The coming fiscal cliff represents a huge hurdle for America. Government and private sector forecasters have warned that the expiration of tax cuts, along with hundreds of billions of dollars in government spending cuts, could throw the United States back into a recession. Fed Chair Ben Bernanke and the nation’s business leaders have issued warning after warning that this is one of the largest risks out there, and a lack of resolution has made investing and hiring plans much more difficult.

If government spending is about to get chopped, and if the public is about to suddenly face higher taxes in general, it is no secret that investors would have to be cautious. After the run we have seen in stocks, it leaves very few safe places for Joe Public to invest in at a time when Treasury notes and bonds offer investment yields so low as to be insulting. 24/7 Wall St. has identified several key companies in defensive investment sectors that likely would maintain investor interest during such a risky period.

Companies with heavy government contracts are instantly out. Companies that are highly dependent on an optimistic consumer or that offer goods that the public can easily cut back on were also eliminated. Another issue, one which eliminated many great companies, is that Wall St. analysts had to have a consensus price target from Thomson Reuters that was higher than a share price today. Preference was given also to those companies that offer a dividend, as dividends create a return on capital for investors when uncertainty may be much higher than normal.

1. American Water Works Co. Inc. (NYSE: AWK) is about as defensive as an investor can get. Not only is it a utility, this is the largest water utility in the United States in many regional markets. If you can figure out a way to live without your local water utility, please make a public service announcement. The water dividend is slightly lower than the electric utility average, but it still pays out 2.7% as of now, and this one has pulled back more than the power utility sector. What is amazing is that the market cap here is only $6.5 billion, and that could grow much more if it makes acquisitions or if it can privatize more municipal-owned water operations ahead. We always said that a 10% pullback has been a gift, and shares have come close to that level of a pullback already. The share price is at about $37.25 and the 52-week high is $39.38. The consensus price target objective of $41.60 implies upside of about 12% with that dividend.

2. Anheuser-Busch InBev N.V. (NYSE: BUD) is a true behemoth in beer, with a $144 billion market value, and it is still growing through acquisitions. Its dividend yield of 1.4% might not exactly sound high, but there is a chance that management will lift that dividend if it does not need acquisition capital. The debt market recently oversubscribed to its last multibillion dollar debt offering to show support for the company’s credit profile. With shares around $90, the consensus price target of $96.40 implies upside of about 7%. Budweiser’s big threat has been the rise of craft beer in America, but it is fair to ask that after a massive multiyear growth in craft beer whether Joe Six-Pack will be willing to keep spending $8.99 to $11.99 for a six-pack, or will he go for the beers he grew up drinking.

3. Dollar Tree Inc. (NASDAQ: DLTR) is a prime example of a company and a stock that should hold up well if the fiscal cliff plays out in the worst case scenario. Dollar General Corp. (NYSE: DG) is larger at $17 billion in market value, versus $11 billion for Dollar Tree, but Dollar General had been taken private before the recession and came public after the recession. Dollar Tree has been public since the mid-1990s. Its share price actually managed to grow during 2008 and has risen by about 300% since the dog days in February 2009. The dollar store theme is currently where Wal-Mart Stores Inc. (NYSE: WMT) was in the 1990s. The one caution is that this dollar stores sector is very short on dividends. That may have to change, particularly if these companies want to bring in many new defensive investors during hard times. It may reflect poorly on the economy if dollar stores become the sweet spot of consumer spending, but investors go to the safe havens regardless. Dollar Tree trades around $48.00, and the consensus target of $54.33 implies upside of about 13% from the current share price.

4. McDonald’s Corp. (NYSE: MCD) is the one of the amazing casual dining stories that proved to do well through the Great Recession. If a family has to eat, McDonald’s can easily accommodate that demand in hard times when families are most concerned about their pocketbooks. With a $92 billion market value, this company’s great share price growth has stalled after its star CEO retired right ahead of a time when same-store sales went mixed. What is happening is that McDonald’s continues to move away from being a just a cheap burger joint to offer more choices, and it has taken the lead in fast food by showing specific calorie content on all of its menu items to appeal to the healthier trends. In short, McDonald’s offers something for everyone and at prices that families can survive. Its 3.4% dividend yield trumps most food and dining stocks. It is at $91.00, the 52-week high is $102.22 and the consensus analyst target of about $99.25 offers upside of more than 12% with its dividend.

5. Merck & Co. (NYSE: MRK) and 5. Pfizer Inc. (NYSE: PFE) have been limited until recently, as the companies faced their own fiscal cliff of sorts. That was the patent cliff. Main Street investors have finally come to grips with a drug economy that includes much more generic competition, and these companies have been hitting 52-week highs. The implication is that these are safe regardless of which party runs the country and a wider degree of health care coverage offers more clients. One new trend that brand name drug companies can minimize generic competition is simply by putting the brand drug out at roughly the same price. Merck’s dividend of about 3.6% offers implied upside of about 5%, if you consider that the $46.25 price compares to a consensus target of almost $47.00. Pfizer’s dividend of about 3.4% and its $25.50 share price offer an implied total return of about 8% to the $26.86 consensus price target.

6. PepsiCo Inc. (NYSE: PEP) and 7. The Coca-Cola Co. (NYSE: KO) are extremely defensive historically. These companies also still are getting large growth from the rest of the emerging market world as well. Of the two companies, Pepsi is even more defensive because of its snack foods business. Its 3.0% dividend yield also trumps a 2.6% dividend from Coca-Cola. Pepsi’s $110 billion market cap is also far less than the $173 billion of its larger rival. In an age where calories are starting to be fought, the case for Coke or Pepsi as being defensive might not be quite as much of a slam dunk as you would have expected a decade ago. Still, investors expect little disruption due to so many lines of products from each company. Pepsi recently traded at $71.00, and the consensus price target of $75.70 implies upside of more than 9% after the dividend is considered. Coca-Cola’s $38.60 price and analyst target of $42.10 generates upside of about 11.5% after its dividend is considered. Fiscal cliff investors can easily have a Coke or a Pepsi (and a smile) when looking for defensive places to invest.

7. Procter & Gamble Co. (NYSE: PG) may have seen shares participate less in the move to very defensive consumer products, but new activist investors are pushing the company to get back on growth. Consumers have to buy products of this sort in good times and bad times, and the massive portfolio includes names like Gillette, Crest, Braun, Dawn, Tide, Pampers and on and on. The $191 billion market cap is so large (a mega-cap) that it may be just that much more defensive for investors, and a dividend yield of 3.2% also offers defensive investors some peace of mind. Shares are back up around $69.60, and the consensus price target of $71.15 still offers investors an implied upside of more than 5%, if the dividend is considered. That activist investor pressure may also lift those upside price targets to new all-time highs above $75.00.

Several other companies “should” be immune to the coming fiscal cliff, but they are not or face more risk due to current valuations or due to current trends. If Altria Group Inc. (NYSE: MO) shares pull back, then the declining case volumes may make tobacco a bit more attractive for the risks. AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ) can easily weather major storms as consumers are now addicted to their cellphones and the landline business has not died off as fast as expected. If the electric utility sector pulls back, those stocks may again become attractive if the dividend yields get back above 4.5% or so.

The fiscal cliff is coming. Maybe Congress and the White House will manage to avert disaster after the election. And maybe not. These are America’s great companies that can easily survive the action of the power brokers in Washington D.C.

JON C. OGG

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