The stock market is having a roaring first half of 2023. But the gains are largely driven by growth stocks in the technology, consumer discretionary, and communications sectors. Less glamorous companies like Johnson Controls International (JCI 1.02%), Equinor (EQNR -0.57%), and Essential Utilities (WTRG -1.31%) are all down on the year.
Here's why that sell-off presents a buying opportunity for these reliable dividend stocks.
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Smart building technology is helping spur growth
Lee Samaha (Johnson Controls): Johnson Controls manufactures and sells heating, ventilation, air conditioning, refrigeration (HVACR) systems, fire and security products, and building controls.
Given the concerns around the commercial office market in the U.S. (rising interest rates and worries over regional bank exposure to commercial real estate loans), management took the time to address its exposure during the last earnings call.
CEO George Oliver noted that the commercial office sector "represents a small portion of our overall business." CFO Olivier Leonetti confirmed that the company had low-single-digit exposure (in terms of overall revenue share) to the new commercial office building market.
Those facts go a long way to explain how the company maintained positive earnings momentum in its fiscal second quarter, ended March 31. Here are a few notable details:
- Building solutions orders increased 8% organically year over year in the second quarter, and the backlog rose 9%.
- Adjusted earnings before interest and taxation (EBIT) margin rose to 10.7% from 10% a year earlier, helped by pricing increases.
- Digital upgrades are helping to grow revenue from connected devices that improve building productivity and reduce carbon emissions.
The company has good near-term momentum from order growth, backlog, and margin expansion. Furthermore, the adoption of smart building technology and the desire to meet net-zero emissions commitments ensures long-term growth for Johnson Controls. Trading on 17 times full-year estimated earnings, Johnson Controls looks like a good stock to buy now.
A balanced way to invest in oil and gas
Daniel Foelber (Equinor): Want an inexpensive stock with a compelling business model and solid dividend yield? Look no further than Equinor. Sixty-seven percent of the integrated oil and gas major is owned by the government of Norway. And in many ways, the company operates like a state-owned oil company.
Being mostly state-owned has its advantages. Namely, Equinor gets to develop Norway's rich offshore oil and gas reserves with less competition (although Equinor also has sizable investments outside of Norway).
The North Sea in Norway's backyard supports the country's energy and fishing industries. And the Norwegian continental shelf is shallow enough to fuel a growing offshore wind industry (which Equinor is investing in).
Offshore wind will be critical for Equinor to hit its aggressive environmental targets. But in the meantime, the company is raking in the free cash flow (FCF) thanks to strong oil and gas prices and its low cost of production. Norway also has pipeline access to mainland Europe, making Norway a natural alternative to Russian gas.
Equinor's record performance has made the stock incredibly cheap. The company has a five-year low price-to-FCF multiple of just 3.3, a price-to-earnings (P/E) ratio of 3.1, and a forward P/E of 6.
Equinor's balance sheet is in incredible shape. The company finished the first quarter of 2023 with cash, cash equivalents, and financial investments of $52.5 billion and gross interest-bearing debt of just $31.1 billion, giving it a surplus of about $21.4 billion. Equinor's decision to use its extra cash to strengthen the balance sheet, grow the dividend, and repurchase its stock is great news for long-term investors because it makes the company a better value and a reliable source of future dividend income.
After briefly cutting its dividend during the COVID-19-induced downturn, Equinor has raised its dividend to more than 3 times pre-pandemic levels and is buying back a ton of its own stock. Over the last three years, Equinor's dividend is up nine-fold, and the company reduced its share count by 5.8% -- which illustrates the sheer volume of extra cash this company is making right now.
With a 4.4% dividend yield, bargain-bin valuation, stable business model, and 22% year-to-date decline, Equinor stock looks like a buying opportunity.
Dip your toes into this leading water stock
Scott Levine (Essential Utilities): Whether you're a retiree or a younger person with years of investing ahead, carving out a portion of your portfolio for conservative investments is always a smart strategy -- although the size of that portion will depend on a variety of factors. One of the most popular kinds of stocks that conservative investors like to put to work in their portfolios are utilities. And luckily, shares of one of the leading water stocks is hanging on the discount rack.
With a history that spans 137 years, Essential Utilities is a utility that operates in both the regulated water and gas markets. Because of this business model, Essential Utilities doesn't have the luxury to raise prices whenever it wants. It's not all bad though; the company, instead, enjoys the security of dependable cash flows. This allows management better clarity into future finances, allowing it to allocate capital strategically -- particularly dividends.
And those cash flows will likely increase. The company plans on acquiring municipal utilities over the next few years to increase its rate base, or the revenue-providing assets in its portfolio. From 2022 through 2025, Essential Utilities projects increasing its water rate base at a compound annual growth rate (CAGR) of 6% to 7% and its gas rate base at a CAGR of 8% to 10%.
With regard to rewarding shareholders, Essential Utilities has hiked its dividend at a 7% CAGR from 2017 through 2022. It expects to maintain the same increases in the coming years while maintaining a prudent payout ratio of 65%. Right now, the stock offers a forward dividend yield of 2.8%.
