Dividend stocks are often the driving force of a well-rounded retirement portfolio.
Dividend stocks offer three key advantages that can be quite attractive to long-term investors. First, they are a sign of a company's proven long-term track record. A business wouldn't consider sharing its profits if the management team didn't believe those profits were sustainable.
Secondly, dividend stocks can help to hedge against inevitable downturns in the stock market. Since 1950, the S&P 500 has had 35 separate stock market corrections of at least 10% when rounding to the nearest integer. While a dividend is unlikely to erase the paper losses created by a stock market downturn, it can help reduce investors' anxiety and mitigate some of their losses.
Lastly, dividend payments can be reinvested into more shares of stock. This is referred to as a dividend reinvestment plan, or DRIP. Using a DRIP can accelerate your capital gains by creating a virtuous cycle in which your holding in the company slowly grows, and thus your dividend grows, and thus your reinvestment in the stock grows, and so on. It's like kicking compound interest into a higher gear.
These top dividend stocks appear to be discounted
Despite the S&P 500's 6% year-to-date gain as of Sept. 25, quite a few top-notch dividend-paying stocks are down for the year. In fact, a quick screen of stocks yielding at least 3% with a minimum market cap of $2 billion and a year-to-date loss in value of 6% or higher produced almost 60 companies. Among these nearly five dozen stocks, three stand out as top dividend stocks that appear to be selling at discounts this fall.
If you want to talk dividend stocks selling for a discount, there's no way the discussion can begin without mentioning Detroit-based automotive giant Ford Motor (F 0.36%), which is trading at just seven times Wall Street's 2017 profit projections and less than five times its 2017 cash flow projections, and sports a dividend yield that's just shy of 5%. Meanwhile, Ford shares are off by 14% year-to-date.
Ford has been dealing with two issues recently. First, recalls have been a thorn in the side of most automakers, including Ford. Just this past June Ford announced a 1.9 million vehicle recall to replace faulty passenger-side airbags from Takata. While this particular problem boils down to an error by one of Ford's suppliers, it nonetheless reflects poorly on Ford and could hurt its margins. Secondly, Ford has been pressured by Wall Street pundits predicting a near-term top in U.S. vehicle sales.
Though I wouldn't wholly dismiss either of these concerns, Ford has enough going for it over the long run that these worries seem easily outweighed by other catalysts.
To begin with, Ford appears to have a bright future in China, the world's largest auto market. For all intents and purposes China's auto market is still relatively young, and Ford has had little trouble increasing its market share. Ford believes its cost-conscious approach and the upcoming introduction of the F-150 Raptor SuperCrew in China should help it forge an emotional attachment to the brand among China's burgeoning middle class. Through the first-half of 2016, Ford has delivered volume and margin improvements in China, and recently logged its best-ever August in terms of sales with 96,450 vehicle sold.
Domestically, Ford has also benefited from low lending rates and weaker prices at the pump. Automobiles are among the most expensive purchases consumers will make, meaning access to cheap and abundant capital is fueling the drive to buy new vehicles. Furthermore, Ford tends to generate higher margins from trucks and SUVs which sell better when fuel prices are lower.
Ford is also leveraging its investments toward in-cabin luxuries such as cloud-based software capabilities and its in-dash infotainment system. Technology will be a key factor in winning over millennials, and Ford looks as if it has the formula to keep young adults as loyal to the brand as their parents and grandparents have been.
Dividend investors may want to consider stepping on the gas, not hitting the brakes, with Ford.
The oil industry might be the last place you'd think to look for discounted, above-average dividend stocks, but Oceaneering International (OII 0.81%), which supplies engineered service and products to the offshore oil and gas industry, certainly seems to fit the bill. Shares of Oceaneering are down 33% year-to-date. Meanwhile, its yield has increased to 4.3%.
The weakness in Oceaneering's top- and bottom-line lately are no secret. Weakness in the price of crude oil has reduced demand for offshore projects, causing Oceaneering International to both reduce its future backlog and report substantial year-over-year profit declines. During the second quarter, further pressured by bad debt expense, Oceaneering reported a 66% decline in year-over-year net income.
Though very near-term visibility in offshore drilling remains poor, Oceaneering International has the tools, literally and metaphorically, to survive this cyclical downturn.
First, investors should consider that the long-term forecast for fossil fuels are promising. According to a recent U.S. Energy Information Administration report, offshore crude oil production should increase to 2.1 million barrels per day by 2021, with offshore natural gas production peaking two decades later in 2040 at 1.7 trillion cubic feet. Oil isn't going to disappear overnight, even with the push to renewable energy sources, meaning Oceaneering should remain busy for many years to come once oil prices rebound.
More important is the fact that Oceaneering International has done what it can to reduce its costs and maintain a healthy balance sheet. On a year-over-year basis, Oceaneering International, through a combination of lower demand for its products and layoffs, reduced its Q2 costs by 17.5% from the prior-year quarter, and it's shaved off about $245 million in costs through the first-half of the year.
Oceaneering also has just $19 million in debt maturities due until October 2018, giving it plenty of financial flexibility with $393 million in cash on its balance sheet and $500 million in an undrawn credit facility. If anything, Oceaneering looks poised to be stronger than ever when the industry does turn higher.
Last but not least, income investors looking for deep discounts should consider digging into French drugmaker Sanofi (SNY 0.78%). Sanofi is currently sporting a forward P/E of 13 and is down 10% year-to-date.
Arguably Sanofi's biggest concern, much like its large drugmaking rivals, has been the expiration of patent protection on previously key therapies. Sales of Plavix and Lovenox, two drugs that are still blockbusters for Sanofi in its established products segment, saw sales fall 22.2% and 1.7%, respectively, during the first-half of 2016 on a constant currency basis (all figures from Sanofi are in constant currency, thus removing the effects of currency movements). Also a bit uncharacteristic is the fact that Sanofi has struggled to establish a strong oncology presence, with sales of its established oncology drugs down 1% during the first half of the year.
Despite these concerns, there are a number of reasons to expect Sanofi to outperform over the long run for income seekers.
A lot of credit goes to Sanofi's rare disease and multiple sclerosis franchises, which both should provide the bulk of the spark for Sanofi's margins and near-term growth. Rare disease drugs typically offer exceptional pricing power due to minimal competition and the fact that most insurers include rare-disease drugs on approved formularies. During the second quarter Sanofi grew its rare-disease sales by 14.2% from the prior year. Similarly, oral MS drugs have been true standouts because of their convenience for the patient, which is probably why Aubagio sales rose 61% during the first-half of 2016.
Sanofi's collaborations are another reason for long-term shareholders to be excited. Sanofi and Regeneron Pharmaceuticals (REGN 0.12%) are working together on a number of potential blockbuster drugs, including moderate-to-severe rheumatoid arthritis drug sarilumab, which demonstrated superiority to Humira in the phase 3 SARIL-RA-MONARCH study and could be approved as early as next year, and Praluent, a Food and Drug Administration-approved injection that offers a completely new path to lower LDL-cholesterol (the bad kind) in instances where statins and exercise aren't enough. Praluent would be particularly intriguing if PCSK-9 inhibitors provide long-term cardiovascular superiority over the current standards of care. Both drugs could easily wind up becoming blockbusters.
With a healthy yield of 4.3%, Sanofi could be worth scooping up.