So far, 2023 has been a year of recovery for the stock market overall. The Dow Jones Industrial Average is up roughly 2.5%. That's not bad given the Dow's 8.9% drop in 2022, but it's also quite a bit less than the 2023 performances so far for the S&P 500 (up 12.7%) or the Nasdaq Composite (up 26.5%).
The Dow's concentration on an established group of 30 blue-chip companies doesn't include a lot of powerful growth stocks and certainly doesn't include smaller companies with breakout potential. Rather, it's meant to represent the broader economy, and almost all of its components are industry leaders and pay a dividend.
But sometimes, even blue chip stocks can get hit with big sell-offs. And that's exactly what's happened so far this year to Dow components like Nike (NKE 0.19%), Verizon Communications (VZ 1.17%), Walgreens Boots Alliance (WBA 0.57%), and 3M (MMM 0.46%). All four dividend stocks are down more than 15% year to date.
Blue chip stocks get that designation for a reason, and all these stocks have the potential to recover from these 2023 drops. Read on to see which is the best one to buy now.
Image source: Getty Images.
High yields with high uncertainty
Verizon, Walgreens, and 3M may be in completely different industries. But as potential stock investments, they're remarkably similar.
All three companies currently sport very high yields and each has a track record of dividend raises. 3M is one of the longest-tenured Dividend Kings, having paid and raised its dividend for 65 consecutive years. Walgreens has raised its dividend every year since it started paying one in 1989 -- giving it a 34-year streak. Verizon has raised its dividend every year since 2007.
As far as yields go, 3M's is 6.2%, Verizon's is 7.8%, and Walgreens' is 9%. To put these yields into context, consider that beaten-down stock prices paired with year after year of dividend raises mean that all three stocks currently trade at or near their highest yield levels ever.
VZ Dividend Yield data by YCharts.
The problem isn't the yield or the dividend track record -- it's that each company is facing slowing earnings growth or worse, negative growth.
To support future dividend raises, a company must make more money to justify the higher expense. If a company isn't earning more and doesn't have a reasonable path toward earning more, investors will start to doubt the strength of the dividend and future raises. They may even argue that the dividend is doing investors more harm than good by taking away funds that could otherwise be used to turn the business around.
One red flag with all three companies is that they have been issuing minimum dividend raises for multiple years now. Anytime you see a company raise its dividend per share by around $0.01 -- which is what all three companies are doing -- it usually means the dividend raise is merely symbolic and reflective of a business that can't afford that raise.
VZ EPS Diluted (TTM) data by YCharts.
In the chart above, you can see that each company has cumulatively raised its dividend by around 10% over the last five years, which is a very low dividend growth rate. Meanwhile, Verizon's earnings are down over 36% annually, and Walgreens's and 3M's earnings have fallen off a cliff and are actually negative.
Since net income can sometimes be a misleading stat due to one-off charges or benefits, it's important to look at other numbers, as well. But throwing in operating income and operating cash flow into the mix still leaves us with ugly charts for all three stocks.
The good news is that all three stocks have sold off big time and are now quite inexpensive. And they'll look really cheap if they can turn their businesses around. For that reason, any of these three companies is worth exploring if you know about an industry or believe a turnaround will happen.
A balanced bet
However, when it comes to picking the best buy now among the four stocks mentioned, Nike (down 22.5% year to date) takes the cake. The simplest reason why I like Nike over Verizon, Walgreens, or 3M is because it has a very clear path to future growth while the other three companies do not. Nike may not be as cheap, but it's cheap enough and its business is doing very well.
Earnings are solid and revenue is at an all-time high. Nike also has an ace in the hole, which is Nike Direct, the company's direct-to-consumer (DTC) business that acts as an alternative to its wholesale business.
Nike Direct allows the company to bypass intermediaries and interact with the consumer, which can boost repeat business and lead to more successful promotions, sales, product releases, and more. It's Nike's way of staying relevant in-store and online, which is important, given the success of e-commerce-heavy brands like Lululemon Athletica.
The biggest concern with Nike is that it could face a slowdown in sales, paired with margin compression as a result of high interest rates and weak consumer spending. However, this has nothing to do with the brand or the business and is simply part of the economic cycle.
Nike stock trades down close to 50% from its all-time high. Its forward price-to-earnings (P/E) ratio is under 25, which isn't dirt cheap but a compelling price for arguably one of the strongest and most recognizable consumer brands in the world.
Nike's dividend yield is only 1.5%, which is roughly the dividend yield of the S&P 500. The latter has a forward P/E ratio of 19.6 -- so it's cheaper than Nike's. However, if you believe that Nike is a far higher quality stock than the S&P 500 overall, then the valuation of Nike, relative to the S&P 500, looks like a great value.
A solid entry point in a potentially lifelong holding
It wouldn't surprise me if Verizon, Walgreens, or 3M showed signs of progress and outperformed Nike and the S&P 500 over the next three to five years. However, that's a big if, especially when compared to the opportunity that Nike stock is offering investors right now.
When a premium business goes on sale for factors mostly outside its control (like the economy), that's usually a great time to buy. There's no telling what Nike stock will do in the short term, and it could stay low for longer than investors hope.
But given all of the Dow stocks that have sold off big time this year, Nike stands out as having the best risk/potential reward profile. Now is an excellent time to consider the stock for folks who believe in the future of the Nike brand.
