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Two Safe Blue Chips for a Bumpier Ride Ahead

February 09, 2010 – by Richard Band

As soon as this “correction” blows through, stocks will be primed for another strong advance to new recovery highs. So, I encourage you to do some shopping every down day, with a goal of becoming fully invested when the S&P 500 crawls down 7%-10% from its most recent pinnacle.

What to buy? For now, I suggest directing most of your firepower at companies with large overseas operations, particularly in Asia and Latin America. I favor multinational companies headquartered in the United States. That way, you can harness the growth of the emerging economies while enjoying the legal protections afforded the shareholder of an American corporation.

PepsiCo (PEP) is based in Purchase, New York, but more than half its sales now originate in foreign countries, as does more than half of its growth in operating profit.

This outfit is truly a citizen of the world, right up to its cosmopolitan chief executive officer, Indian-born Indra Nooyi. I’m also a fan of Pepsi’s arch-rival Coca-Cola (KO), but if you can afford only one of the pair, start with PEP.

Pepsi features a more diversified array of products, including snack foods (Lay’s) and breakfast foods (Quaker Oats). All told, PEP counts 18 product lines with annual sales of more than $1 billion.

Pepsi is growing faster than Coke, too, with earnings per share up 181% in the past decade, versus 122% for KO. Yet Pepsi shares are quoted at a modest discount to Coke at 14.5x forward earnings, versus 15.9x. Both stocks yield just about 3%, half again greater than the S&P 500, which dishes out a skimpy 2% dividend.

Procter & Gamble (PG), the maker of Crest toothpaste, Duracell batteries, Gillette razor blades, Pampers diapers and Tide laundry detergent, reaches its tentacles far from corporate headquarters in Cincinnati.

P&G rings up more than 60% of its sales overseas, with 32% of the total coming from developing markets. The company intends to build (not close!) 20 new manufacturing plants over the next five years, nearly all of them in developing markets.

It counts 23 brands that generate at least $1 billion of annual sales; more than half are the number-one seller in their category. Just below the top tier are another 20 half-billion-dollar brands. By contrast, many big-time drug makers rely on two or three brands for the bulk of their sales.

P&G maintains an almost religious devotion to shareholder welfare. Directors have hiked the dividend 53 years in a row, including a 10% sweetener in slump-saddled 2009. Dividends have tripled in the past decade. (Current yield: 2.9%.) If you can find a stronger international growth player in any country, I’ll send you a tube of Pringles wrapped in a roll of Bountypaper towels, with a bottle of NyQuilto help you sleep off your headache!

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