Investors looking beneath the surface of the market could find some good deals in dividend-paying defensive names, according to UBS. Stocks saw strong gains the first half of the year , which ended Tuesday. Yet the market is narrowly concentrated and being driven by a handful of megacap tech companies. That has led correlations across the broader universe to fall to historically slow levels, analyst Sean Burns said in a note last week. In other words, instead of the broad market moving together, stocks are trading on their own merits. Since investors are avoiding lower-risk companies, many now have attractive valuations, he pointed out. In fact, the gap between expensive and cheap defensive names is near the widest levels seen since 1990 and roughly double its long-run average, Burns said. “We would not characterize the defensive setup as a precise timing call, but the starting point has improved materially,” he wrote. “Low-risk stocks now trade at a 4.4% market-implied yield versus 1.4% for high-risk stocks, and comparable valuation spreads have historically been followed by positive forward low-volatility returns.” With that in mind, Burns looked for defensive opportunities in names with at least a $5 billion market cap, except real estate investment trusts. They also have a 1-year trailing beta to the S & P 500 of less than 0.5x, which means it is half as volatile as the broader market over the last 12 months. The stocks also have a negative 1-year correlation in daily excess returns to mega-cap tech and artificial-intelligence exposure. In addition, based on UBS analytics, they have low volatility and are trading at a discount. They are all rated a buy at UBS. Here are some of the dividend-paying names that made the cut. PepsiCo has a 4.37% dividend yield and is down roughly 6% so far this year, as of Tuesday’s close. The snack and beverage giant is expected to report second-quarter earnings on July 9. In April, it posted a beat on the top and bottom lines for its first-quarter. Its struggling North American food business also saw a return to volume growth after cutting prices on Lay’s, Tostitos, Doritos and Cheetos by as much as 15%. “We feel good about where we are at this at this point in the journey,” CEO Ramon Laguarta said on the company’s earnings conference call. “Still, in the process of all the shelf resets and launching the innovation — I would say by the end of Q2, we’d probably be almost completed in that process. But the early reads are quite exciting.” PEP YTD mountain PepsiCo year to date Pepsi is well-liked by analysts, who give it an average rating of overweight, according to FactSet. The stock has nearly 23% upside to the average price target. McDonald’s also posted a first-quarter earnings and revenue beat in May. The stock has an average analyst rating of overweight and 21% upside to the average price target, per FactSet. UBS said in a May 18 note that the fast-food giant is well positioned for market share gains globally. “We expect solid execution of strategic plans to continue, w/ value, marketing and menu innovation likely to further resonate globally with customers and support mkt share gains in the US and key international markets,” analyst Dennis Geiger wrote. MCD YTD mountain McDonald’s year to date McDonald’s, which yields 2.75%, has shed about 12% year to date. WM , formerly known as Waste Management, also made the list. The stock has an average rating of overweight and 15% upside to the average price target. UBS upgraded the stock to buy from neutral in January. “[W]e view the integration of WM Healthcare Solutions (previously Stericycle) as progressing better than expected, with consolidated segment margins improving sequentially each quarter since acquisition and target EBITDA synergies of $300M by 2027 within reach through cross-selling opportunities and efficiency improvements,” analyst Jon Windham wrote at the time. WM has a 1.7% dividend yield and has added 1% so far this year. Lastly, Willis Towers Watson yields 1.47% and has tumbled 20% year to date. It last reported earnings in April, beating on adjusted earnings and coming in line with revenue estimates for its first quarter. WTW YTD mountain Willis Towers Watson year to date The insurance stock has an average rating of overweight and roughly 28% upside to the average price target, per FactSet. Other names that made the list include T-Mobile , Cigna and AIG . — CNBC’s Amelia Lucas contributed reporting.
UBS sees opportunities in these defensive stocks. They also pay dividends
