the acquisition of Abiomed, Inc (ABMD). ABMD will operate as a standalone business within JNJ’s MedTech segment, delivering innovative medical technologies to people worldwide.
Ashley McEvoy, Executive Vice President and Worldwide Chairman of MedTech at JNJ, said, “The completion of this acquisition allows Johnson & Johnson MedTech to expand our portfolio in the high growth cardiovascular markets, adding solutions for heart recovery to our global market leading Biosense Webster electrophysiology business.”
JNJ’s U.S. sales increased 2.9% year-over-year to $12.52 billion for the fourth quarter that ended December 31, 2022. Its adjusted earnings before the provision for taxes on income rose 17% from the prior year’s quarter to $7.42 billion. Furthermore, the company’s adjusted net earnings and EPS grew 9.5% and 10.3% year-over-year to $6.22 billion and $2.35, respectively.
JNJ has raised its dividends for 60 consecutive years. It pays a $4.52 per share dividend annually, translating to a 2.99% yield at the current price. Its four-year average dividend yield is 2.61%. Also, the company’s dividend payments have grown at 6.1% CAGR over the past five years.
The consensus revenue estimate of $97.63 billion for the fiscal year (ending December 2023) reflects a 2.8% year-over-year growth. The consensus EPS estimate of $10.51 for the current year indicates a 3.6% increase from the previous year. In addition, JNJ has topped its consensus EPS estimates in all four trailing quarters, which is impressive.
Shares of JNJ have plunged 4.6% over the past month to close the last trading session at $151.05. The stock’s 24-month beta is 0.32.
JNJ’s strong outlook is reflected in its POWR Ratings. The stock has an overall rating of A, translating to a Strong Buy in our proprietary rating system.
JNJ has an A grade for Stability and a B for Value and Quality. It is ranked #7 in the 166-stock Medical – Pharmaceuticals industry.
In addition to the POWR Ratings I’ve highlighted, you can see JNJ’s Growth, Sentiment, and Momentum ratings here.
Merck & Co., Inc. (MRK)
With a $265.03 billion market cap, healthcare giant MRK operates through two segments: Pharmaceutical and Animal Health. The company provides human health pharmaceutical products in the areas of oncology, immunology, neuroscience, cardiovascular, and hospital acute care. It also offers veterinary pharmaceuticals, vaccines, and health management services.
On March 6, 2023, MRK announced that the U.S. Food and Drug Administration (FDA) approved the addition of the intramuscular (IM) route of administration to the United States Product Insert (USPI) for MRK’s MMRV family of vaccines, including M-M-R®II, VARIVAX®, and ProQuad®, which have been important in the fight against measles, mumps, rubella, and varicella.
Also, on January 27, MRK announced that the FDA approved KEYTRUDA, its anti-PD-1 therapy, as a single agent, for adjuvant treatment following surgical resection and platinum-based chemotherapy for adult patients with stage IB II or IIIA non-small cell lung cancer. These drug and therapy approvals should bode well for the company.
MRK’s total sales increased 2.3% year-over-year to $13.83 billion for the fourth quarter that ended December 31, 2022. Its Pharmaceutical segment revenue grew marginally year-over-year to $12.18 billion. Also, Animal Health sales rose 6% from the year-ago value to $1.20 billion, reflecting strategic price actions and volume growth.
The company has a record of increasing its dividend for 12 consecutive years. Its dividend payouts have grown at a 9.4% CAGR over the past five years. MRK’s annual dividend of $2.92 yields 2.74% on the current price level, and its four-year average yield is 2.95%.
Analysts expect MRK’s EPS and revenue for fiscal 2024 to increase 6.4% and 22.6% from the previous year to $61.89 billion and $8.59, respectively. Also, the company has surpassed the consensus revenue and EPS estimates in all four trailing quarters.
Over the past six months, the stock has gained 19.3% and 31.7% over the past year to close the last trading session at $104.40. Its 24-month beta is 0.13.
MRK’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, which equates to a Buy in our proprietary rating system.
MRK has a B grade for Value, Stability, and Quality. MRK is ranked #21 out of 166 stocks in the Medical – Pharmaceuticals industry.
Click here to access additional Growth, Sentiment, and Momentum grades for MRK.
Consider This Before Placing Your Next Trade…
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TSM shares were trading at $95.06 per share on Thursday morning, up $2.44 (+2.63%). Year-to-date, TSM has gained 28.14%, versus a 3.91% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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