It took almost two years to get here, but the Dow Jones Industrial Average is officially in a bull market. The collection of stocks is way up from its recent lows, and it reached a new all-time high in late December.
The Dow Jones Industrial Average may be way up, but some of its components didn't get the memo. These two stocks are trading at what appears to be bargain prices. The most richly valued of the pair is trading for just 11.6 times trailing free cash flow.
These well-established businesses probably won't be the fastest growers in your portfolio. Buying them at depressed valuations, though, means they don't need to set the world on fire to produce market-beating gains for your portfolio.
Here's a closer look at some apparent bargains in the Dow Jones Industrial Average index to see if they can be relied on to deliver strong gains in the years ahead.
Shares of Verizon (NYSE: VZ) did not participate in the Dow Jones rally last year. The stock fell 4.3% in 2023, and at recent prices, it offers a juicy 7.1% dividend yield.
Declining revenue pressured Verizon's stock price last fall. but it perked up again in response to better-than-expected third-quarter results. The three months ended Sept. 30, 2023, was the fourth consecutive quarter with more than 400,000 net new broadband subscribers. That brought total broadband subscriptions to 10.3 million, which was 21% more than the company had a year earlier.
Investors seeking rapid growth want to look elsewhere, but folks interested in steadily rising quarterly payments will be glad to learn that Verizon announced its 17th consecutive annual dividend increase last September.
At just 11.6 times trailing free cash flow, shares of Verizon look like a bargain. But there's a catch. The company finished last September with $126.4 billion in unsecured debt, and interest expenses on those debts rose sharply last year.
Plenty of new broadband subscribers are producing the huge profits Verizon needs to meet a rising dividend commitment and service its enormous debt load. The company expects to report $18 billion in free cash flow for 2023, or 28% more than it reported a year earlier.
Over the past year, Verizon used 80% of the free cash flow its operations generated to meet its dividend commitment. Cash flows seem sufficient to continue its dividend-raising streak, but there isn't any room for error. Retired investors who can't afford any dividend reductions might want to stay on the sidelines for a few quarters until its debt load appears more easily manageable.
Shares of American Express (NYSE: AXP) hit a low point this fall, after its CEO told investors he noticed a consumer spending slowdown in October. A successful Black Friday helped the stock quickly bounce off its lows to finish the year 26.8% higher.
At recent prices, American Express offers an unattractive 1.3% yield, but it's not shy about sharing profits with investors. Heaps of share buybacks have lowered its share count by 14% over the past five years.
They may start small, but the dividends you receive from this company could be significant by the time you retire. The payment network raised its quarterly payout by a whopping 54% over the past five years.
Trailing-12-month free cash flow is up 146% over the past 10 years, but shares of American Express are trading at a valuation that suggests it will never grow again. Right now you can buy the stock for just 7.5 times trailing free cash flow.
The credit card business is cyclical, but it doesn't look like we're headed for a trough right now. The charge-off rate on credit card loans held by commercial banks was a mediocre 3.49% in the third quarter. Unlike Visa and Mastercard, American Express keeps loans on its balance sheet and tends to be more discerning about its customers' credit profiles. Its net writeoff rate of 2% in the third quarter was much better than the industry average.
With a relatively low yield, this probably isn't the right stock for income-seeking investors who have retired already. For most investors with time ahead of retirement, though, buying at its super-low valuation looks like the right move.
Should you invest $1,000 in Verizon Communications right now?
Before you buy stock in Verizon Communications, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Verizon Communications wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.
See the 10 stocks
*Stock Advisor returns as of December 18, 2023
American Express is an advertising partner of The Ascent, a Motley Fool company. Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Mastercard and Visa. The Motley Fool recommends Verizon Communications and recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.
A Dow Jones Bull Market Is Here: 2 Dividend Stocks That Still Look Like Bargains was originally published by The Motley Fool
Wondering how to pick strong, market-beating stocks for your investment portfolio? Look no further than the Zacks Style Scores.
3M (MMM) closed the most recent trading day at $108.17, moving +0.35% from the previous trading session.
Stalwart companies with long streaks of higher dividends like to be predictable in their moves.
PayPal Holdings stock received yet another downgrade Friday, as some Wall Street analysts warn the company’s turnaround isn’t going to be quick. PayPal stock has had a rough couple of years, as the company has dealt with issues ranging from macroeconomic challenges to competition from companies like Apple who offer buy now, pay later services. BTIG analysts Andrew Harte and Thomas Smith cut their rating on PayPal to Neutral from Buy in a Friday report.
A Dow Jones Bull Market Is Here: 2 Dividend Stocks That Still Look Like Bargains – Yahoo Finance
Leave a comment