The Dow Jones Industrial Average (DJIA) is among the oldest stock market averages in the world. The index comprises 30 large-cap American companies, stocks like Walmart, American Express, and Microsoft.
The index is price-weighted, meaning that higher-priced stocks make up a larger percentage of the index than lower-priced stocks. For example, UnitedHealth, with a stock price near $540, makes up more than 10% of the index, while Coca-Cola, which trades near $63, makes up less than 1.3%.
Although the index is a fairly narrow measure of the U.S. stock market, it is often cited by media organizations to track market sentiment owing to its longevity and prominence. This year, the DJIA has come under pressure and is down about 7% year to date.
But for long-term investors, this sub-par year could offer opportunity. Many excellent companies now find their stocks below where they were at the start of 2022. So let's examine two companies worth buying on the dip and one to avoid.
Image source: Getty Images.
One to buy: Chevron
Many people associate the Dow with blue-chip stocks -- well-established companies with massive profits and impressive longevity -- and Chevron (CVX 1.04%) certainly fits that bill.
This fully integrated oil and gas major is only a few years away from the 150th anniversary of its founding. It's been a member of the Dow since 2008, and it comprises 3.1% of the overall index. The company operates in both the upstream (exploration and production) and downstream (refining, transportation, retail sales) areas of the energy market.
This sprawling infrastructure allows Chevron to produce huge results. The company recorded $206 billion of revenue over the last 12 months, helped by high prices for oil and natural gas.
While oil prices have somewhat leveled off near $90 a barrel, Chevron remains highly profitable at current prices. The company's break-even price for oil (the price at which it recoups its operating costs) is around $50. This means that at current prices, Chevron will continue to have a flood of free cash flow (FCF).
The company generated $24.1 billion of FCF over the last 12 months and returned much of it to shareholders via dividends and share buybacks. It increased its share buyback program from $10 billion to $15 billion after reporting record profits at the end of July. And its dividend yield stands at a plump 4.2%.
All told, Chevron offers investors what they should expect from a Dow component: undeniable value, solid execution, and steady shareholder returns.
One to buy: Visa
My second pick to buy on the dip is Visa (V 0.05%), with its worldwide network that facilitates payment transactions. Visa was added to the Dow in 2013, and it is the seventh-largest component -- around 4.1% of the overall index.
In its most recent quarter, the company processed over $2.9 trillion in payments globally, resulting in 8% nominal year-over-year growth or 12% on a constant currency basis.
Owning shares of Visa is a great way to benefit from global economic growth. The company estimates that over 100 million businesses accept Visa-branded debit and credit cards worldwide. With over 3.8 billion cards in circulation and 232 billion annual transactions, its scale is enormous.
The company generates revenue by collecting a small fee for each of the millions of transactions completed daily. During the last 12 months, Visa generated $28 billion and an impressive $14.3 billion in net profit, good for a stout 52% profit margin.
Wall Street thinks the stock remains undervalued. Of the 39 analysts who cover the company, 35 rate it a buy or a strong buy, with none rating it lower than a hold.
Investors looking for a Dow component with a little bit of growth-stock flavor would be wise to sprinkle some Visa into their portfolio.
One to avoid: Intel
A blue-chip company may have been great, but that doesn't mean it will stay great -- and that might be the problem for Intel (INTC 1.77%) today. Added to the Dow back in 1999, Intel is now the smallest component of the Dow and makes up only 0.7% of the index.
The company was on the rise during the personal computing (PC) boom of the 1990s. But declining PC sales and a streak of disappointing earnings results have left Intel a shadow of its former self.
CEO Patrick Gelsinger went so far as to say that the company's recent results were "below the standards we have set for the company and below the commitments we have made to [our] shareholders."
If Intel were a sports franchise, it would be going through a rebuild. And while the company has a long-term strategy to reinvent itself, including plans to invest up to $20 billion in two new factories in Ohio, it will take time to right itself.
Its dividend yield of 4.1% and slim price-to-earnings ratio of 7.7 might entice some, but I worry the stock could become a value trap. Investors looking for the typical stability and shareholder returns that Dow components offer would be wise to pass on Intel for the time being.
