The COVID-19 pandemic has had a devastating impact on society and the economy this year. Some companies closed their doors for good, while many others struggled to make it through by cutting expenses like dividends.
However, after months of waiting, we received several doses of good news over the past couple of weeks as data on two leading vaccine candidates was rolled out, with both proving to be highly effective in late-stage trials. This positive news suggests that we'll be able to return to some sense of normalcy in the coming months as these vaccines get distributed and bring the pandemic to an end. That should provide a big shot in the arm for the global economy while putting many dividends back on solid ground. Three dividend-paying stocks that our contributors think could be among the biggest winners from these vaccines are Phillips 66 ( PSX -0.61% ), 3M ( MMM -0.52% ), and Honeywell International ( HON -1.09% ). Here's why this trio stands out.
The catalyst needed to fuel a recovery in demand
Matt DiLallo (Phillips 66): Demand for gasoline and other refined products fell off a cliff when governments shut down their economies to help slow the spread of the COVID-19 outbreak earlier this year. While consumption has recovered somewhat, it's well below its pre-pandemic level because people are traveling less. That's hurting refiners like Phillips 66.
The company only generated $491 million of cash during the third quarter, which was barely enough to cover its $393 million dividend outlay, much less the $552 million it invested into capital projects. Because of that, there has been some concern about the sustainability of its 6%-yielding payout.
It's not generating enough cash right now because it's only using about three-quarters of its refining capacity due to weak demand and low margins. As a result, its refining operations lost nearly $1 billion in the third quarter, which it partially offset with its midstream, marketing, and chemical businesses. However, a widely available vaccine would give people the confidence to travel again, boosting gasoline consumption and refining profitability. That would enable Phillips 66 to generate more cash and put its dividend on a firmer foundation. Moreover, the company would likely be able to resume share buybacks, giving its stock -- which is still down nearly 50% this year even after its recent vaccine rebound -- more fuel to keep rallying. Add that upside to Phillips 66's high-yielding dividend, and it could be a big winner as a vaccine gets rolled out and gets the economy rolling again.
When things get back to normal
Reuben Gregg Brewer (3M): Right now 3M is focusing on producing safety equipment, like N95 masks, for first responders. However, its business is extremely diversified, with 36% of sales from its safety and industrial segment, 27% from transportation and electronics, 26% from healthcare, and the remainder from consumer products. That's just a high-level view, but it gives a sense of the breadth of offerings this industrial giant provides the world. It has been facing headwinds, from falling sales to increasing costs, across most of its business as the world deals with COVID-19.
Third-quarter earnings, for example, fell nearly 6% year over year. That's not terrible, but if a COVID-19 vaccine can help to get global growth back on track, 3M would likely see earnings turn higher. That's not a shocking statement, given the cyclical nature of the industrial sector. Remember, the United States, along with many other nations, fell into a recession thanks to the coronavirus. That's bad for cyclicals like 3M.
But when a vaccine does get developed, approved, and distributed, virtually all of 3M's businesses are likely to benefit from a world that will be eager to get back to normal. Sure, demand for some products (like N95 masks) might fall off, but the strength from the rest of its industrial portfolio should power ahead. Meanwhile, if you act now, you can collect 3M's historically high 3.4% yield while you watch as the medical industry successfully develops new vaccines.
Returning to growth and margin expansion
Daniel Foelber (Honeywell International): Honeywell is recovering along with the economy, but its numbers are still down from last year. Aerospace, its biggest segment, serves the aviation industry through new original equipment sales as well as air transport aftermarket sales -- both of which were down 47% in the third quarter. And although defense and space were up 12%, Honeywell reported a 25% overall decline in third-quarter aerospace sales.
Management doesn't expect a rapid recovery in aerospace but did say that low interest rates, fiscal stimulus, and a vaccine in early 2021 would likely help Honeywell return to growth and margin expansion. Another benefit of a vaccine is that it would likely lead to increased demand for fuels used in transportation and industrial processes, which could help Honeywell UOP. Surging crude oil prices would naturally benefit UOP, which serves the oil and gas industry and is part of the company's performance materials and technologies segment.
Honeywell would be a big winner from a coronavirus vaccine, but it also has the financial strength to weather a prolonged economic slowdown or a slower-than-expected vaccine rollout. The company has very little debt and plenty of cash to pay expenses, make investments, and cover its dividend, which yields 1.8%. Honeywell is an attractive investment in that its business would improve from a vaccine, but it is diversified enough to generate sizable cash flow and earnings even without one.