By Mitchell Clark, B.Comm
With the turmoil in global capital markets, the sell-off in stocks is serving as the consolidation/correction that we did not experience in 2013, which was an exceptionally strong year.
But stepping back from historical share price action, we have continued certainty regarding the Fed funds rate this year. The low interest rate environment remains a very positive catalyst for the equity market and the medium-term trend.
Stocks may very well have a difficult year in 2014, but that doesn’t mean that current fundamentals aren’t laying the groundwork for more capital gains over the next several.
The marketplace fully expects continued tapering of quantitative easing to occur over the coming quarters. There’s likely to be continued pressure on longer-term interest rates, but this is a market-driven precursor to economic activity; it’s perfectly normal and is a positive, market-driven reflection of financial market sentiment.
With this backdrop and so many large-cap companies boasting very good balance sheets, strong cash positions, and the expectation that cash flows will contribute to increasing dividends, a good buying opportunity for new positions may soon present itself.
Dividend paying stocks like 3M Company (MMM) are becoming increasingly attractive as their share prices retreat. The company missed Wall Street consensus just slightly in its most recent quarter, but growth expectations are still decent for such a large conglomerate, and the company’s valuation is not unreasonable. (See “The Stocks to Own Right Now…”)
According to 3M, its fourth-quarter earnings per share increased a solid 15% to $1.62. Sales growth was in the single digits, as expected, at 2.4% to $7.6 billion. Currencies impacted sales negatively by 1.7%.
In all of 2013, the company paid out $1.7 billion in cash dividends to shareholders and bought back an exceptional $5.2 billion of its own shares. Sales growth for 2014 is currently estimated to be between three to six percent.
3M has pulled back by more than 10 points from its recent high and is definitely a solid dividend-paying blue chip that’s getting closer to the buy zone.
Many stocks have pulled back nicely, and it’s a healthy development. Other dividend paying stocks becoming much more attractive for new positions include: Johnson & Johnson (JNJ), Cisco Systems, Inc. (CSCO), Cracker Barrel Old Country Store, Inc. (CBRL), and ConocoPhillips (COP).
In terms of equity market dynamics, important benchmark indices like the Dow Jones Transportation Average and Russell 2000 Index have only retrenched modestly and their leadership relative to strength is very much a material positive for stocks.
But it is time for a price retrenchment in the broader market. Fourth-quarter earnings are pretty decent and the selling-off of stocks as companies meet consensus is more normal trading action.
I still don’t see a lot of new action to take in this market in terms of portfolio level adjustments. Blue chips continue to offer excellent income prospects. Speculative fervor for more aggressive stocks has worn off a bit, but can easily return later in the year as global capital markets balance themselves out after material gains and a new tone in monetary policy.