Mega-cap stocks are defined as stocks with market capitalizations above $200 billion. As a result, there are certain advantages to buying mega-caps, such as the relative safety that comes with investing in the world’s largest businesses.
Mega-cap stocks tend to generate steady profits during recessions, and many pay dividends to shareholders.
While mega-cap stocks may not offer the growth potential of small-caps, they become much more appealing during bear markets. Investors looking for quality dividend stocks during a downturn should consider these 3 mega-cap stocks.
Mega-Cap Stock: JP Morgan Chase (JPM)
JPMorgan is a global banking behemoth with a $600 billion market capitalization and about $124 billion in annual revenue. JPMorgan competes in every major segment of financial services, including consumer banking, commercial banking, home lending, credit cards, asset management and investment banking.
JPMorgan Chase posted second quarter earnings on July 12th, 2024, and results were somewhat mixed. The bank beat on revenue, with the top line soaring almost 22% higher year-over-year to $50.2 billion, and beating estimates by $4.5 billion. Earnings, on the other hand, came to $4.40 per-share on an adjusted basis, which missed estimates by 11 cents.
The company noted a $7.9 billion net gain from its investment in Visa (V) shares, which helped boost headline earnings per-share by $2.10. The company also donated $1 billion of Visa shares to pre-fund charitable contributions, resulting in a reduction of 18 cents in earnings-per-share.
Future growth will result in additional dividend increases. Shares of JPM currently yield 2.4%. We see the payout ratio remaining under 35% for the foreseeable future. JPMorgan has been spending heavily on buybacks but is still able to increase the dividend meaningfully. We see the payout as very safe and a good choice for income investors given strong earnings growth and a willingness to return that capital to shareholders.
JPMorgan’s competitive advantages include its enormous scale, diversified revenue streams and world class reputation. However, it is susceptible to recessions, just like any other bank, and earnings suffered during the downturn, although not to the extent previously feared, and the rebound was swift.
Mega-Cap Stock: Broadcom Inc. (AVGO)
Broadcom designs, develops and sells semiconductors under the following business units: Wired infrastructure, wireless communication, enterprise storage and industrial. Its offerings include data center chips, factory automation, energy systems and power generation, broadband access, and home connectivity. AVGO has a market cap of $830 billion.
Broadcom reported its third quarter earnings results on September 5. The company generated revenues of $13.1 billion during the quarter, which represents an increase of 47% compared to the prior year’s quarter. The strong revenue growth performance was driven by AI data center investments by many of Broadcom’s customers as well as by M&A, primarily the VMWare takeover.
The company outperformed revenue expectations easily. Broadcom reported earnings-per-share of $1.24 for the fiscal third quarter, which was ahead of the analyst consensus estimate. The company expects that revenues will come in at around $14 billion during the fourth quarter, which would represent a nice revenue increase on a sequential basis as well as on a year-over-year basis.
Broadcom’s biggest market is wireless communication, where the company owns a strong connectivity portfolio that includes advanced LTE, Bluetooth 5.x, Wi-Fi, GNSS (GPS, Galileo, etc.), and so on. Broadcom is also well positioned in the enterprise storage market, where it provides switching and other connectivity solutions.
Shareholders will naturally benefit from this growth, through rising dividends. Broadcom’s dividend payout ratio has risen considerably over the last couple of years, due to the large dividend increases that Broadcom has offered to its owners. Between 2010 and 2021, Broadcom increased its dividend by an incredible factor of more than 100.
Broadcom’s dividend still looks relatively safe, as it is well-covered by both profits as well as by the cash flows that the company generates. Shares currently yield 1.2%.
Mega-Cap Stock: UnitedHealth Group (UNH)
UnitedHealth offers global healthcare services to tens of millions of people via a wide array of products. The company has two major reporting segments: UnitedHealth and Optum. The former provides global healthcare benefits to individuals, employers and Medicare/Medicaid beneficiaries.
The Optum segment is a services business that seeks to lower healthcare costs and optimize outcomes for its customers. UnitedHealth has a market capitalization above $530 billion, while the company generates annual revenue above $250 billion.
UnitedHealth posted second quarter earnings on July 16th, 2024, and results were better than expected on the top line. Adjusted earnings-per-share came to $6.80, which was 17 cents ahead of estimates. Revenue was up 6.4% year-over year at $98.9 billion, but that only met estimates. UnitedHealthcare revenue was up 5% year-over-year, while Optum once again led the way with 12% growth.
UnitedHealth noted cash flow from operations were $6.7 billion, or a staggering 1.5 times net income, implying outstanding free cash flow conversion. The company’s medical care ratio was 85.1%, which was worse than the 83.2% a year ago, and 84.3% from the first quarter. This was primarily due to the ongoing impact of the Change Healthcare cyberattack. The company has provided $9 billion in interest-free loans to those impacted.
UnitedHealth could conceivably increase its dividend by 10% per year, without moving its dividend payout ratio much at all. This is because the company continues to increase its earnings-per-share at an impressive rate. And, even though UnitedHealth stock has a current yield of 1.4%, investors could see their dividend income grow rapidly over the years.
Disclosure: No positions in any stocks mentioned
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Bob Ciura has worked at Sure Dividend since October 2016. He oversees all content for Sure Dividend and its partner sites. Bob received a Bachelor’s degree in Finance from DePaul University, and an MBA with a concentration in Investments from the University of Notre Dame.