In 2021 investors have gone cuckoo for Alpha, that measure of a stock’s ability to outperform the markets. They aren’t interested in growth, or business fundamentals. They want pure gains, driven by pure greed. Buy what’s hot now and get someone else to buy it off you for more.
In this new world, all the cloud stocks are strong, all the SPACs are good looking, and all returns must be above average. These are the hallmarks of a bubble, and a peak from which naïve investors will soon be washed out like rain. That’s because the real economy doesn’t justify this market.
The recovery, such as it is, remains mostly “k-shaped.” Those with assets were bailed out by the Federal Reserve and have fully recovered. Those who had nothing going in, like the millions who drive the “gig economy,” feel doomed.
The stock market may feel like these are happy days. But on America’s streets it’s “Happy Days are Here Again,” that ironic song of the Great Depression.
That makes this a good time to consider value stocks. Instead of trying to make money off the next fool chasing high Alpha, I would recommend solid companies making money in the real economy. One hallmark of such companies is real revenue. Another is dividends rather than just capital gains.
After all, capital gains just mean someone else bought your stock for more than you paid for it. A dividend means the company you invested in is making money and sharing it with you.
Here are 7 bypassed value stocks to buy before the speculators do:
- Exxon Mobil (NYSE:XOM)
- 3M (NYSE:MMM)
- CVS Health (NYSE:CVS)
- Pepsico (NYSE:PEP)
- Kraft Heinz (NYSE:KHC)
- Toyota Motor (NYSE:TM)
- NextEra Energy (NYSE:NEE)
I can’t guarantee all of these stocks will be worth more a year from now than they are today. But I do think that in a panic, they’ll fall less than today’s favored mistakes and you’ll still reap plenty of dividends to keep you warm.
Bypassed Value Stocks to Buy: Exxon Mobil (XOM)
Personally, I’m no fan of Exxon Mobil (NYSE:XOM).
I accept the science of climate change. If I ever have grandchildren, I want them to have a livable planet.
But the last time I wrote about this company in December, I suggested that at least in 2021, XOM would be a good investment. Since 2021 began, Exxon Mobil stock is up 21%. XOM stock opened February 16 at almost $52 a share. Yet even at that higher price price, the yield on the 87 cent per share dividend is nearly 7%.
Despite suffering a big loss in 2020 thanks to a $19 billion asset write-down, Exxon is still profitable. The company had nearly $4.4 billion in operating cash flow during the most recent quarter. Without its write down, it would have had earnings of 3 cents per share.
The loss came from the write-down of natural gas assets in the U.S., Canada and Argentina. Otherwise, earnings were better than expected. Exxon Mobil now says 90% of its production will be profitable at $35 per barrel. As this was written the price of West Texas Intermediate, the main U.S. grade, was hovering near $60 per barrel.
Oil production during the fourth quarter came to 3.7 million barrels per day. It’s now producing 120,000 barrels per day from its finds off Guyana and plans to triple that output in 2022.
What that means over the short term is that Exxon Mobil should produce a gusher of earnings. It means the company can both pay the rich dividend and pay down debt. The stock has made more than twice the gains of other oil stocks so far in 2021 . Plus Exxon’s chemical operations remain strong.
Over time oil is going to fade away with renewables taking an increased market share. Electric cars are going to depress gasoline prices. But right now, in early 2021, Exxon Mobil is where I’d go for alpha.
In 2020, 3M (NYSE:MMM) earned nearly $5.4 billion, or $9.25 per share fully diluted, on sales of about $32.2 billion. It reduced debt during the year and had over $8 billion in operating cash flow, $4.6 billion after paying out $3.4 billion in dividends. Management predicts it can grow the company another 5-8% in 2021.
But the stock is still cheap. Price to earnings ratio is just 19 while the dividend yields a fat 3.35%. And yet no one seems in a rush to buy MMM. There are 10 analysts covering and 3 say sell.
Over the last year 3M stock is up about 10%. Add the dividend and your total gain is 13%. Compare that to a 30-year bond at 2%.
Why is 3M so cheap? The stock fell out of bed in mid-2019 after a weak earnings report and the $6.7 billion acquisition of Acelity, a wound care expert. In the wake of all that, MMM cut share repurchases. Before that deal shares were trading at $216; they haven’t come close to $200 since.
Still, you buy tomorrow, not yesterday. In the case of today’s Baby Boomer investors, you buy tomorrow and tomorrow and tomorrow. 3M has been paying a dividend grower for 62 years. Over the past 5 years the payout has increased from $1.11 per share to $1.48.
More important, this isn’t a food company or a consumer products outfit. One-third of 3M sales come from products invented during the last five years. It’s a chemicals company, launching hundreds of new products each year. 3M Natural Pozzolans, for instance, are a powder added to cement that can reduce its environmental impact.
That innovation will be important as the Biden Administration looks to target what it calls “forever chemicals,” additives that can cause cancer and don’t degrade. The folks at 3M downplay the impact, disagree on their cleanup costs, but in the end will be cooperative. Rivals who can’t are going to be hurt.
