Few investors would have predicted the incredible 70% rise between the March 2020 crash and today. But it is surprising what future expectations and low interest rates can mean for an economy. Industrial stocks have outperformed the market in the past. And industries that pay dividends are even better because they provide guaranteed income, no matter what the stock market does.
With that in mind, we asked some of our contributors what dividend stocks they think are a good buy for a 2021 bull market. They came up with 3M (NYSE: MMM), Ruspe (NYSE: CAT), en Emerson Electric (NYSE: EMR). Therefore, they believe that these three stocks may be higher.
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3M seems undervalued
Lee Samaha (3M): The multi-industry industry has fallen out of favor with the market over the past few years, mainly due to a history of lack of leadership, PFAS liability risk and poor execution. However, there is a strong argument to argue that the degradation has gone too far. Whether it’s an earnings-based valuation, or one based on free cash flow, 3M now looks like a good value compared to its peers.
Data by YCharts
Throw in a well-covered dividend (currently yielding 3.6%) and a management team committed to reducing the cost base, making administrative changes and restructuring the portfolio through corporate activities, and you have a recipe for the stock to have a good 2021.
The company has indeed started the year well with all its segments now generating an underlying growth. In addition, analysts expect 3M to benefit from a recovery in the economy that will lead to 6% sales growth in 2021.
While there is no guarantee that CEO Mike Roman will be successful with his restructuring goals, it is to the point that he has the free cash flow (approximately $ 5.8 billion in 2020) at his disposal to restructure the company. Meanwhile, the stock is trading at an attractive valuation and paying a good dividend. If you can tolerate the PFAS risk, the stock looks like a very good value.
Wake up the sleeping giant
Daniel Foelber (Caterpillar): The stars are in line for Caterpillar to conquer a 2021 bull market, but it was a rocky road to get there.
After Caterpillar reported its best annual revenue in the company’s history in 2012, it hit four years of declining sales. Just when it was about to enter a period of growth again, the trade war between America and China derailed its upward mobility. Then the COVID-19 pandemic threw a wrench into its 2020 targets, leading to one of Caterpillar’s worst quarters on record. However, sales began to recover in the third quarter, and the company believes it is on track to have a much better year in 2021.
Caterpillar’s strong balance sheet has made it possible to make oil and gas acquisitions in time in 2020. Most people recognize Caterpillar for its large earth-moving construction equipment, but the energy and transportation divisions generate about the same revenue as the construction segment. The rising oil prices coupled with an overall economic boom should help increase the division’s sales.
Even though the year is not as planned, Caterpillar plans to increase its annual dividend for the 28th consecutive year, just as through several downturns.
However, the market is already praising Caterpillar’s share for a strong earnings year. If a record high is traded at a P / E ratio higher than 30, Caterpillar’s share will look expensive if it is unable to deliver its strong expected growth. Given the strength of its dividend, this cyclical stock could be one of the best ways to take advantage of a 2021 bull market.
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Scott Levine (Emerson Electric): The increase of more than 16% in 2020, S&P 500 has expanded its rise so far in 2021, rising by more than 1.4%. Many investors believe that the market will not return any time soon. Between this belief and the knowledge that dividend-paying stocks tend to outperform non-dividend payers, it’s not surprising that investors pay particular attention to stocks that offer recurring payouts – stocks like Emerson Electric, which offer investors a 2.4% return.
Since 1890, Emerson Electric has grown into a global power station providing solutions for a wide range of industries, including food and beverage, oil and gas, mining and water treatment – to name a few. However, dividend investors are probably more familiar with the fact that Emerson Electric is a dividend king. A more elite group than Dividend Aristocrats, who have increased their dividend for at least 25 consecutive years, Dividend Kings have a good record of raising their dividends for a striking 50 consecutive years. Did Emerson Electric just join this select group? Not exactly – Emerson Electric has been raising its dividend for 65 years.
While a company’s commitment to rewarding shareholders with a dividend is large, it means little if the company endangers its financial health to saturate investors. In the case of Emerson Electric, this is hardly the case. Over the past ten years, the average payout ratio of the business has been 59%. In addition, the company generates a significant amount of cash flow, with an average annual free cash flow of $ 2.4 billion over the past three years, according to Morning Star. This indicates that the company’s dividend is sustainable; in addition, Emerson may also continue the trend of making strategic acquisitions, such as the recent acquisition of Progea Group, which strengthens Emerson Electric’s position on the Internet of Things.
Another thing I find interesting with Emerson Electric is the exposure to hydrogen, an area that has been hugely interested in the past year. Lal Karsanbhai, CEO of Emerson Automation Solutions, for example, noted at the fourth quarter conference of 2020 that Emerson Electric plays an important role here [in helping customers reach carbon neutrality] especially in the hydrogen value chain from production to distribution and use. “
While stocks are not currently on the discount record – trading at 16.3 times the operating cash flow, a premium on its five-fold average multiple of 15.4 – I like to pay a slightly steeper price for a coveted Dividend King like Emerson Electric. Between the company’s long-standing record of returning capital to shareholders and the impressive ability to generate free cash flow, Emerson Electric is a stock that investors should strongly consider as a way to propel their portfolios.