Income investors—meaning those looking to generate cash flow from their investment portfolios—are in a difficult position.
ZenInvestor welcomes guest articles. This one is from Bob Ciura at Sure Dividend.
Over the past year, the Federal Reserve has reduced its key short-term interest rate benchmark, known as the Fed Funds rate, on multiple occasions. In addition, the U.S. stock market rallied nearly 30% in 2019, and now sits near a record high.
All of this means that interest rates and dividend yields are in decline. For income investors, it is not easy finding high-dividend stocks with yields of 5% or more. But we have found 3 dividend stocks with high yields, and just as importantly, durable competitive advantages and reliable profits to secure their hefty payouts.
High-Yield Stock #1: AbbVie Inc. (ABBV)
AbbVie is a global pharmaceutical company that was spun off from former parent company Abbott Laboratories (ABT) in 2013. In the years since, AbbVie has become one of the largest companies in the biotechnology industry, with sales of $33 billion annually and a market capitalization of $125 billion.
Growth in recent years has been fueled by multi-purpose product Humira, the top-selling pharmaceutical in the world. But AbbVie faces a challenging near-term outlook, as Humira’s patent recently expired in Europe. The company has been forced to cut prices there to retain market share, which has negatively impacted AbbVie’s international sales. Making matters more complicated is the fact that Humira will lose patent exclusivity in the United States, starting in 2023.
Fortunately, the company is investing heavily to build a pipeline of new products. Last quarter, total Humira revenue declined 4% year-over-year, but AbbVie’s revenues were positively impacted by strong growth from Imbruvica, which generated $1.3 billion in sales. Overall, AbbVie generated 3% revenue growth last quarter, thanks to strong domestic Humira sales, as well as contributions from new products.
Combined with share repurchases, AbbVie’s adjusted earnings-per-share increased 9% for the most recent quarter. This allowed the company to raise its quarterly dividend by 10% in November 2019. Following the dividend increase, AbbVie has a dividend payout ratio of approximately 53%, which indicates a secure dividend.
Future growth in earnings and dividends is highly likely for AbbVie, especially because of the recent $63 billion acquisition of Botox-maker Allergan (AGN). This transformational acquisition will diversify AbbVie’s product offerings, and will meaningfully add to growth. The combined company will have annual revenues of nearly $50 billion. AbbVie expects the transaction to be 10% accretive to adjusted EPS over the first full year following the close of the transaction, with peak accretion of greater than 20%.
High-Yield Stock #2: Exxon Mobil (XOM)
Exxon Mobil is a global oil and gas behemoth, with a market capitalization of $250 billion. It is an integrated major, which means it has a diversified business model across various oil and gas activities. In 2018, the oil major generated 60% of its earnings from its upstream segment, 26% from its downstream (mostly refining) segment and the remaining 14% from its chemicals segment.
This is a challenging time for Exxon Mobil. Weak commodity prices, combined with fears of slowing global demand for oil, have caused the stock to decline near 10-year lows. The company’s recent fundamentals validate investor concerns. In the fourth quarter of 2019, production remained flat over last year’s quarter, as a 4% increase in liquids was offset by a 5% decrease in gas. Excluding non-recurring gains of $3.9 billion from asset sales, adjusted earnings-per-share plunged -71%, primarily due to depressed margins in the downstream and chemical segments.
Despite the recent declines, Exxon Mobil has a strong catalyst for long-term growth, in the form of its new project lineup. In the United States, the Permian Basin will be a major growth driver, as the oil giant has about 10 billion barrels of oil equivalent in the area and expects to reach production of more than 1.0 million barrels per day in the area by 2024. Internationally, Guyana is an exciting growth project. The company recently announced major discoveries in the area and thus it has now nearly tripled its estimated reserves in the area, from 3.2 billion barrels in early 2018 to more than 8.0 billion barrels now.
Exxon Mobil has a long track record of successfully navigating downturns in the oil and gas industry. It is a Dividend Aristocrat with over 30 consecutive years of dividend growth, which means it has a unique ability to continue raising its dividend each year. This is even more impressive given the inherent volatility of operating in a commodity business. The recent plunge in Exxon Mobil’s share price could be a buying opportunity for Exxon Mobil, as the stock has a high dividend yield of 5.7% which sits near a 10-year high.
High-Yield Stock #3: Altria Group (MO)
Altria Group was founded by Philip Morris in 1847. Today, it is a consumer staples manufacturer. It sells the Marlboro cigarette brand in the U.S. and a number of other non-cigarette brands. Its other brands include Skoal and Copenhagen chewing tobacco, and the Ste. Michelle brand of wine. Altria also has a 10% ownership stake in global beer giant Anheuser Busch Inbev (BUD). It currently trades at a market capitalization of $86 billion.
Altria has tremendous competitive advantages. It has the most valuable cigarette brand in the U.S., Marlboro, which commands greater than a 40% domestic retail share. This gives Altria the ability to raise prices to drive revenue growth, as it has done for many years. Thanks to Altria’s stable growth, the company increased its dividend for the 50th consecutive year in 2019, placing it on the exclusive list of Dividend Kings.
Another benefit of Altria’s business model is that it is highly resistant to recessions. Cigarettes and alcohol sales hold up very well during recessions, which keep Altria’s profitability and dividend growth intact. Altria should hold up very well during the next downturn.
The major risk factor for Altria is the declining smoking rate in the United States, but the company has prepared for this by investing in adjacent categories such as beer and wine. It has also made numerous investments recently, to accelerate its portfolio diversification efforts. For example, last year Altria invested $13 billion in e-cigarette leader JUUL, as well as a $1.8 billion investment in Canadian marijuana producer Cronos (CRON). Separately, Altria also recently invested $372 million to acquire an 80% ownership stake in Switzerland-based Burger Söhne Group, to commercialize its on! oral nicotine pouches. Altria has a high dividend yield of 7.3%, and a target payout ratio of 80%. Altria’s strong free cash flow generation helps secure the dividend, while leaving room for continued dividend growth.