3M may look a little woebegone right now. But this is a retiree’s dream stock and there are more (soon-to-be) retirees than ever.
CVS Health (CVS)
Despite earnings that beat out analyst estimates, CVS Health (NYSE:CVS) remains in the market doghouse. I bought CVS stock anyway.
Shares are selling for just over 6 times last year’s $15.9 billion in operating cash flow. Investors are ignoring conservative guidance that this company can keep up the pace.
The market is ignoring CVS’s 2.84% dividend yield. The market is also ignoring America’s changing demographics.
I’m the exact age of the average male baby boomer: I turned 66 last month. I still feel good, and plan to keep working. But Father Time remains undefeated. This is true for my generation as it will be for yours. CVS Health, and the health care system, are going to help me toward what I hope will be a long fade out.
In line with that thought process, CVS’s secret sauce is Aetna, the health insurer it bought in 2018. Along with Caremark, its pharmacy benefit manager, CVS is the only health care company with the scale to go toe-to-toe with market leader United Healthcare (NYSE:UNH).
CVS also didn’t mention in its earnings release that it would be returning to the Affordable Care Act health exchanges this year.
What works on the exchanges isn’t traditional insurance, but managed care. Insurance is a bet against your being sick, the insurer paying bills as they come in. Managed care is a bet on your being well, or at least staying out of the hospital.
To win the game, a managed care company must own clinics and treat doctors as employees. It must follow established protocols. It must control drug costs. It must have the ability to say no and make it stick.
About 75% of health care bills are for chronic conditions like heart disease and diabetes. Those ongoing conditions respond well to managed care.
CVS is now in good position to deliver managed care. Its Minute Clinics can provide cheap front-line care while its pharmacy benefit manager Caremark keeps drug costs down. It’s getting into acute care, starting with dialysis clinics. It operates in specialty pharmacy, where drugs are taken to patients, in long-term care and in infusion services.
CVS is set up to grow in the future market.
Recently, after being asked to look at Beyond Meat (NASDAQ:BYND), I did a drive-by recommendation for Pepsico (NYSE:PEP).
Pepsi began diversifying away from drinks back in 1965 when it bought Frito-Lay. The company later bought Quaker Oats in 2001 and is now the third-largest food company.
If it can successfully add protein to that food, Pepsico will have a huge win for the world’s diet, and a big win for the bottom line. Even without Beyond Meat, food is powering Pepsi’s results. That’s thanks to Quaker, which saw a 19% gain in operating profit for the fourth quarter year over year. Quaker now grinds barley and corn along with oats, producing cookies and biscuits along with cereal.
CFO Hugh Johnston says the work from home trend helps Quaker, because people are eating breakfast at home. He expects that to continue. People who can work from home will keep doing it after the pandemic, rather than spend two hours dressing and driving.
Quaker’s breakfast foods should also be the first offerings to get the Beyond Meat treatment. The current product line is already high in protein, indicating consumers want that in their snacks. I’d love a healthier breakfast alongside the coffee at my desk.
“The stock’s not bad even without Beyond Meat, I wrote. “With it, it’s even tastier.” And after delivering fat earnings and a dividend raise, PEP is tastier still. Starting in June, the payout rises to $1.075 per quarter, or $4.30 per year. That brings the yield close to 3.2.
Bank of America (NYSE:BAC) analysts recently reiterated their buy rating on Pepsi stock after talking things over with management. I don’t have to listen to their spiel to know this is a good buy.
Remember, Pepsi isn’t just fizzy drinks. It’s breakfast, it’s snacks and international growth. And right now, it’s on sale. You can get a dividend over 3% with solid growth prospects.
Kraft Heinz (KHC)
Kraft Heinz (NYSE:KHC) was born to deliver dividends. Yield is why it is now shrinking.
The company was jointly purchased by Warren Buffett of Berkshire Hathaway (NYSE:BRK.A) and Brazil’s 3G Capital in 2013. The idea was to cut costs in popular packaged food brands through “zero-based budgeting,” where all spending must be justified every year, then give the cash flow to investors.
This has worked great at Restaurant Brands International (NYSE:QSR), another 3G-Buffett collaboration. QSR is up 89% since that deal was formed in 2015.
But it hasn’t worked at Kraft Heinz, down 50% since it was formed. Now, to protect the dividend, the company is being broken up.
The latest step is an agreement to sell its Planters Nuts business to Hormel (NYSE:HRL) for $3.35 billion. That business represents about 16% of last year’s $6.9 billion of revenue, or $1.1 billion. It’s the second big deal in a year for Kraft Hein, which sold a number of cheese brands, including Breakstone’s and Cracker Barrel, to France’s Lactalis Group in September for $3.2 billion. Those operations represent $1.8 billion of revenue and included some Kraft cheese naming rights.
Kraft Heinz called 2020 a “transition year” but it’s more like clean-up on aisle 5. The company wrote off $19.4 billion in assets in 2019 and suffered an accounting scandal that cost then-CEO Bernardo Hees his job.
