Pfizer (PFE +1.25%) is one of the largest drug manufacturers in the world, and along with partner BioNTech and rival Moderna, it's one of the first companies to cross the finish line in the race to develop a COVID-19 vaccine. It has also raised its dividend for 10 consecutive years, and at current share prices, its payout yields an impressive 4%.
In short, Pfizer may be one of the best COVID vaccine stocks -- but it's not the best dividend stock. In my view, Honeywell International (NYSE: HON) and Chevron (NYSE: CVX) are better picks for investors looking for steady income from quality companies.
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Honeywell
Honeywell is a multifaceted industrial behemoth whose products bridge the gap between the physical world and the digital world. It's embracing the transition from industrial manufacturing to industrial connectivity, and is a leader in the Industrial Internet of Things (IIoT) and software as a service (SaaS) for industrial companies.
The company had a decent second quarter and a strong third quarter. It's rebounding nicely from a pandemic-induced slowdown. Its free cash flow (FCF) remains strong, and after some goes to paying its dividend, what's left over can be used to pay down debt, buy back shares, or invest further into the business. Management is optimistic that the company will return to growth and margin expansion next year.
Honeywell's history of performance and growth is impressive, but what makes it truly stand out is its balance sheet.
HON Net Total Long Term Debt (Quarterly) data by YCharts
Despite being the top U.S. industrial company by market capitalization, it has the lowest net long-term debt out of the 10 largest U.S. industrials. That low debt is Honeywell's ultimate ace in the hole. The strength of its balance sheet allows the company to make timely acquisitions during tough times, continue to invest when others are scaling back, and grow its dividend when others are cutting theirs.
Chevron
Investors may be wary of big oil stocks in today's market. But Chevron is one of the most well-run integrated oil and natural gas companies. At current share prices, its dividend yields 5.8%. Also, with 32 consecutive years of payout raises, it holds a coveted spot on the list of Dividend Artistocrats.
The COVID-19 pandemic has impacted oil and gas demand, leading to short-term oversupply and lower commodity prices. In response, Chevron cut spending and selectively reduced production. The result is that Chevron expects to finish 2020 with spending significantly below its original capital budget of around $20 billion. That was right around what it spent in 2019. As of its most recent quarter, it's poised to finish this year closer to $14 billion. Those spending cuts have helped Chevron mitigate losses and limit its use of debt.
Even with that reduced capital spending, Chevron found a creative way to grow its long-term prospects. It bought Noble Energy for $13 billion, which looks to be a bargain price given its asset portfolio. Noble is a big player in the Permian Basin, which is the largest producing onshore oilfield in the U.S. and Chevron's main long-term growth driver. That deal closed in October.
Management plans on further reducing costs in 2021, guiding for a capital budget of $14 billion that includes the former Noble operation. Of that amount, Chevron estimates that it needs to spend roughly $10 billion a year to sustain its production. Noble needs about $800 million. This means that there will be a significant amount of spending (even at this reduced level) going toward long-term investments. Looking back over the past five years, it's impressive to see the progress that Chevron has made at reducing costs while sustaining a healthy level of FCF.
CVX Capital Expenditures (Quarterly) data by YCharts
If FCF is too low, a company may cut its dividend or tap into its reserve cash to fund the payout. But that's a slippery slope because it can put a company's finances on shakier ground. This is exactly what has happened to many of Chevron's peers, which is one reason why Chevron has the best balance sheet in its cohort. Granted, Chevron's debt load has increased due to the Noble acquisition, but it remains at a healthy level.
A dynamic duo
Honeywell's growth prospects, earnings stability, safe and growing dividend, and financial health make it a premium industrial stock for long-term investors. Chevron is similar in that it has arguably the best balance sheet of the oil majors. And although Chevron's earnings have taken a major hit this year, its cost reductions and timely investments are a sign it is doing its best to navigate a challenging market.
Honeywell has a dividend yield of 1.8% compared to Chevron's 5.8%, which makes sense given Honeywell is the safer of the two. Investors should pick which company best matches their risk tolerance, but both are good dividend stocks to buy now.
