2 Stocks I'm Watching but Won't Buy Yet

Dividend yields for these two industry dominators are becoming quite compelling.

Joe Tenebruso
Joe Tenebruso
Aug 18, 2015 at 5:00PM
Consumer Goods

Sophisticated investors are always on the look out for great new investments. Whether you're consistently investing new capital or simply trying to optimize your portfolio, studying businesses outside your existing holdings can help you maximize profits. In that regard, here are two businesses I'm currently watching, as well the prices at which I'd consider buying them.

The oil giant
The dividend yields of the major integrated oil companies are becoming quite tempting. Dominant, well-run businesses that have typically yielded 2% to 3% in recent years have seen their yields surge as their stock prices have plummeted, with some -- such as oil and gas giant Chevron (NYSE:CVX) -- now approaching 5%.

CVX Dividend Yield (TTM) Chart

CVX Dividend Yield (TTM) data by YCharts

The problem is that there are legitimate reasons these businesses have seen their stock prices decline so significantly -- namely, that the prices of oil and natural gas have declined to an even greater extent.

WTI Crude Oil Spot Price Chart

WTI Crude Oil Spot Price data by YCharts

Even worse, many executives at these companies expect oil prices to remain depressed for years because of the surge in U.S. shale oil production. A sustained downturn of this nature could wipe out a huge portion of the major integrated oil companies' cash flows and could even force the weakest businesses to slash their dividends.

For these reasons, if I'm going to invest in an oil major, I want to invest in the strongest, and that title belongs to ExxonMobil (NYSE:XOM). Exxon is widely considered to be the most conservative company in oil and gas and also the most disciplined, with returns on capital that typically rank at the top of the industry.

Source: ExxonMobil.

Still, I don't believe the time has yet come to buy Exxon. It's true that Exxon's stock price is down more than 20% from its 52-week high, and at 3.6%, its dividend yield is the highest it's been in the past half-decade. Yet I believe Exxon's shares could decline further. Should fears of a prolonged downturn in oil prices become more widespread, we could see Exxon's shares fall to a price where they would yield a more appealing 4%, which would require a decline of only about 7% from today's $78 level. And should Exxon's stock price drop to a point where its yield approaches 5% -- similar to where Chevron is trading now -- I'd consider buying some shares of Exxon as a way to profit from a potential -- albeit likely long-term -- recovery in oil prices.

The consumer-goods titan
Another area that's seen considerable selling is the consumer-goods space. Industry leader Procter & Gamble (NYSE:PG) has seen its shares fall 20% from its highs of the year as it struggles with sluggish revenue growth and significant foreign currency headwinds.

Yet Procter & Gamble is the midst of a major overhaul in which the company is spinning off more than half its brands to focus on its most profitable and fastest-growing products. These moves should give the company a clearer focus and have also helped raise billions in cash that management is passing on to shareholders through dividends and stock buybacks. Management is also making progress on its cost-cutting and productivity initiatives, which are helping to drive improvements in operating margin and core earnings. 

Still, the question remains: Can P&G deliver consistent organic revenue growth? The company has saturated developed markets with its products and is finding it challenging to compete against less expensive rivals in emerging markets. In addition, P&G's international revenue is being dampened by a strong U.S. dollar, which is offsetting much of the growth the company is able to muster in these areas. Maybe most worrisome is that P&G is seeing fierce competition from new challengers such as Dollar Shave Club, whose edgy marketing campaigns have made it a surprisingly troublesome threat to P&G's high margin, multibillion-dollar Gillette razor business.

For these reasons, P&G's revenue growth is likely to remain challenged in the years ahead. Yet even slow-growth businesses can deliver strong returns if purchased at the right price, particularly those that pay sizable dividends. And at about 3.5%, P&G's dividend yield is at the top of its range over the past decade.

PG Dividend Yield (TTM) Chart

PG Dividend Yield (TTM) data by YCharts

Yet with P&G still struggling to regain its growth footing, further share-price declines could still be ahead. In addition, with the Federal Reserve set to raise interest rates in the months ahead, income stocks could come under pressure as bonds become more attractive. If investors sell P&G's stock down to a level where it yields 4% (around $66 per share), P&G's shares would represent a considerable bargain at that price -- one that investors may wish to consider acting upon should the opportunity present itself.