When the stock market becomes uncertain, investors often tend to flock toward defensive stocks or stocks that have very high-quality earnings. That generally means that their dividends are deemed safe as well. It turns out that Merrill Lynch’s February RIC report has a focus on high-quality stocks to outperform low quality because they tend to outperform in volatile markets.

The RIC report featured a screen for companies with a high return on equity (ROE). Merrill Lynch’s Matthew Trapp and Savita Subramanian believe that volatility will remain. After all, a slowing growth story is being doubled by uncertainty about Federal Reserve rate increases and commodity price weakness. They also pointed out that high-quality stocks also have more attractive valuations for being cash-rich large cap stocks with dividend growth potential.

February’s RIC report does admit that recession risks are rising in the quantitative analysis but are so far contained. Late-cycle excesses that would be typical warning signals of an impending downturn are not present, and growth elsewhere has remained robust despite weakening industrial sector data.

Subramanian’s preferred measure of quality is low earnings dispersion. These have lower earnings risk and high returns on equity. She screened for S&P 500 stocks that have an S&P Quality rank of A- or better and that have a return on equity above the S&P 500 average — and then of course that have a Buy rating at Merrill Lynch, which generated some 39 stocks.

24/7 Wall St. decided to take an even closer look at this list. We set a hurdle at a minimum of 25% return on equity and a dividend yield with a minimum of 2.00%, and we screened out any company that had a market cap less than $10 billion. This took the list down to nine stocks when we kept the same screen criteria in a FINVIZ screener as well. In almost all cases, the Merrill Lynch price objective is higher than the consensus analyst targets from Thomson/First Call.

Altria Group Inc. (NYSE: MO) is now of course in nearly a duopoly for the big U.S. tobacco stocks. Merrill Lynch had its 2015 return on equity at 184.7%, versus over 200% in the FINVIZ screen. Its market cap is nearing $120 billion and its yield is over 3.7%. Altria has an official goal and an unofficial pledge to raise its dividend each year into the future. Altria shares were last seen trading at $60.72, with a consensus analyst price target of $65.14 and a 52-week trading range of $47.31 to $61.74. Merrill Lynch’s price objective is slightly above the consensus at $66.00.

Lockheed Martin Corp. (NYSE: LMT) was shown by Merrill Lynch as having 111% return on equity in the Merrill Lynch data, and it was 116% according to FINVIZ. This defense contractor has a dividend yield north of 3% and a market cap of $66 billion. Shares of Lockheed Martin were recently trading at $216.00, compared to a consensus price target of $234.87 and a 52-week range of $181.91 to $227.91. Merrill Lynch’s price objective is handily above the consensus at $250.00.
Home Depot Inc. (NYSE: HD) was a surprise to see on the list, but its return on equity was listed as 56.4% by Merrill Lynch — more than double that of rival Lowe’s — and FINVIZ even had a higher ROE screen. Home Depot’s market cap is $144 billion, and its yield is north of 2%. It is also a Dow Jones Industrial Average stock. Its shares were trading at $115.10, with a consensus price target of $141.57 and a 52-week range of $92.17 to $135.47. Merrill Lynch’s price objective for Home Depot is almost 10% above the consensus at $155.00.

Hershey Co. (NYSE: HSY) is a company that many investors forget about, but every kid and adult in the world can probably recognize what a Hershey bar or Kiss is. Hershey’s ROE was over 81% by the Merrill Lynch data and was 47% according to FINVIZ. The company has a $14 billion market cap and a yield of almost 2.6%. Shares of Hershey were at $90.74, compared to a consensus price target of $91.00 and a 52-week range of $82.41 to $107.57. Merrill Lynch has a $95.00 price objective on Hershey.

McDonald’s Corp. (NYSE: MCD) has been a turnaround stock that went from being a troubled stock to a darling stock again. Now we have to see if it can continue. Still, it is a highly defensive stock, with a $107 billion market cap and a yield of about 3%. Merrill Lynch showed its ROE at over 43%, and FINVIZ was at 42%. McDonald’s shares were trading at $117.50, with a consensus price target of $126.00 and a 52-week range of $87.50 to $124.83. Merrill Lynch’s price objective is slightly above the consensus at $130.00.

3M Co. (NYSE: MMM) had a ROE of 40.1% per Merrill Lynch and 37.9% per FINVIZ. The stock has recovered handily from its lows and its yield is now closer to 2.7%, with a $95 billion market cap. Shares of 3M were trading at $154.24, with a consensus analyst target of $159.87 and a 52-week range of $134.00 to $170.50. Merrill Lynch’s price objective of $178.00 is more than 10% above the consensus price target.

PepsiCo Inc. (NYSE: PEP) was shown by Merrill Lynch as having a 45.2% ROE, and FINVIZ had it at 31.9%. Its $143 billion market cap comes with a dividend yield of closer to 2.9%. Shares were last seen trading at $98.21, with a consensus price target of $105.43 (right in line with the $105 price objective from Merrill Lynch) and a 52-week range of $76.48 to $103.44.

General Dynamics Corp. (NYSE: GD) made the 25% ROE screen barely at both Merrill Lynch and FINVIZ, at 26.3% and 26.8%, respectively. Its market cap is nearly $42 billion, and it comes with a 2.1% dividend yield. Shares of General Dynamics were at $133.52, with a consensus price target of $159.69 and a 52-week range of $121.61 to $153.76. Merrill Lynch’s price objective is over $10 above the consensus at $170.00.

Honeywell International Inc. (NYSE: HON) also snuck in on the screen, with Merrill Lynch pointing to ROE of 26.6% versus 26.4% at FINVIZ. Honeywell has a $79 billion market cap and a 2.3% dividend yield. Its shares were recently trading at $103.61. The consensus analyst target is $114.81, and the 52-week range is $87.00 to $107.41. Merrill Lynch’s $116.00 price objective is just barely above the consensus analyst target.

We have an included an image of the full list of screened companies from Merrill Lynch and shown what the screen went down to on more strict criteria from FINVIZ.

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