If you like dividends, then you'll be interested in investing in UPS (UPS 0.14%), building products company Johnson Controls (JCI 1.02%), and home appliances company Whirlpool (WHR -0.39%). Their average dividend yield is 4.1%, and they are attractive stocks to buy. However, they are value stocks for a reason, and it makes sense to explore that reason before buying in.
UPS
Yielding 4.1%, UPS is coming off of a difficult 2023. Delivery volumes have failed to meet expectations due to a weakening economy and protracted labor negotiations, leading customers to divert traffic to other networks. As a result, UPS will miss the earnings expectations management laid out at the start of the year.
It's been a disappointing year, and as FedEx's recent commentary attests, it's still a weak environment, so don't be surprised if there's more pressure on delivery volumes in the first half of 2024.
That said, there are three reasons UPS can make a big comeback in 2024. First, management continues to make significant progress in its aims of expanding its small and medium-sized business and healthcare markets, as it focuses on improving the profitability of its deliveries rather than chasing volume growth.
Second, UPS is already winning back delivery volumes lost due to the Teamster negotiations. For example, the average daily volume was down 15.2% in August on a year-over-year basis at the high point of friction, but as UPS started to win back volumes, it was only down 7.4% in the last week of September. Third, lower interest rates in 2024 will take the brakes off of the economy, and delivery volumes should pick up accordingly.
Finally, UPS continues investing in smart facilities and automation that help reduce cost per piece by, for example, improving misload rates and scanning packages upon pickup.
It will take time for UPS to recover, and it faces some near-term risk. But it trades at 16 times trailing earnings, and investors will earn a 4.1% yield while they wait for improving earnings in the second half of 2024.
Johnson Controls
The building products company Johnson Controls is attractive. Its heating, ventilation, air conditioning, fire and security products, digital platforms, and building control solutions help building owners reduce emissions and operate buildings more efficiently to meet their net-zero targets. On its investor day in 2021, management outlined that it had a $250 billion incremental market opportunity ahead of it over the next decade.
Indeed, Johnson Controls is growing. It's just not growing as much as management expected. The stock price is down 29% since the start of 2022 after the company missed its initial 2022 earnings per share (EPS) guidance of $3.22-$3.32 in reporting $3 in 2022.
Fast-forward to its fiscal 2023, and management's initial guidance was for organic revenue growth of high single digits to low double digits and EPS of $3.20-$3.60. Management delivered on the earnings ($3.50) but organic revenue growth of just 8% (and just 2% in the fourth quarter ) is disappointing.
Image source: Getty Images.
On balance, I think giving management the benefit of the doubt makes sense. The reason behind the sluggish sales comes down to dealers running down inventory built up previously when it was harder to obtain products due to the supply chain crisis. It's not the only company reporting such conditions. In addition, its orders and backlog remain in growth mode.
Johnson Controls trades at less than 16 times Wall Street's estimated forward earnings and yields 2.6%.
Whirlpool
Disappointing trading in Europe and Asia and interest rates pressuring its core North American market have created a problematic 2023 for Whirlpool. When management released its third-quarter earnings in late October, investors didn't take too kindly to it lowering its full-year adjusted EPS guidance to the low end of its previous range of $16-$18.
It's never good news when companies cut full-year guidance on their third-quarter earnings calls because it implies deteriorating earnings momentum in the fourth quarter. Moreover, companies with cyclical exposure to the economy, such as FedEx, and others with exposure to consumer discretionary spending, like Nike, have disappointed investors with their growth outlooks.
That said, there's little Whirlpool can do about rising interest rates choking off demand, and the headwinds it's currently facing could turn into tailwinds if rates come down in 2024. In addition, management is on track for $800 million in cost-cutting actions. It is also set to position its Europe, Middle East, and Africa business into a new business with Arcelik's European business and create a new stand-alone company with Whirlpool owning a 25% share. The deal will see Whirlpool exit a region where it's found it tough to generate an adequate profit margin.
With the turnaround strategy in place and the prospects of lower interest rates, Whirlpool and its 5.8% dividend yield will suit enterprising investors.
