With the market volatile over the last several months due to the economy shutting down and new fears regarding a second wave of the coronavirus, you may find dividend-paying stocks are a tempting proposition.
There are caveats to buying these companies, of course. During the pandemic and ensuing uncertainty from stay-at-home orders, many companies have suspended dividends. So it is not merely those with the highest dividend yields that are attractive. It is important to pick stocks with sustainable payouts.
With that being said, it is time to look more closely at three companies that make the grade.
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Home Depot
In a quarter which saw many retailers hurt by the outbreak, Home Depot's (HD 0.10%) fiscal first-quarter (ended May 3, 2020) worldwide same-store sales (comps) rose 6.4%. Management raised expenses during the pandemic, including providing weekly bonuses and enhanced overtime pay to its hourly workers in its distribution centers and stores.
These moves dented Home Depot's quarterly diluted earnings per share (EPS) by $0.60. As a result, its EPS fell to $2.08 compared to $2.27 in the year-ago period. This is not concerning since these cost increases are temporary.
Home Depot also has an impressive record of generating annual comps' increases and profitability growth for several years. It has also been astute at capital allocation, with the company's return on invested capital (ROIC) rising from about 28% in fiscal 2015 to 45.4% last year.
The economic slowdown does present a challenge, and Home Depot may feel the effects from a sustained downturn as people hold off home repurchases and major construction. During the last recession, comps were negative from fiscal 2007 to fiscal 2009, and diluted EPS declined.
Nonetheless, Home Depot maintained the same quarterly dividend for that period until resuming annual increases. It was only a temporary pause in the payout during a severe economic downturn. Obviously, its dividend is important to the company, and it has made a quarterly payment for 33 consecutive years.
Management pulled its fiscal 2020 guidance due to the uncertain environment created by the pandemic. But it had enough confidence to declare its regular $1.50 quarterly dividend. This is a 2.5% dividend yield.
Last year, Home Depot's operating cash flow was $13.7 billion, and its capital expenditures were $2.7 billion. The $11 billion of free cash flow easily covered its $6 billion of dividends.
Its payout ratio is 55%, which provides Home Depot a cushion from a temporary earnings decline.
Kimberly Clark
People ran out to buy paper products, helping boost Kimberly Clark's (KMB -1.42%) first-quarter results. Sales rose by 11% versus a year ago after excluding foreign exchange translations and exited businesses. On this basis, last year's sales growth, before the coronavirus had a major impact, was a solid but unspectacular 4%.
The company's well-known stable of brands do well no matter the economic cycle. This is particularly important for dividend investors, considering we are officially in a recession.
It sells everyday products, including diapers, baby wipes, feminine care, and paper products (e.g., toilet paper, tissues, paper towels, and napkins) under the Huggies, Depend, Kleenex, and Scott brands, to name a few.
The payout ratio is a fairly high 61%, but this is a company with stable demand and sales.
If you want a company's strong commitment to its dividend, Kimberly Clark fits the bill. Earlier this year, the board of directors raised the quarterly dividend by 4% from $1.03 to $1.07, and the dividend yield is 3.1%. Incredibly, it has hiked the dividend for 48 straight years and has made a payment for 86 years in a row.
McDonald's
It's been rough going for McDonald's (MCD 0.25%) with the pandemic hurting first-quarter results. The company got off to a strong start this year before the illness disrupted people's lives. Comps were down 3.4%, and the second quarter, with a 29.8% drop for the first two months, has gotten off to a rough start, too.
But there is a reason for optimism. Comps improved in May, and now 95% of worldwide restaurants are open in some form. This should continue with people returning to work and getting back to their routines. Even though certain restrictions are likely to remain in place for some time, McDonald's is in a stronger position than other restaurant companies. As CEO Chris Kempczinski pointed out:
Our strong foundation and the unique advantages of the McDonald's System, including a high percentage of drive-thru restaurants and investments in delivery and digital, have enabled us to adapt to the changing landscape presented by the COVID-19 outbreak.
With nearly 39,000 restaurants in 119 countries, there is good geographic diversity. Approximately 93% of these locations operate under a franchise agreement, so McDonald's earns a percentage of revenue and, since it typically owns the real estate, also receives rental payments. In light of the pandemic, the company deferred the franchisees' payments, but with restaurants reopening, these should return in due time.
Historically, McDonald's free cash flow is plentiful, coming in at $5.7 billion last year. This handily paid for the $3.6 billion of dividends.
The company started paying a dividend in 1976 and has raised it annually since then. Currently paying $1.25 a quarter, the dividend yield is 2.6%.
