2 Blue-Chip Strong Buys With 5% Yields

seekingalpha2022-03-13

Riddy/iStock via Getty Images Co-produced by Austin Rogers for High Yield Investor War & Inflation Produce Opportunities Volatility has returned to the stock market with a vengeance in 2022, driven by...

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GinOng
·2022-03-13
Guess?
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Natdns
·2022-03-13
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We all know by now about the 7%+ consumer price index readings seen so far this year, but producer prices have been rising even faster. Data by YCharts And now, with the price of oil (CL1:COM) having recently soared above $120 per barrel, it's difficult to envision inflation cooling down soon. This should result in continued high inflation for both consumers and producers. After all, all kinds of goods require transportation from the producer to the consumer, and oil is by far the most important fuel for such transportation. As the United States bans Russian oil & gas imports, the supply-demand imbalance seems to still be tilted toward higher prices, as Russia supplies nearly 10% of US petroleum imports. Unfortunately, though the US is sitting on top of ample oil & gas reserves, American oil production has only grown at a crawling pace since the onset of COVID-19, and output remains well below its pre-pandemic level. Data by YCharts And then there's the uncertainty that goes along with the war in Ukraine. Of course, as far as markets are concerned, the physical violence and destruction in Ukraine, heartbreaking as it is, makes up only a small part of the financial concern. The broader economic war being waged between the West and Russia, including sanctions and import bans, have the potential to wreak much more havoc on US businesses. And yet, investors have bought the dip on multiple days during this conflict. In fact, a shallow dip in stocks would be right in line with historical geopolitical events, especially those in which the US was not directly involved. Drawdowns during geopolitical events (Fundstrat) Interestingly, as of the end of trading on Tuesday, March 8th, the S&P 500 (SPY) was down exactly 4.6% - the same as the average drawdown during geopolitical shocks historically - since the beginning of the war in Ukraine. These typically brief market selloffs catalyzed by war events have historically resulted in strong rebounds, making them good \"buy the dip\" opportunities. Hence the \"buy the invasion\" charts are making the rounds in the financial sphere of the Internet. Buy the invasion (Eugene Ng Twitter) As for whether the market continued higher or turned lower after the initial rebound, that depended much more on the prevailing market conditions at the time - whether a bull market or bear market. At this point, the economic consequences of the war and the inflationary outbreak are becoming intertwined, disrupting supply and pushing prices higher. That's the bad news. The good news is that the market has severely punished certain stocks, even blue-chip dividend growth stalwarts with strong balance sheets, as a result of these headwinds. This has created good buying opportunities for the long-term investor. Let's take a look at two of these opportunities.  1. Unilever PLC (UL)  Whether or not you've heard of Unilever, you almost definitely have at least one of the England-based company's products in your home. UL makes a variety of consumer staples products, from personal care to beauty to home care to food & beverages. They are the owners of Dove, Axe, Ben & Jerry's, Breyers, and many other consumer brands. Unilever brands (Unilever) One intriguing aspect of UL is its international diversification and especially its concentration in the faster-growing populations of emerging markets like China, India, and Africa. Due largely to soaring input costs for its core products, UL's stock price is down over 27% from just before the outbreak of COVID-19. Unilever price performance (YCHARTS) The war in Ukraine is only the latest hit taken by the consumer staples giant. UL has suspended all imports of its products and exports of input materials from Russia. Further, the company is stopping all investments, media, and advertisements in the country and has vowed not to profit from any current sales of its products inside Russia. How much exactly this will hurt UL's bottom line is unknown. Indeed, it may simply be a posturing gesture, since Western sanctions on the Russian financial sector make it very difficult to pull money out of the country anyway. But, in any case, it couldn't help. The good news for UL is that management is actively working to offset the harmful effects of inflation with cost cuts and price hikes. Prior to the Russia-Ukraine conflict outbreak, management expected to restore most of its pre-COVID margin in 2023. Unilever margins (Unilever) Even if it proves difficult to fully restore UL's margins in the near term, the company's popular brands should give it the pricing power to restore them eventually. In fact, in 2021, most of UL's revenue growth was derived from price hikes and changes in the mix of products sold rather than unit volume. Unilever 2021 results (Unilever) Last year, despite soaring input costs, UL's underlying operating margin only compressed by 10 basis points versus that of 2020 and was down only 20 basis points from 2018's operating margin. Likewise, return on invested capital in 2021 slipped only slightly from 2020's ~18% to 17.2%. Unilever 2021 results (Unilever) Likewise, earnings per share continued to grow last year as well. Though such a large company as UL doesn't come by growth easily, management appears to be taking the right steps to improve the long-term outlook. They have continued their well-established track record of selling slow-growing segments, such as the recent disposition of Lipton and other tea brands, and reinvesting into faster-growing brands. What's more, activist investor Nelson Peltz of Trian Partners recently took a stake in UL. This could be good news since Trian's activist investing in the likes of Procter & Gamble (PG) seemed to work out well for that consumer staples company's growth. Moreover, with an investment-grade balance sheet and net debt to EBITDA of 2.2x, UL appears to have the financial fortitude to weather the current inflationary storm. UL's ~4.6% dividend yield looks very attractive for long-term investors. The yield combined with the growth and multiple expansion should be enough to deliver double-digit annual total returns going forward.  