If you're going to invest your hard-earned savings into a stock, it's better to have the high conviction that comes from understanding the business, building an investment thesis, and arguing the best case for or against the company.
One of the best ways to gain an understanding of a business is to tune in to investor presentations. And with earnings season underway, listening to earnings calls can be another great way to gauge how the company is doing and learn what management is trying to accomplish.
United Parcel Service (UPS 0.14%), Newmont (NEM -1.57%), and Brookfield Infrastructure (BIPC -1.04%) (BIP -0.80%) deserve to be high-conviction components in a diversified portfolio, according to the following three fool.com contributors. They'll give you an idea of what each company is about and why it's a good investment.
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Near-term challenges, long-term opportunity
Lee Samaha (UPS): There's no avoiding the elephant in the room: The global economy is slowing in 2023, affecting package delivery volumes.
That's not good news for UPS; management has already lowered revenue expectations for 2023. The initial guidance range was $97 billion to $99.4 billion, now reduced to just $97 billion. Similarly, the company now expects an operating margin of 12.8% compared to initial guidance of 12.8% to 13.6%.
It's not just that the economy is slowing; there's also a natural correction in demand after previous years' surging growth in business-to-consumer shipments caused by stay-at-home measures. In addition, the recent agreement with the Teamsters union is seen as potentially threatening UPS' cost expectations this year, and therefore its full-year guidance.
As such, don't be surprised if UPS disappoints with its guidance on Aug 8.
That said, it's essential to put these near-term issues into context. There's little management can do about slowing demand. Still, it can continue to transform its business through its initiatives to focus on end markets like small and medium-size businesses (SMB) and healthcare while continuing to improve margins by being more selective over deliveries.
It's been a highly successful strategy and positions UPS very well to grow profits when its overall end markets improve. Meanwhile, its $5.1 billion dividend payout is easily covered by its expected $8 billion in free cash flow in 2023. All told, look out for its earnings in August, as it could create a compelling buying opportunity in a dividend-investing favorite.
Buy the dip on Newmont
Daniel Foelber (Newmont): Newmont is one of the largest gold miners in the world. Like other commodity-focused industries, the objective is simple: Produce the commodity at a lower price than you can sell it for.
Newmont is benefiting from relatively strong gold prices. They have flattened out over the last three years or so, but are still up considerably over the last five- and 10-year periods.
Gold price in dollars data by YCharts.
Newmont's issue is that its operating costs have gone up, squeezing margins and affecting profitability. A commonly quoted metric for gold producers is the all-in sustaining cost (AISC). This figure is similar to the break-even price for an oil and gas producer. It's the amount, usually quoted by the ounce, that it costs to produce gold, maintain its mines, and fund future development.
Since Newmont can't always count on a high gold price, it has to keep a lid on its AISC to ensure it can turn a profit and support a dividend even in a weaker price environment.
Newmont's second quarter AISC was $1,472 per ounce compared to $1,376 in the first quarter of 2023 and $1,199 in the 2022 second quarter. The higher costs were due to labor issues and plant disruptions. The glass-half-full approach of looking at these challenges is that the company is still making a sizable profit.
Also encouraging is that Newmont reaffirmed its full-year guidance to produce 5.7 million to 6.3 million ounces of gold at an AISC of $1,150 to $1,250 per ounce, signaling that cost pressures should subside in the second half of the year.
The company has a strong balance sheet that allows it to buy out other miners and boost production if needed -- which is exactly what Newmont is doing with its acquisition of Newcrest Mining, an Australian miner.
All told, Newmont and its 3.8% dividend yield is a great way to generate passive income from a gold investment. The stock enjoyed a sizable run-up when inflation fears were high in early 2022. But now that those fears have cooled off, investors might be discarding gold stocks in favor of growth stocks.
With Newmont hovering near a three-year low, now is a great time to take a look.
Don't call it a comeback: Brookfield Infrastructure has been here for years
Scott Levine (Brookfield Infrastructure): Discussions regarding the $1.2 trillion infrastructure bill are much less frequent compared to when the legislation dominated the headlines nearly two years ago. That doesn't mean it has been forgotten, though.
According to the White House, about $220 billion in funding from the bill has been allotted for projects. With plenty of work left to be announced, Brookfield Infrastructure is poised to benefit from the increased infrastructure spending, helping to make it a high-conviction dividend stock that currently offers a juicy 3.3% forward yield.
Including rail, data transmission, and midstream infrastructure, among other assets, Brookfield operates a massive diversified portfolio that generates stable (and growing) cash flow from the long-term agreements it inks with customers.
With this business model, management has clarity into future finances, helping it to allocate capital accordingly. Besides spending on acquisitions, it is able to increase the dividend at a responsible rate. From 2012 to 2022, the company's funds from operations (FFO) had an 11% compound annual growth rate (CAGR), while its dividend had a 9% CAGR.
Looking ahead, management aspires to maintain the same balance between growing FFO and increasing the distribution, setting an annual target of 10% for FFO and 5% to 9% for distributions. It's not only U.S. assets that Brookfield Infrastructure will rely on to support that growth; the company generates 56% of its FFO from assets operating outside the country.
Conservative investors interested in a reliable dividend stock should certainly consider putting Brookfield Infrastructure to work in their portfolios.
