2022 has been a brutal year for stocks -- with the S&P 500 and the Nasdaq Composite on track for their worst performances since 2008. However, there are instances of stocks that are performing well and are still cheap.
Emerson Electric (EMR +0.16%), Chevron (CVX 0.63%), and Nucor (NUE +0.35%) are three dividend stocks that are all up year to date and could have more room to run. Here's why.
Image source: Getty Images.
The industrial powerhouse has a 66-year history of raising dividends
Lee Samaha (Emerson Electric): The argument that Emerson Electric is undervalued is based on a comparison with its automation peer, Rockwell Automation (ROK +1.19%). Industrial-sector investors will already know that Emerson launched a takeover bid for its smaller peer in 2017. The rationale behind the proposal was clear: to create a U.S. automation and industrial software powerhouse with the size and scale to take on European giants like Siemens and ABB.
Ultimately, Rockwell rejected the bid, but ever since then, Emerson has been on the pathway of continuing to refocus its business on automation and software. Small, noncore businesses such as Therm-O-Disc, which deals in sensing and protection, and InSinkErator, maker of garbage disposals, have been sold. Meanwhile, Emerson bought software businesses and merged them with AspenTech to create a new Aspen Technology (AZPN +0.00%) business, in which it retained a 55% stake. And most recently, Emerson announced a deal to divest a 55% stake in its climate technologies business.
All told, Emerson is increasing its exposure to automation and industrial software, through the stake in Aspen Technology, and reducing its climate technologies exposure. That's something that should lead to a rerating for the stock because, based on Wall Street analyst consensus, Rockwell trades on an enterprise value (market cap plus net debt) to earnings before interest, taxation, depreciation, and amortization (EBITDA) multiple of 17.8 times estimated 2023 EBITDA, while Emerson trades at only 14 times estimated 2023 EBITDA. That's quite a discrepancy, suggesting an upside for Emerson Electric stock.
NYSE: EMR
Key Data Points
Chevron will energize the spirits of income and value investors alike
Scott Levine (Chevron): Don't be fooled. Shares of Chevron may be trading closer toward to its 52-week high than its 52-week low, but the oil supermajor's stock is actually inexpensively valued right now. Trading at 7.2 times operating cash flow, Chevron's stock is valued at a discount to its five-year cash flow multiple of 9.8. When gauging its valuation from a forward earnings multiple, the stock seems even more attractively priced. While its five-year average price top forward earnings ratio is 38.3, investors can scoop up shares today with the stock valued at 10.8 times forward earnings.
For 35 consecutive years, Chevron has raised its dividend, demonstrating a long-standing commitment to rewarding shareholders. And that commitment doesn't seem to be tapering off anytime soon. Management reaffirmed that dedication on the company's recent third-quarter 2022 conference call. During the call, Pierre Breber, Chevron's CFO, commented:
We've been growing our dividend at a compounded annual growth rate of 6% for 15 years. And that is our first financial priority. So there's a lot of attention on the buyback, but it's clearly our fourth priority after sustaining and growing the dividend, investing to grow both traditional and new energy businesses, maintaining a strong balance sheet.
Skeptics may question how viable the company's dividend growth plan may be in light of volatile energy prices. A look at Chevron's growth projects, however, should help allay those concerns. The company expects to generate $4 billion in free cash flow in 2026 -- assuming a $60 per barrel price of Brent crude -- solely based on its work in the Permian Basin.
While energy prices may fluctuate in 2023, income investors seeking to buy a dividend stalwart on the cheap should have Chevron on their radars. Proving its prowess at rewarding shareholders by boosting its dividend for more than three decades, the company seems well positioned to continue lifting its payout higher in the years ahead.
NYSE: CVX
Key Data Points
Nucor is the best bet in the steel industry
Daniel Foelber (Nucor): One glance at steel titan Nucor's 4.2 price-to-earnings ratio, and the stock looks too cheap to ignore. However, Nucor is a highly cyclical company whose earnings tend to boom and bust to the tune of the broader steel industry. A 10-year chart of Nucor's quarterly diluted earnings per share (EPS) illustrates how much of an outlier the company's banner 2022 performance has been -- and that the trend is shifting to the downside.
NUE EPS Diluted (Quarterly) data by YCharts
On Dec. 15, Nucor released guidance for Q4 2022 -- projecting $4.25 to $4.35 in diluted EPS compared to $7.97 in diluted EPS in Q4 2021 and $6.50 in diluted EPS in Q3 2022. The company cited margin compression, lower average selling prices, lower order volumes, and decreased profitability -- which is precisely what investors don't want to hear.
Nucor will face difficult comps in 2023. And while there's no reason to buy Nucor hand over fist right now, Nucor continues to be the best company in the steel industry and will likely be able to take market share during a downturn. The company's balance sheet is phenomenal, as Nucor has very little debt and a low financial debt to equity and debt to capital ratio.
NUE Net Total Long Term Debt (Quarterly) data by YCharts
Aside from its strong balance sheet, Nucor is a particularly unique investment because it has increased its dividend for 49 consecutive years. Nucor is also on track to become a Dividend King next year -- an incredible feat for a company that endures wild swings in its performance.
Nucor is no stranger to cycles. And while its performance could look bad in 2023, it's in the company's best interest to stay the course and invest for the long term. Nucor's ability to keep a healthy balance sheet and raise its dividend no matter the market cycle is a testament to its consistency and financial discipline. For investors who want a little bit of passive income and exposure to the steel industry, Nucor stands out as best in breed.
