Well, I’ll start by addressing the elephant in the room for dividend investors. There isn’t much value out there. Especially as interest rates continue to fall (thanks for the detailed analysis on the impact of interest rates Lanny) . Still, after talking to Lanny on the phone Saturday night about our portfolios, I realized there still are a few companies trading at a discount. So I decided to dust off the Dividend Diplomats Stock Screener and put a watch list together. Here are the three companies on my Dividend Stock Watch List for June and July.
For my Dividend Watch list for June and July, I will use June 21, 2019 close prices, EPS per Yahoo! Finance, and dividend information from www.dividendinvestor.com
Dividend Stock #1: Caterpillar Inc. (CAT) – Shockingly, Caterpillar is actually up YTD. However, the company is trading well off of their 52-week high from October 2018. Caterpillar has some major exposure to the trade war, which has caused the company’s stock price to whiplash with the ebbs-and-flows of the news cycle. In May, it was stated that the Trade War would cost the company $250 million – $300 million in 2019 if the trade war continued. So why am I now watching CAT despite the uncertainty?
In the investor day announcement in May, CAT sang an optimistic tone about the company’s financial performance. First, the company announced a MAJOR 20% increase in their dividend. But wait, it gets better from there. The company plans to continue to return capital to shareholders in the near future. Management stated the following: “Caterpillar expects to increase the dividend in each of the following four years by at least a high single-digit percentage. With its remaining free cash flow, the company intends to repurchase shares on a more consistent basis, with the goal of at least offsetting dilution in market downturns.” Thus, despite the trade war headwinds, the company still plans to increase their dividend, improve performance, and return capital to shareholders.
Second, the company performed very well in our stock screener. With a closing price of $133.89 per share and est. EPS of $12.34 per share, the company’s Price to Earnings ratio of 10.85X is well below the broader market. Plus, their dividend payout ratio, with the 20% dividend increase, is only 33%. Thus, the even if the company absorbs the full estimated cost of the trade war, the dividend should remain safe.
That of course, assumes the costs don’t escalate in the coming months. There is a critical G20 summit on the horizon that could change my answer completely. But today, with great metrics and a very strong dividend increase, it seemed like a great time to add CAT to my watch list. My wife owns some shares in her Roth IRA. It may be time to continue adding and building that position.
Dividend Stock #2: Archer-Daniels Midland (ADM) – I actually purchased 20 shares of ADM in May (Discussed in this article very briefly). Like CAT, ADM has been impacted by the Trade War. But the trade war isn’t the only condition impacting ADM. The company has impacted by weather (in particular, the flooding) that has hit the Midwest hard this year. Living in Ohio, I can tell you, it has rained a lot in 2019. The true impact of weather may not be fealt just yet by ADM.
And just like CAT, ADM performed very well in our dividend stock screener. With a closing price of $41.08 per share and est. EPS of $3.27 per share, the company’s 12.56X is well below the broader market. The company’s dividend payout ratio 42.8%. Since ADM is a Dividend Aristocrat, the company clearly has a history of increasing their dividend.
The negative news has caused a decrease in price from highs in October. Even with the company’s recent price increase, the company’s metrics still look great. The economic environment may push the company’s price down once again. Once it does, I will be ready to add to my stake in the company.
Dividend Stock #3: CVS Health Corporation (CVS) – Last, but not least, CVS. CVS is the one company that has not increased their dividend in the last 12 months on this listing. That of course is due to the Aetna acquisition. The two of us have talked about CVS a lot on our website. In particular, how the company’s new business model places the company in a unique position to capitalize on the aging population. With a shift to health centers, rather than convenience stores, the company’s changes have a chance to change the sector.
Of course, the company was just in the news due to the dreaded “Amazon Effect.” In a recent lawsuit, CVS disclosed Amazon’s plan to use PillPack to sell prescription drugs directly to health plans and employers. In particular, discussions between Amazon and Blue Cross Blue Shield were unveiled. This was a rare glimpse into Amazon’s future move into the industry.
Even with this revelation, I’m still taking a look at CVS. The company’s Price to Earnings Ratio is just 7.83X. That assumes a share price of $53.65 per share and est. EPS of $6.85 per share. Their dividend payout ratio is just 29%. Pretty low. Last quarter, CVS crushed earnings due to Aetna’s performance. I think there could be additional future earnings surprises in the future due to better than anticipated results in the insurance sector. Especially if losses are low and investments perform very well. With metrics like these, I have to keep CVS on my watch list.
What are your thoughts about my dividend stock watch list for June and July? Do you agree with the companies? Or would you wait until the Trade War dust settles before considering buying CAT or ADM? Are you staying away from CVS (or their competitor Walgreens)?
Bert