2. Leggett & Platt (LEG)  LEG is a newly minted \"Dividend King,\" having recently raised its dividend for the 50th consecutive year in a row. Obviously, it takes a special combination of farsighted management, prudent financial stewardship, and consistently smart capital allocation to achieve such a long record of dividend growth. Though not customer-facing like Unilever, LEG makes products and components that end up in numerous big-ticket consumer products, from mattresses to car seats to flooring to couches and other furniture. Leggett & Platt product mix (Leggett & Platt) Though nowhere near the ~50% decline registered at the beginning of the pandemic, LEG's stock price is still down around 20% from its level immediately preceding the COVID-19 outbreak. Data by YCharts Though LEG has been hurt by input cost inflation like many other companies, the good news is that its revenue has rebounded strongly from the pandemic year of 2020, during which the company suffered a 10% drop in sales. Here are LEG's net sales by year:  2017: $3.94 billion 2018: $4.27 billion 2019: $4.75 billion 2020: $4.28 billion 2021: $5.07 billion  As you can see, 2021 net sales were up 19% from 2020's number and 6.7% from 2019's number. But with the ravages of inflation in 2021, how did earnings per share hold up? Here's how reported diluted EPS looked:  2017: $2.14 2018: $2.26 2019: $2.47 2020: $1.82 2021: $2.94  Now, note that this is reported, or GAAP, EPS. But even adjusted EPS came in strong in 2021: $2.78 versus $2.16 in 2020. That is, adjusted EPS rose 28.7% from 2020 to 2021. Though it wasn't until the fourth quarter that cost pressures dragged down LEG's EBIT (earnings before interest and taxes) margin the most - from 13.2% in Q4 2020 to 11.4% in Q4 2021. This goes a long way in explaining the 55% drop in operating cash flow from $603 million in 2020 to $271 million in 2021. But management expects 2022 to be the toughest for margins. The guidance calls for revenue of $5.3 billion to $5.6 billion and adjusted EPS of $2.70 to $3.00. But its EBIT margin is expected to decline even further from Q4 2021's depressed level of 11.4% to a range of 10.5% to 11.0%. 2022 Guidance (Leggett & Platt) The midpoint of EPS guidance for 2022 reflects ~2.5% earnings growth this year. While that doesn't sound impressive, it will still be quite a feat given the enormous challenges facing industrial businesses like LEG right now. Keep in mind that:  LEG is a leader in its various product segments and should enjoy enough pricing power to rebuild its margins in the coming years, This high inflation almost certainly won't last forever, and LEG's BBB-rated balance sheet and 2.29x leverage ratio are quite comfortable.  Recall that LEG's dividend growth streak has lasted 50 years, which means that the current inflationary bout is not the company's first time being tested under the strain of high oil and other input prices. The company continued to grow and raise its dividend through the inflation of the 1970s and 1980s, and in all likelihood, it will do the same this time. With this in mind, LEG's ~4.6% dividend yield looks quite attractive right now, and just like UL, we expect double-digit total returns going forward. Bottom Line Based on the current euro-to-dollar exchange rate, UL's 2021 EPS was about $2.85, making its current ADR price to earnings ratio 15.3x. Meanwhile, LEG's price to adjusted EPS sits at ~13.2x. For blue-chip stocks like UL and LEG, these are deep value prices. Of course, a stock doesn't become a deep value without a little pain or some kind of valid fear from the market. The trick is to find strong businesses with resilient business models and/or products, prudent management, and a long-term orientation that are going through temporary challenges that are solvable over time. Once one finds such companies, the key is simply to buy at good prices and hold patiently, collecting dividends along the journey.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":9036464232,"gmtCreate":1647185523722,"gmtModify":1676534201295,"author":{"id":"3585489224255758","authorId":"3585489224255758","name":"GinOng","avatar":"https://static.tigerbbs.com/dbc4f4af938fe9cbc71173da2486f50b","vip":1,"crmLevel":4,"crmLevelSwitch":1,"idStr":"3585489224255758","authorIdStr":"3585489224255758"},"htmlText":"Guess?","listText":"Guess?","text":"Guess?","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9036464232","repostId":2219347225,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9036465914,"gmtCreate":1647185233682,"gmtModify":1676534201253,"author":{"id":"3576319038001885","authorId":"3576319038001885","name":"Natdns","avatar":"https://static.tigerbbs.com/be6cb184b10d5e613602b38d396409cf","vip":1,"crmLevel":4,"crmLevelSwitch":0,"idStr":"3576319038001885","authorIdStr":"3576319038001885"},"htmlText":"K","listText":"K","text":"K","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9036465914","repostId":2219347225,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"hasMoreComments":true,"newsSizeData":{"likeSize":9,"commentSize":2,"repostSize":0,"favoriteSize":1,"likeStatus":false,"favoriteStatus":false}}