Few investors would have predicted the surprising 70% increase in the stock market between the crash of March 2020 and today. But it is amazing what future expectations and low interest rates can do for the economy. Industrial stocks have outperformed the market during many previous booms. And dividend-paying industries are even better because they generate guaranteed income, no matter what the stock market is doing.
With that in mind, we asked some of our taxpayers what dividend stocks they think are good buys for a bull market in 2021. They came up with 3M (NYSE: MMM), Caterpillar (NYSE: CAT), and Emerson Electric (NYSE: EMR). It is here that they believe that these three stocks are about to rise.
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3M seems undervalued
Lee Samaha (3M): The multisectoral industry has fallen out of favor with the market in recent years, largely due to a history of lost guidance, risk of PFAS liability and poor execution. However, there is a strong case for arguing that downgrading went too far. Whether it is a profit-based or free cash flow valuation, 3M now looks good value compared to its peers.
Data by YCharts
Play in a well-covered dividend (currently earning 3.6%) and a management team committed to cutting the cost base, making administrative changes and restructuring the portfolio through corporate activity, and you have a revenue for the stock to have a good 2021.
In fact, the company started the year in good shape, with all of its segments now generating some underlying growth. In addition, analysts expect 3M to benefit from a recovery in the economy, leading to a 6% growth in sales in 2021.
While there is no guarantee that CEO Mike Roman will succeed in his restructuring goals, the point is that he has free cash flow (about $ 5.8 billion in 2020) at his disposal to restructure the company. Meanwhile, the shares are traded at an attractive valuation and pay a good dividend. If you can tolerate the PFAS risk, the stock appears to have very good value.
Awaken the sleeping giant
Daniel Foelber (Caterpillar): The stars are lined up for Caterpillar to capture a bull market in 2021, but it has been a difficult road to get there.
After reporting its best annual revenue in the company’s history in 2012, Caterpillar experienced a four-year decline in sales. Just as it was about to enter another growth trend, the US-China trade war derailed its upward mobility. Then, the COVID-19 pandemic affected its 2020 goals and resulted in one of the worst quarters in Caterpillar’s history. But sales began to recover in the third quarter, and the company believes it is on track to have a much better year in 2021.
Caterpillar’s strong balance sheet allowed it to make timely purchases of oil and gas in 2020. Most people recognize Caterpillar for its large earthmoving equipment, but the company’s power and transportation division generates approximately the same revenue as its construction segment. The rise in oil prices combined with a general economic boom should help boost sales for this division.
Even if this year does not go as planned, Caterpillar plans to increase its annual dividend for the 28th consecutive year, just as it did in several crises.
However, the market is already pricing Caterpillar shares for a year of strong gains. Trading high with a P / E ratio above 30, Caterpillar inventory would look expensive if it could not meet its highly anticipated growth. But given the strength of its dividends, this cyclical action may be one of the best ways to take advantage of a bull market in 2021.
A real approach to increasing your passive income stream
Scott Levine (Emerson Electric): Rising more than 16% in 2020, the S&P 500 extended its rise so far in 2021, rising more than 1.4%. And many investors believe that the market will not change course anytime soon. Between that belief and the knowledge that stocks that pay dividends mostly outnumber those that don’t, it’s not surprising that investors are paying special attention to stocks that offer recurring distributions – stocks like Emerson Electric, which offers investors 2.4% production.
Since 1890, Emerson Electric has grown to become a global powerhouse that provides solutions for a wide range of industries, including food and beverage, oil and gas, mining and water treatment – to name a few. Dividend investors, however, are probably more familiar with the fact that Emerson Electric is a Dividend King. A more elitist group than the Dividend Aristocrats, who have increased their dividends for at least 25 consecutive years, Dividend Kings have a history of raising their dividends for 50 consecutive eye-popping years. Did Emerson Electric just join this select group? Not exactly – Emerson Electric has been increasing its dividends for 65 consecutive years.
While a company’s commitment to rewarding shareholders with dividends is great, it means little if the company is putting its financial health at risk to appease investors. In the case of Emerson Electric, this is hardly the case. In the past 10 years, the company’s average payment rate is 59%. In addition, the company generates a considerable amount of cash flow, with an average annual free cash flow of $ 2.4 billion over the past three years, according to Morning Star. This suggests that the company’s dividend is sustainable; in addition, Emerson can also continue its trend of making strategic acquisitions, such as the recent acquisition of the Progea Group, strengthening Emerson Electric’s position on the internet of things.
Another thing I find interesting about Emerson Electric is its exposure to hydrogen, an area that gained huge interest last year. In the company’s fourth quarter 2020 conference call, for example, Lal Karsanbhai, chief executive officer of Emerson Automation Solutions, noted the company’s opportunity stating that Emerson Electric has “a significant role to play here [in helping customers reach carbon neutrality] particularly in the hydrogen value chain, from production to distribution and use. “
Although the shares are not currently found in the discount rack – they are trading at 16.3 times operating cash flow, a premium for their average multiple of 15.4 in five years – I would gladly pay a slightly steeper price by a distinguished King of the Dividend like Emerson Electric. Between the company’s long history of returning capital to shareholders and its impressive ability to generate free cash flow, Emerson Electric is an action that investors should strongly consider as a way to strengthen their portfolios.