Experienced investors in search of large-cap stocks to add to their portfolios are often looking for growth potential, good value relative to peers, and strong dividends, among other attributes. We asked a trio of Foolish analysts to suggest a few choices you could add to your portfolio now that fit those criteria. Their answers -- tech giants Microsoft (MSFT -1.27%) and Cisco (CSCO 0.44%), along with natural gas leader Williams Companies (WMB 2.48%) -- meet the challenge nicely. Below, they detail why.
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An eye toward the future
Tim Brugger (Microsoft): After Microsoft reported what some folks considered mediocre results for its fiscal third quarter -- its 8% jump in revenue to $22.1 billion missed consensus estimates -- its stock meandered in May. But a mini-rally of late has driven Microsoft's stock up 16% year to date, and savvy long-term investors may see that its revenues and share price have a lot more room to grow.
The only segment that didn't show year-over-year improvement last quarter was the Surface unit. But Microsoft is hardly reliant on its device sales to drive growth; that's coming from its $15.2 billion plus cloud annual run-rate, and the multitude of services and offerings delivered on its Azure platform.
Office 365 sales for the commercial market, delivered via the cloud, jumped 45% last quarter, an increase that was only surpassed by the 81% jump in Dynamics 365 revenue and the 93% improvement in Azure results. But gaming, Bing search, and server revenues -- also key components of Microsoft's future -- enjoyed strong quarters too.
Virtual reality (VR) is soaking up much of the attention in the gaming and commercial application spaces, but it is in augmented reality (AR) where the real opportunity lies. According to one estimate, the combined market for VR and AR will climb to $108 billion by 2021. Of that, AR is expected to garner $83 billion, and Microsoft is leading the AR charge.
Its continuing cloud-related gains, plus a strong early presence in burgeoning markets such as AR and artificial intelligence (AI), and a host of other hyper-growth opportunities, along with a dividend currently yielding 2.2%, combine to make Microsoft a slam-dunk addition to any short list of large-cap stocks to buy now.
An undervalued industry leader
Keith Noonan (Cisco Systems): The share price of networking giant Cisco has nearly doubled over the last five years even as its core businesses have shown signs of slowdown, but the roughly $158 billion market cap company still looks to be a worthwhile investment.
Cisco trades at roughly 13 times forward earnings estimates, and less than 12 times trailing free cash flow, buts its value proposition is even more enticing when the company's $36 billion in cash and securities net of debt are taken into account. Most of the company's cash stockpile is held overseas, but it would still net more than $23 billion even if it were taxed at the corporate rate of 35% upon repatriation. Back that figure out, and the company's business is valued at just over 11 times forward earnings estimates. And if President Trump's tax repatriation holiday plan, or some variation on it, ever becomes law, Cisco might be able to bring its assets stateside at a significantly lower rate.
While the company's legacy router and switching hardware no longer look like avenues for growth, Cisco is making progress on building up its software businesses and recurring revenue streams by way of acquisitions and internal development, and there's an attractive returned income component to fall back on as the company goes through a transitional period. With its yield sitting at roughly 3.7% and an average annual payout increase of 28% in the six years since the company initiated its dividend, Cisco stock presents appealing value at current prices.
Repositioned and ready to grow
Matt DiLallo (Williams Companies): Natural gas pipeline giant Williams Companies and its MLP, Williams Partners (NYSE: WPZ), have undergone a remarkable transformation over the past year. Thanks to a series of strategic transactions, the franchise has vastly improved its credit profile and dividend sustainability. That said, despite all the progress, Williams' stock trades at a very compelling valuation, especially given its growth prospects.
Fueling the investment thesis for Williams is the assumption that natural gas demand in America will continue growing at a healthy clip for the foreseeable future, which would drive the need for more infrastructure. According to a recent forecast, natural gas demand in North America should grow by 3.8% annually through 2021, thanks to a slew of new LNG export terminals, petrochemical facilities, and gas-fired power plants on the docket. That forecast represents an acceleration from the 3.2% compound annual growth rate in natural gas demand over the last five years. Further, the bulk of this demand growth is expected to be along the East Coast and the Gulf Coast, which plays to the strengths of Williams Partners because that's where its crown jewel, the Transco pipeline system, runs.
Williams has already captured several opportunities to expand the Transco system, with $7 billion of projects underway representing $1.15 billion of annualized earnings when the expansions enter service over the next few years. These expansions, along with other growth projects across its portfolio, should fuel 5% to 7% annual growth in Williams Partners' distribution to investors. Since Williams Companies owns the bulk of Williams Partners' units, it stands to collect the lion's share of this income, which it anticipates will drive 10% to 15% annual dividend growth for its investors.
Best of all; savvy investors can pick up that soon-to-be growing income stream for a fair price these days; the company trades at around just 12.3 times its enterprise value-to-projected 2017 EBITDA, which is the second-lowest valuation in its peer group.
