The COVID-19 crisis is forcing a growing number of companies to cut or suspend their dividends to conserve cash. However, investors shouldn't avoid dividend stocks altogether, since many companies are still generating adequate cash flows throughout the pandemic.
Moreover, many high-yield stocks are trading at low multiples, which should limit their downside potential. Let's check out three stocks that fit the bill: IBM (IBM -0.89%), Cisco (CSCO 0.67%), and Verizon (VZ 0.88%).
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1. IBM
IBM recently raised its dividend for the 25th straight year in a row, making it a new Dividend Aristocrat of the S&P 500. It currently pays a forward yield of 5.3% and spent just 50% of its free cash flow (FCF) on dividend payments over the past 12 months -- which gives it plenty of room for future hikes.
IBM's stock declined nearly 30% over the past five years as it struggled to grow its revenue by pivoting from its legacy business hardware, software, and IT businesses toward high-growth cloud markets. Yet that gradual transformation -- which included its acquisitions of companies like SoftLayer and Red Hat -- is keeping Big Blue relevant in the crowded cloud market. Its new CEO, Arvind Krishna, has already vowed to focus on IBM's expansion into the cloud and AI markets with its mainframe, services, middleware, and hybrid cloud platforms.
IBM withdrew its guidance in late April, and analysts expect its revenue and earnings to fall 5% and 12%, respectively, this year as the COVID-19 crisis caps enterprise spending. Despite those challenges, IBM's growth could rebound next year -- and its stock looks cheap at 11 times forward earnings.
2. Cisco
Cisco recently raised its dividend for the ninth straight year. The networking hardware giant pays a forward yield of 3.5%, and it spent just 40% of its FCF on its dividend over the past 12 months. Cisco's stock rallied about 40% over the past five years, as a cyclical growth spurt -- fueled by stronger demand for switches in the enterprise campus market and the growth of its application and security businesses -- buoyed the stock in 2018 and 2019.
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That virtuous cycle ended earlier this year as declining hardware sales overwhelmed its growth in software and services, and the COVID-19 crisis exacerbated the pain. As a result, Wall Street expects Cisco's revenue and earnings to dip 5% and 1%, respectively, this year, followed by a mild rebound in 2021. Based on those estimates, Cisco trades at 13 times forward earnings.
Cisco faces plenty of near-term headwinds, but investors shouldn't ignore three long-term tailwinds: The surging use of data centers throughout the crisis should boost demand for enterprise and data center upgrades, the shift to remote work is lighting a fire under its oft-overlooked collaboration business, and its recent acquisitions -- including Acacia and Fluidmesh -- should widen its moat against its smaller rivals.
3. Verizon
Verizon has raised its dividend for 15 straight years. It currently pays a forward yield of 4.4%, and it spent 57% of its FCF on those payments over the past 12 months. Verizon's stock only rose about 10% over the past five years, but it trades at less than 12 times forward earnings.
Unlike its rival AT&T (T 1.30%), Verizon isn't hamstrung by a massive media acquisition and fragmented streaming platforms. Verizon's ad-focused acquisitions of Yahoo's internet assets and AOL were also poorly conceived, but it gradually streamlined those assets to focus on the expansion of its core wireless and broadband businesses.
In late April, Verizon withdrew its full-year revenue guidance and expected its adjusted EPS to remain roughly flat, due to "significant headwinds prevailing" through the second quarter of 2020. Wall Street expects a 4% revenue decline for the year with a 1% dip in earnings, followed by a potential rebound in 2021.
Verizon's near-term growth seems mediocre, but new 5G smartphones could lift its revenue at the end of the year and throughout 2021. Its digital advertising revenue could also stabilize as businesses reopen. Until then, Verizon's high yield and low valuation should set a floor under the stock and make it an attractive alternative to AT&T.
