The 30 stocks that comprise the Dow Jones Industrial Average represent some of the largest and most important blue-chip companies in the world. That means the index is closely watched because as the Dow goes, so often does the rest of the market.
So far this year, the biggest stragglers in the index are Home Depot (HD 0.94%), Nike (NKE 0.19%), and 3M (MMM 0.46%), all of whose shares are down double-digit percentages so far in 2022.
That possibly makes these three stocks great values right now because when the market does bounce back, large-cap blue chips such as these are the first to ride the wave. In the meantime, they each have dividends that reward patient investors.
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1. It might be time to stock up on Home Depot
Home Depot stock is down about 27% this year. That's despite having reported revenue of $151.2 billion in 2021, up 14.4% year over year, and 2021 earnings per share (EPS) of $15.43, up 30.1% over 2020.
There are three reasons for the stock's decline. First, the company came out with relatively tepid guidance for 2022, saying it expected revenue growth in 2022 to be "slightly positive" and annual EPS growth in the low single digits. The second concern is with the rise in interest rates, investors anticipate that housing starts will slow, and Home Depot does a lot of business with contractors that help build homes. The third concern is inflation will eat into the company's profits and sales.
However, at its current price, Home Depot may be oversold, with a low price-to-earnings ratio (P/E) of 19.7 and low forward P/E of 18.9. The company's revenue growth over the past five years is 49.8% and that's not just due to increased sales during the pandemic. It's true that housing starts could slow, but the shortage of new homes means there may not be that big a drop because demand for housing remains high.
Inflation isn't as big a problem for the retailer because it sells so many things that its business isn't reliant on just a handful of products. It has been able to increase annual gross profit margin by 48% over the past five years.
Lastly, Home Depot just raised its quarterly dividend by 15% to $1.90 a share, giving it a yield of 2.24% (with a safe dividend payout ratio of 50%) compared to the 1.3% yield average of the S&P 500 index. If you had invested $100 in this stock and $100 in the S&P 500 in January 2017, by January 2022, your Home Depot investment would have provided a total return (meaning dividends reinvested) of $297.56 compared to a total return of $211.61 for the S&P 500. That's shows the pricing power of the dividend.
2. Nike is already on the comeback trail
Nike stock is down nearly 22% for the year and since its third-quarter 2022 report on March 21, shares of the sports apparel giant bounced higher but have settled a bit. With a P/E of 34 and forward P/E of 34.7, it isn't as oversold as Home Depot, but there are plenty of signs the stock can bounce back.
In the third quarter, the company saw revenue rise to $10.9 billion, up 5% year over year. The company also improved gross margin by 100 basis points to 46.6%, despite increased inflation and logistics costs. The one down note in the report was that EPS was $0.87, down from $0.90 in 2021, something the company attributed partly to higher wages and U.S. taxes.
Nike has raised its quarterly dividend for 20 consecutive years, including a bump of 11% in 2021 to $0.30 per share, giving it a yield of 0.86%. Its strategy of investing more in its own stores and in online sales has paid off and it has increased gross profit margin by 30.4% over the past five years, including a year-over-year increase of 2 percentage points in the third quarter to 46.6%.
3. 3M sticks with what works
Industrial giant 3M has four segments: safety and industrial, healthcare, consumer, and transportation and electronics. Its share prices are down more than 15% so far this year. The same issues of inflation and supply chain problems that concern investors about Home Depot and Nike also affect 3M, with one added wrinkle. It has been struggling to increase its profit margin. Over the past five years, it has boosted it only 6.14% while its revenue has grown 11.7%.
However, it appears its struggles are already factored into its share price, perhaps too much, with a P/E of 14.8 and a forward P/E of 14.4. A Dividend King, it also has the highest yielding dividend of these three companies at 4% with a cash dividend payout ratio of 58.5%, which is safe considering the company's consistent revenue streams. It raised its quarterly dividend by 0.6% to $1.49 a share this year, the 64th consecutive year the company has increased its dividend.
Last year, 3M reported revenue of $35.4 billion, up 9.9% year over year, and EPS of $10.12, up 8%. In the fourth quarter, though, the company's sales appeared to be slowing with revenue of $8.6 billion, up 0.3% over the same period in 2020, and EPS of $2.31, down 4% year over year.
The company released 2022 guidance in February, but management's expectations of revenue growth of between 1% to 4% and EPS between $10.15 and $10.65 didn't wow investors.
Time to make a choice
Of the three blue-chip stocks, Home Depot appears to be the best bargain. Most of the reason the stock is down appears to be based on what could happen, though the company's own earnings don't show any slowdown.
3M, because of its dividend, is also a strong value play, but the company's slow growth doesn't appear likely to change anytime soon. Nike's share price drop merely makes a good stock a little more affordable, but its higher valuation makes it less of a bargain than the other two.
