Lower consumer spending, high inflation, rising interest rates, geopolitical tensions -- the list of economic headwinds besetting the stock market goes on and on. Being bearish is in style, and the price action of the broad-market indexes certainly reflects that.
While investors shouldn't rule out the chance of a prolonged recession, it's also important to remember that economic cycles are simply par for the course when it comes to long-term investing. Economic growth looks unlikely in the short term, but one day, the cycle will shift again.
For patiently optimistic investors looking for bargains, FedEx (FDX 0.77%), Carrier Global (CARR 2.59%), and Air Products and Chemicals (APD 0.05%) stand out as three dividend stocks worth considering now as the companies are poised to benefit when the economic tide turns.
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A worthy turnaround play
Daniel Foelber (FedEx): FedEx shocked the investing world this month when it pre-announced worse-than-expected diluted earnings per share for its fiscal 2023 first quarter and discarded its full-year guidance. When it reported quarterly results in late June, the package delivery giant had forecast a record year in fiscal 2023.
That stark transition from upbeat optimism to red flags signals that consumer and business demand could be slowing, particularly for FedEx's premium services through FedEx Express. Long-term followers of the company will know that it tends to be viewed as an economic bellwether, as its performance ebbs and flows with the broader economy. And while there is merit to that, FedEx has been relatively more impacted by macroeconomic events in recent years than its rival United Parcel Service -- as well as the broader transportation industry.
Poor management at FedEx and an inability to accurately forecast short-term performance have left investors in the dark. The stock has unsurprisingly sold off, is down nearly 50% from its all-time high, and is lower today than it was five years ago.
But investing isn't about where a company has been. It's about a company's prospects and the stock's valuation, and whether it's positioned to compound its gains over time. While it's true that FedEx's performance could get worse before it gets better due to a deteriorating macroeconomic climate and it may take new CEO Raj Subramaniam some time to get his feet under him, the company remains an industry leader. And the economy will turn around. Given that the stock is relatively cheaply valued even if earnings fall, now looks like a good time to scoop up shares of FedEx. As a bonus, FedEx's dividend at the current share price yields 3%, making it an appealing source of passive income.
Carrier remains primed for growth
Lee Samaha (Carrier): Shares of Carrier are down roughly 30% so far in 2022, but you wouldn't guess it from the company's outlook. Management boosted its full-year earnings-per-share (EPS) guidance on its second-quarter earnings call in late July. Having started the year forecasting organic revenue growth in the high single-digit percentages and adjusted EPS of $2.20 to $2.30, management upgraded its EPS guidance to a range of $2.25 to $2.35.
Leadership at the heating, ventilation, air-conditioning, refrigeration (HVACR), fire and safety, and building technology company believes these kinds of growth rates are sustainable. During its investor day presentation in February, management outlined expectations for 6% to 8% growth over the medium term, based on secular trends identified by Carrier. Examples include the trend toward healthy, clean buildings in response to the pandemic. In addition, there's the need for commercial building owners to retrofit equipment to meet more stringent emissions goals and standards. Meanwhile, the trends toward smart, digitalized buildings are ongoing, and investing in them will significantly improve buildings' efficiency. On top of that, there's growing demand for HVACR products as the number of people in the middle class rises in countries around the world.
Another critical growth driver will come from the European Union's "Fit for 55" package -- a set of policy proposals intended to help the EU reach its goal of reducing carbon emissions by 55% by 2030. Carrier's energy-efficient HVACR solutions could help with that. There's also the REPowerEU plan, which aims to reduce the EU's dependence on Russian fossil fuels. Among its many facets, it intends to double the installation rate of heat pumps to replace gas boiler systems.
It all adds up to a compelling growth story in which Carrier can grow as spending grows, with international customers offsetting any potential decline in U.S. residential HVAC spending.
This Dividend Aristocrat remains poised to prosper when the economy bounces higher
Scott Levine (Air Products and Chemicals): Unless you're getting your Halloween decorations out from storage early, you can put away the crystal ball. Predicting when the economy will return to growth mode is an impossible task. But, that's OK. Instead of trying to project when the economy will bounce back, investors would be better off grabbing shares of quality dividend stocks that can pay them while they wait -- Air Products and Chemicals, for example. Offering investors a forward dividend yield of 2.7% at its current share price, Air Products is a Dividend Aristocrat that has a long history of rewarding shareholders. It's also well-positioned to benefit when the economy returns to growth.
A leader in the production of industrial gases, Air Products plays a critical role in ensuring that businesses across a wide swath of industries -- from food and beverage to metals production to biotechnology -- have the basic materials they need to operate. Because its clients come from such a diverse range of industries, Air Products mitigates the risk associated with an acute downturn in one industry, or several.
Nonetheless, cautious investors may question the company's ability to withstand the headwinds associated with an economic downturn while also maintaining its distributions to shareholders. But this isn't the company's first rodeo. For four decades -- a period during which the economy has seen its share of dips -- Air Products has consistently lifted its dividend every year.
Oftentimes, investors have to pay a premium for quality dividend stocks. These days, however, shares of Air Products can be grabbed on the cheap. The stock is trading at 21 times forward earnings, a nice discount to its five-year average multiple of 24.5.
