Why own any stock if it doesn't pay a dividend? While the S&P 500 and its tracking exchange traded fund, SPY (SPY), has rallied nearly 20% from the market lows of last summer, and stocks such as Apple (AAPL) are up over 30% in the last year, the recent sell-off has been brutal.
While the S&P 500 is off nearly 10% in the last several months, cyclical sectors such as energy, technology, the industrials, and the financials, are off nearly 20%. Many leading stocks in these sectors, such as General Electric (GE), IBM (IBM), Deere (DE), and Citigroup (C) have also sold-off hard of late. Energy and retail companies such as Exxon-Mobil (XOM), Chevron (CVX), VFC (VFC), and Abercrombie & Fitch (ANF) have sold-off hard as well.
Still, the one type of mutual and exchange traded fund that has held up very well is dividend stocks. Most dividend mutual and exchange traded funds, with significant holding in higher yielding consumer staple names, such as Kimberly-Clark (KMB), Altria (MO), and Wal-Mart (WMT), at or near these funds' one-year highs.
Still, while, obviously, cyclical stocks are always more volatile during times of economic uncertainty, a number of cyclical companies have been able to maintain solid earnings and not cut dividends during the last decade. Most cyclicals have also sold-off hard in the last month while many leading consumer staple names are trading at the highest levels these stocks have been at in several decades.
IBM is a nearly $230 billion dollar trading at less 12x an average estimate of next years likely earnings. The company specializes in global technology Services, global business services, software, systems and technology, and global financing. While IBM had trouble in the '80s in the hardware business, the company has repositioned its business model and has had strong and consistent growth for over two decades. IBM is significantly leveraged to Europe, but management has heavily invested in Asia and Latin America as well, and IBM European business has held up well.
IBM offers cost savings to company's and governments, and IBM longer-term contracts have enable the company to maintain solid earnings during downturns. The company also has a strong record of making successful acquisitions during periods of economic weakness as well.
IBM's management team that has consistently met earnings expectations has a goal of generating $20 per share in earnings of 2015, and the company has historically traded at around 15x trailing earnings, suggesting the stock could trade at around $300 dollars a share in the next three years if management is able to execute its goal. IBM has raised its dividend by an average of 16% a year over the last 5 years, the company's payout ratio is a very reasonable 25%, and the company has not cut its dividend in nearly 20 years.
Deere is a nearly $30 billion dollar company specializing in agricultural and industrial equipment that trades at around 9x an average estimate of next years likely earnings. While Deere does have exposure to real estate and construction market, the company core agricultural equipment division has held up well during periods of economic weakness.
While Deere has significant exposure to Europe agricultural prices have held up fairly well, and farmers have very strong balance sheets. Deere recently guided to around 5% sales growth in Europe just last week. Deere has raised its dividend by 14% a year on average over the last five years, the company's payout ratio is a very reasonable 21%, and Deere has never cut its dividend. Deere's management team has a goal of doubling sales by 2018, and the company currently only gets around 40% of its revenues outside of the U.S. and Canada.
VF Corporation is a retail company that gets nearly 70% of its revenues overseas. While VFC will obviously be affected by an economic slowdown, the company's product portfolio is largely discount and luxury products. VFC's strongest brand, The North Face, sells largely to a higher end consumer, and the company's recent acquisition of Timberland also sell at the higher end as well. VFC's other major brand, Wrangler, obviously sells at a much lower price point, and is a brand that offers good value during tough economic times. The company has also tripled its revenues from the Vans brand it acquired 2004, and is seeking to grow the Vans brand by around 13% a year through 2016 by expanding to new markets outside of the West Coast.
While VFC has significant European exposure, the company recently reported strong earnings and sales in Europe, with the company's higher end North Face brand doing particularly well. VFC continues to show strong earnings and market share growth in Europe well retailers with heavy European exposure such as Abercrombie & Fitch and Guess have struggled in the Euro-Zone of recent. The company has forecast (GES) sales to rise nearly 10% a year for the next five years.
VFC is an very well managed company that trades at around 13x an average estimate of next year earnings and yields nearly 2%. VFC was one of the few retail companies that never cut the company's dividend during the height of the recession, and the company has also consistently raised its dividend by an average of over 10% a year since 1999. VFC's payout ratio of around 33% is very reasonable.
To conclude, while, obviously, all cyclical companies do better during periods of economic strength, not all cyclicals are created equally. With the U.S. economy still growing at 2-2.5% and unlikely to reenter a recession many cyclicals companies are still reporting solid earnings. While some investors may look at yields on company's with moderate to low growth prospects trading at or near their 52 week highs in the consumer staple sector, today, cyclical companies with strong earnings and stable dividends offer the best likely long-term returns.