What’s left is a dividend yielding 4.5%, which should attract income investors. The dividend is sustainable thanks to high free cash flow, which hit $5 billion last year. The company has cut long-term debt by $2.3 billion in the last year, and the dividend costs it $2 billion per year to service.
To keep the dividends flowing the company has been doing brand extensions, cutting the total number of brands it supports. It has also been cleaning up its packaging, replacing plastic rings with cardboard.
The last quarter counted as a beat with analysts. Bears worry about whether pandemic-fueled gains in “center of the grocery” items will continue after the pandemic ends.
But this is a value stock, not a growth stock. You buy it for income and trust management can keep the dividends coming. It may not make you rich, but it will keep you from becoming poor.
In all the Tesla (NASDAQ:TSLA) inspired electric car hoopla, Toyota Motor (NYSE:TM) has been ignored.
But Toyota is the world’s largest car company, having passed Volkswagen (OTCMKTS:VLKAY) last year. Toyota did $284 billion in business during fiscal 2020, based on February’s dollar-yen exchange rate. That’s more than twice what General Motors (NYSE:GM) did and the last quarter’s sales outstripped pre-pandemic levels.
Investors are not impressed. They haven’t been impressed with Toyota for years. Since the pandemic’s bottom last March, the stock’s up just 32%, while the value of GM is up 213%.
Toyota opened on February 20 at $153.50. That’s a market cap of $213 billion on calendar 2020 sales of about $215 billion. The price to earnings ratio is a dirt cheap 9.4. The $1.06 per share quarterly dividend yields 2.7%.
Toyota insists its plug-in hybrids, like the Prius, have a smaller carbon footprint than electrics because they don’t need such a large battery. Toyota will launch two new electrics this year, but also a new hybrid. The company has built 30 million cars in the U.S. since 1984 , when it launched the Saturn joint venture with GM. That Saturn plant now makes Teslas.
Toyota has all sorts of data it claims proves the point that hybrid cars are greener than plug-ins because they can use smaller batteries. But the stock market doesn’t want to hear it.
Investors only care whether Toyota is growing. And right now, it isn’t. The company’s fiscal 2020 revenue was just 5% ahead of where it was in fiscal 2016. Net income was even lower in 2020 than it was back then.
Toyota says it will produce 9.2 million cars this year, 2% more than it did before the pandemic. It also says it has enough semiconductors to deliver these cars, something its rivals can’t say. But this hasn’t impressed investors either because Toyota tends to be modest in its marketing. Its TV ads don’t look much different than GM ads from the 1950s, people with ridiculous grins walking around a dealership.
I have owned Toyotas for three decades. The cars are great, and so are the dealers. But with that business model under serious threat, all I’m left with as an investor is the dividend. That’s why Toyota stock is for only the most defensive portfolios.
NextEra Energy (NEE)
Most electric utility stocks are distinctly unloved right now.
While the stock market is up 41% over the last two years, the Utilities Select SPDR Fund (NYSEARCA:XLU) is up just 11%. This is despite the fund delivering a rising dividend that currently yields 3.17%.
But there’s an exception to this rule, NextEra Energy (NYSE:NEE). NEE stock is up 75% over those last two years.
NextEra has a reputation for being the “cleanest” electric utility, with 50% fewer carbon emissions than the industry average. But in 2016 half its power still came from burning natural gas, and another quarter came from nuclear power.
What makes NEE special is its own power generation, 70% wind and 10% solar. While NEE’s own efforts are green, those of its utility subsidiaries are anything but. In 2019 48% of the power produced by Gulf Power, which it bought from Southern Co. (NYSE:SO) in 2018, came from burning coal. The same year its Florida Power & Light utility was getting 74% of its electricity from burning natural gas.
NextEra’s dependence on fossil fuels continues to dog its results. Full year net income was down for 2020, as it wrote off $1.2 billion on a natural gas pipeline that regulators have been reluctant to approve. The result was a small loss for the fourth quarter, obscured from view by a 10% dividend increase.
Renewable power is also continuing to get cheaper, while fossil fuel plants always need new fuel. Once a wind turbine is spinning you only pay down its capital costs and maintenance.
What NextEra is doing makes good business sense. The company plans to add 14.4 GWH of solar power through 2024. It will also add 6.5 GWH of battery storage.
If you want to buy into the NextEra story, I think the way to do that is through its energy generation unit, NextEra Energy Partners (NYSE:NEP). NEP is organized as a Master Limited Partnership, building assets with debt, handing out profits as dividends. Over the last year NEP is up more than NEE and has a higher dividend yield.
None of this should be read as a criticism of CEO Jim Robo, of NextEra Energy, or of its strategy. What it’s doing makes both economic and environmental sense. You’re just better off buying the sell side of the business, the renewable energy production, than the buy side of the utilities.
At the time of publication, Dana Blankenhorn directly owned shares in CVS and BAC.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at email@example.com, tweet him at @danablankenhorn, or subscribe to his Substack https://danafblankenhorn.substack.com/