One of the hardest things to do as a long-term investor is to filter out the noise and determine if a collapsing stock is falling for the right reasons or the wrong ones. In 2022, numerous reputable companies were unable to offset the impact of inflation on their businesses, and their share prices plunged. 3M (MMM 0.41%) and Stanley Black & Decker (SWK 1.56%) have both been doing business for more than 120 years, but their recent issues have pushed their stock prices down to around their 10-year lows. Meanwhile, Dominion Energy (D 0.08%) is one of the largest regulated electric utilities in the U.S., and it too has seen its stock price plunge to close to its 10-year low.
Each company has its problems. But there are reasons to believe that their recent sell-offs present buying opportunities for these high-yield dividend stocks.
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Consider the 5-year yield on 3M stock
3M's disappointing fourth-quarter report and management's abysmal 2023 guidance were enough to push the stock down to near its 10-year low. At the midpoint of its forecast, the company is guiding for 4% lower sales and 11.4% lower earnings in 2023 as its cost-cutting measures continue to clash with ongoing inflation-related impacts and its business restructuring. But given 3M's recent track record of missing guidance, it would be wise to err on the side of caution by expecting its results to come in at or even below the low end of its forecast range instead of the midpoint.
Despite these cons, 3M has a lot of pros going for it at its current price. Its valuation is inexpensive. And it has done an excellent job of maintaining a solid balance sheet as its earnings have outpaced the cost of its dividend. In fact, its payout ratio is a healthy 58%, which is excellent given what the business is going through.
As with most down-beaten stocks, 3M's share price could get worse before it starts to get better. But the nice thing about buying a stock that has sold off as much as 3M has is that so many other investors have given up on the stock. What's more, the company's bleak forecast is already out in the open, and leaves room for it to surprise to the upside. So if the company begins to turn things around, value and income investors alike could quickly start to come back to the stock.
The elephant in the room for 3M is its mounting legal woes due to litigation involving its faulty Combat Arms earplugs and use of per- and polyfluoroalkyl substances (PFAS). Estimates call for as high as tens of billions of dollars in potential costs after a judge ruled in December that 3M could not achieve bankruptcy protection by transfer its legal liabilities to an independent business unit. Granted, some of these legal risks may have already been baked into the stock price. 3M's price to earnings (P/E) ratio sits at 11.3 -- which is far below its 10-year median P/E ratio of 20.3. Slowing growth alone isn't enough to warrant that low of a valuation. But it remains to be seen how costly these legal costs could become. And for some investors, it may be better to simply wait for the story to unfold before buying the stock.
That being said, investors who plan to hold 3M stock for the long term have a chance now to buy the dividend payer near its 10-year low with the prospect of collecting what will likely be at least $30 in dividends per share over the next five years since 3M just raised its quarterly payout to a record high $1.50 per share. That degree of passive income is a compelling incentive to hold a stock through volatility.
Write-downs have proven costly for Stanley Black & Decker
Stanley Black & Decker has some similarities to 3M. For starters, both companies are Dividend Kings -- businesses that have paid and raised their dividends for at least 50 consecutive years. And both stocks are trading far below their highs.
In the case of Stanley Black & Decker, the 180-year-old tool company erred by overestimating how long its pandemic-induced sales surge would persist. Its sales skyrocketed in 2020 and 2021. But in the past year, the company has struggled to move products. As a result, profits have plummeted, and margins have compressed.
Management's forecast for 2023 is about as bad as it gets. The company's guidance for GAAP earnings ranges from a $1.65 per share loss to a $0.85 per share profit, and it expects free cash flow in the $500 million to $1 billion range. However, the company's earnings collapse actually isn't as bad as it seems. Most of the downward pressure on its earnings is not a result of operational issues, but rather, one-off asset write-downs and other losses. In fact, Stanley Black & Decker's full-year adjusted EPS, when excluding charges, was $4.62. With the annualized dividend payout now at $3.20 per share, using that adjusted EPS gives it a much more respectable payout ratio of 69%.
While it's true that investors prefer temporary losses over recurring ones, Stanley Black & Decker stock deserved to fall because of management's poor execution and forecasting across the supply chain, customer demand, inflation, pricing, and inventories.
Once the company moves its excess inventory and completes the bulk of its write-offs, it stands to reason that the stock could begin to look relatively inexpensive. While its dividend yield of 3.8% isn't quite as impressive for income investors as 3M's 5.2% yield, Stanley Black & Decker stock is still worth a look.
Dominion Energy has a path toward sustainable growth
Perhaps the safest stock on this list is Dominion Energy. Regulated electric utilities work directly with governments and agencies to provide reliable electricity to customers. With a locked-in base of customers and pricing protection from regulators, Dominion energy's business has a wide moat relative to 3M and Stanley Black & Decker.
The vast majority of Dominion Energy's business is in Virginia and North Carolina. Dominion Energy Virginia is aggressively investing in offshore wind in line with federal policies and goals to improve the electrical grid and boost renewable production.
In the short term, Dominion has been caught between a rock and a hard place. Its energy transition has involved some mistimed nonrenewable asset sales. And its renewable energy projects carry high upfront costs, but won't enter service for several more years.
If one were to take only a quick look at the company's recent performance, it would be easy enough to conclude that this was a stock to take a pass on. But the company's 4.5% dividend yield offers a solid incentive for longer-term investors to hold the shares as they wait for its renewable energy investments to pay off. As choppy as its short-term performance has been, Dominion deserves a lot of credit for being on track with its 2.6-gigawatt $10 billion offshore project, which is on schedule to complete construction by the end of 2026.
The biggest risk for investing in Dominion Energy is the uncertainty of the impact of the energy transition on its cash flows. The levelized cost of electricity is much higher for offshore wind projects than onshore wind, solar, combined cycle natural gas, or even coal. And for that reason, Dominion Energy is taking a risk by investing so much in its massive offshore wind farm. Therefore, some investors may prefer to wait a few years for the project to enter service. But for those that agree with the decision to retire high-emission assets in favor of renewable projects even if it means a slew of headwinds, then Dominion Energy stock could be worth buying now.
Turnaround plays in the making
3M, Stanley Black & Decker, and Dominion Energy are three very different businesses. But aside from their high dividend yields, they actually have quite a bit in common.
Their short-term outlooks are cloudy, but each has an entrenched position and is well-prepared to outlast tough times. In this vein, investing in any of these three companies is far less risky than buying some other high-yield dividend stocks. And given how far all three stocks have fallen, the risk/reward ratio looks attractive for investors who plan to hold onto their shares for at least three to five years.
