2019 was good to investors. U.S. stocks were up 29% (as measured by the S&P 500 index), making the market's negative return in 2018 -- the first calendar-year negative return in a decade -- a distant memory and overcoming worries over sluggish global economic growth hastened by the U.S.-China trade war.
While about two out of every three years are positive for the stock market, massive returns with nary a hiccup along the way aren't the norm. Investing in stocks is often a roller-coaster ride. That's why dividend-paying companies should be an important part of a portfolio mix, as they help smooth out returns and provide a steady stream of income (for retirees) or cash to buy more stock (for those still in savings mode). Three that I like for the month of February are Comcast (CMCSA 0.94%), Hasbro (HAS -0.98%), and Seagate Technology (STX).
Bridging the canyon between cable and streaming
A lot has been said about the disruptive force that is the TV streaming industry. Millions of households around the globe are parting ways with expensive cable TV plans and opting for internet-based entertainment instead. Many legacy cable companies have felt the pinch as a result.
Not immune from the trend has been Comcast, but cable cutting is only part of the story. While cable TV has weighed on results -- the company reported it lost a net 732,000 subscribers in 2019 -- consumers going the way of streaming still need high-speed internet to make it happen. And that's where Comcast's results have shined, as net high-speed internet additions have more than offset losses in its older lines of business. Net residential additions were 1.32 million and net business adds were 89,000 last year, respectively.
Plus, it's not as if Comcast is going to get left behind in the TV market entirely. It is introducing its own TV streaming service, Peacock, in spring 2020; while an early look doesn't appear Peacock will make huge waves in the internet TV industry, its addition of live events like the 2020 Summer Olympics and live news means it will likely be able to carve out a niche for itself in the fast-growing digital entertainment space.
Comcast is an oft-overlooked media company, but it shouldn't be. Revenue is growing at a healthy single-digit pace for a business of its size (when excluding the Sky broadcasting acquisition in 2018), and free cash flow (revenue less basic operating and capital expenses) are up nearly 50% over the last three years. Based on trailing 12-month free cash flow, the stock trades for a mere 15.3 multiple, and a recent 10% dividend hike puts the current yield at a respectable 2.1%. Comcast thus looks like a good value play to me.
Playtime for the 21st century
The way kids play is changing. The digital world we now live in means TV and video games are a larger part of children's lives than ever before. Entertainment is also undergoing rapid change, with franchises aiming to capture consumer attention across multiple mediums -- from the screen to merchandise to live in-person experiences.
Enter Hasbro, a leading toy maker responsible for all sorts of classics like the Monopoly board game to toy favorites like Play-doh, Mr. Potato Head, Transformers, and G.I. Joe. The diversified play company has had some early success making its toys into virtual experiences -- most notably with The Transformers movie franchise. A small mobile video game division has also done well based on Monopoly and the Magic: The Gathering card game. Hasbro is doubling down on its early digital success, though, getting into the streaming TV business -- via its Power Rangers acquisition, a Netflix (NFLX -0.60%) series based on Magic: The Gathering, and its most recent $3.8 billion takeover of Peppa Pig creator Entertainment One.
That latter move is significant as it yields Hasbro a kids production studio with experience bringing popular TV shows to market. It all plays into the company's strategy to deepen roots with kids on multiple levels, building out the kind of relationship that Disney (DIS -2.00%) has with its fans. In fact, Hasbro's toy-making partnership with Disney helped its "partner brands" segment surge 40% higher during the fourth quarter of 2019. It's obvious that mega-franchises that span the silver screen to toys are a powerful business, and Hasbro would be more than happy to capture even a little bit of that Disney magic.
Along the way, Hasbro has also been updating its selling model for the age of e-commerce. That has created some variability in quarterly earnings results. Nevertheless, in spite of its transition on multiple fronts, the stock trades for just 18.1 times trailing 12-month free cash flow, and the company pays a dividend of 2.7% a year. I'm a buyer of the evolving but still highly profitable toy maker at those prices.
Riding the memory chip rebound
As is the case with manufacturing in general, semiconductors are a cyclical business. That has been on display the last year or so in the digital memory chip industry. A period of surging demand and not quite enough supply -- hastened by data center construction and new consumer tech products like autos with driver assist features, smartphones, and wearables -- was followed by a slump in 2019. Prices on memory chips fell, and many manufacturers got burned.
It's a cycle that repeats every few years, but one company that has been able to ride out the ebbs and flows and maintain healthy profits throughout has been Seagate Technology. During the second quarter of its 2020 fiscal year (three months ended Jan. 3, 2020), revenues stabilized and were down 7% after falling by double digits for a few quarters in a row. Its outlook is also improving, with management forecasting a return to growth for the balance of 2020 -- including a 17% year-over-year sales increase in Q3.
It's usually the best timing to purchase cyclical stocks like Seagate while they are down in the dumps, and the 54% rally in calendar year 2019 is evidence of that. While perfect timing is nearly impossible, there nonetheless could be plenty more left in the tank if sales continue to edge higher as new demand for the company's hard drives for data centers, PCs, and laptops rebounds. Plus, even after the big gain in share price last year, Seagate's dividend currently yields 4.4% a year -- a substantial payout that is easily covered by the company's free cash flow generation.
Put simply, with the cyclical semiconductor industry showing signs of positive demand coming online in the year ahead, Seagate Technology is one of my favorite dividend stocks to start 2020.