The Dow Jones Industrial Average is a composite of stocks, with some doing better than others over any given period. In June, Caterpillar (CAT 1.59%), Intel (INTC -9.20%), and Verizon (VZ 1.17%) were all standouts. But does that make them worth buying as July gets underway? Here's a look at each of the Dow's best-performing June stocks.
1. A long runway
Caterpillar makes the massive machines that power construction sites. The company had a very good first quarter, with revenues up 17% and adjusted earnings per share up 70%. But that's actually just a single quarter. The long-term success here is best summed up in the company's 29-year streak of annual dividend increases. You don't create a record like that by accident.
The real story, however, is about the long-term opportunity as the United States, and other countries, focus on upgrading infrastructure. That requires the type of equipment that Caterpillar sells, with the company's backlog sitting at a robust $30.4 billion at the end of the first quarter. Although the company's business is cyclical, rising and falling along with economic activity, it looks like there's a material long-term tailwind.
But it isn't exactly a screaming buy. While the price-to-earnings ratio and price-to-cash flow ratio are a little below long-term averages, the price-to-sales and price-to-book ratios are a touch above. That suggests a fully priced stock. If you are willing to pay full fare for a well-run company, Caterpillar could be worth the price of admission. If you have a value bias, you'll probably want to wait.
2. Stumbling
Intel is a large producer of computer chips, but it has a focus on chips that power personal computers and the servers that provide the backbone of the internet. For years that was a very good business, with a boost coming from the work-from-home trend during the early days of the coronavirus pandemic. However, longer term, chip industry dynamics are shifting and personal computers do not present a compelling long-term opportunity. The growth is likely to come from the chips used to power mobile devices and artificial intelligence. These are not areas of strength for Intel.
The company is repositioning its business to better compete. But that will require a lot of capital investment before there's any substantive revenue coming in. And if there's an execution misstep along the way, all that spending could be, well, for naught. Investors are worried and have pushed the stock lower over the past year.
Meanwhile, Intel is looking to preserve cash for its capital investment push, which was highlighted by its recent dividend cut. The company lost $0.66 per share in the first quarter and is expecting a nearly similar loss in the second quarter. Since it's operating from a position of weakness, this is really a turnaround stock that only the most aggressive investors should own. There's still a lot of work to be done.
3. Always more to do
Verizon is an income stock, with a dividend yield of 7.2%. It operates in the communications industry, providing legacy land line and fiber optic connections. More importantly, it is one of the largest cellular phone providers in the United States. It has increased its dividend annually for roughly two decades. So far, so good.
The problem is that Verizon's business requires a lot of capital spending. The most notable driver is the seemingly neverending upgrade cycles in the cellphone industry. It has to keep pace with peers if it wants to retain its customers. Thus, there are big spending needs ahead. That, meanwhile, has to be juxtaposed against the company's leveraged balance sheet. Verizon's debt-to-equity ratio of 1.6 times is above the levels of its closest peers AT&T (T 1.02%) and T-Mobile (TMUS -0.06%), which sit at 1.4 and 1.1 times, respectively.
Subscriber revenues are generally consistent over time, so there's no reason to believe that Verizon can't continue to support its dividend and capital spending needs.
At its core, however, Verizon is really a slow-growth dividend stock that will always be spending heavily to participate in a very competitive industry. When you add in its leverage, that proposition may be a bit too risky for more conservative income investors.
No clear wins
Investing is really about probabilities, since nobody can predict the future. Dow component Caterpillar seems fully priced today, but appears to have a bright future ahead. Intel is working from a weakened state. Verizon is a lumbering, debt-encumbered giant with an ultra-high dividend yield. Cat and Verizon might be worth a look for growth and more aggressive dividend investors, respectively. Intel should only be of interest to turnaround types.
