The market is full of risk and stocks can see big drops if the company warns on earnings, lowers guidance or announces other news that investors are not pleased to hear. Risks are elevated because the general uncertainty and fear in the market can cause exaggerated sell-offs in stocks when bad news is released. Also, the risk of a major drop in the price of a stock is higher just before and during earnings season. We are just weeks away from earnings for the second quarter of 2012. Already a few companies have warned that profits will be lower than expected due to exposure to the weak economy in Europe. Companies are also seeing lower earnings due to the strength of the dollar and the weakness in the Euro. Even the United States has seen disappointing economic data recently, and that could also spell trouble. Based on all the economic challenges and continuing uncertainty from Europe, it's best to keep cash on hand for buying opportunities that are going to surface when great companies report weak results. Ironically, the "safest" dividend stocks to hide out in, are likely to be the ones that just dropped in value due to an earnings or guidance miss. In this market, it probably makes more sense to avoid committing new capital unless bad news is already priced into a stock. That's because it is increasingly difficult for companies to not be impacted in some way by the global economy, Europe and the significant moves in currencies. With all this in mind, here are a few dividend stocks that have already taken a hit and therefore offer investors a lower entry point, a higher dividend yield, and perhaps less risk relative to other companies that could also warn or release negative news in the future. These stocks have dropped due to bad news, but could be ready to rebound when markets show strength:
Procter & Gamble (PG) shares are now trading just barely above the 52-week low. The company recently warned that sales are slowing in Europe as well as in the United states and China. A few months ago, Procter & Gamble announced plans to cut expenses which were expected to result in projected savings of about $240 million per year. However, the pace of the cost-cutting appears to be only mitigating the impact of slower sales, rather than boosting profits. The company now expects quarterly earnings to be in a range between 75 to 79 cents per share, which is down from expectations of 79 to 85 cents. The company owns some top brands which include Head & Shoulders, Olay, Pantene, Downy, Duracell, Tide, Braun, Gillette, and more. Products like this could see some competition from generic items in a weak economy, but overall the product line looks very stable. Now that the "bad news" for the slower growth is out and with a lower stock price, investors should focus on the dividend growth story at Procter & Gamble. This company has raised the dividend every year since 1991. This steady increase has taken the dividend up almost 10-fold from just 6 cents per quarter in 1991, to 56.2 cents per quarter. With the share price down, the yield is now about 3.6% and likely to continue rising in the long-term.
Here are some key points for PG:
- Current share price: $60.07
- The 52 week range is $57.56 to $67.95
- Earnings estimates for 2012: $3.84
- Earnings estimates for 2013: $4.01
- Annual dividend: $2.25 per share which yields 3.6%
VALE, S.A. (VALE) shares have been slammed over concerns of a slowing global economy. Vale mines and produces iron ore, steel, fertilizer and other basic materials, all of which are economically sensitive. After months of bad news talking about reduced demand from countries like China, this stock might already have more than priced in these issues. China is one of the world's largest consumers for Vale's products, and even with a slowdown in that country, analysts still expect about 7% growth. While investors are correct to assume that Vale could see some short-term impact in terms of demand, the long-term outlook remains strong, especially with China's huge population. This stock is now trading for just about 5.4 times earnings. Considering that the average stock in the S&P 500 Index trades for about 13 times earnings, Vale shares look like a bargain. Also, the dividend yield is compelling at over 5%, while the average yield in the market is just over 2%.
Here are some key points for VALE:
- Current share price: $19.34
- The 52 week range is $17.62 to $33.74
- Earnings estimates for 2012: $3.58 per share
- Earnings estimates for 2013: $3.68 per share
- Annual dividend: $1.15 per share which yields 5.7%
Philip Morris International (PM) recently announced that currency exchange rates would lower earnings for 2012 down to about $5.10 to $5.20, from a previous forecast of $5.20 to $5.30. The stock dropped nearly $3 per share after this news came out. It might be a little early to buy, but it's time to at least watch or consider averaging into a position over time. With brands like Marlboro, Merit, Parliament, Virginia Slims, L&M, Chesterfield, this company has been a favorite for income investors. Philip Morris offers dividend growth as it has been raising the dividend each year in recent history. For example, in 2008 the quarterly dividend was 46 cents, but thanks to steady annual increases, the dividend is now 77 cents per quarter.
Here are some key points for PM:
- Current share price: $85.62
- The 52 week range is $60.45 to $91.05
- Earnings estimates for 2012: $5.10 to $5.20 per share
- Earnings estimates for 2013: $5.83 per share
- Annual dividend: $3.08 per share which yields 3.5%
McDonald's Corporation (MCD) is one of many companies that recently warned on that both slower than expected sales and currency exchange rates are impacting the bottom line. Some promotional dinner deals in China might also have lowered the average check per visit. Europe is McDonald's biggest market, so the economic weakness is likely to continue to impact sales. Also, the Euro could continue to weaken which will translate to lower profits when converted to dollars. Since these issues might last for at least a few quarters, it probably makes sense to only average in over many months with a buy on dips strategy. However, at least some of the bad news is already out, and the stock has dropped about 15% off the 52-week high. This means that buying on dips over the next few months could reward longer-term investors. McDonald's has been a great dividend growth stock for many years. For example, the quarterly dividend was 37.5 cents in 2008, but in about 4 years the payout has nearly doubled to 70 cents per quarter. Buying on dips and collecting the dividend while waiting for a higher share price makes sense.
Here are some key points for MCD:
- Current share price: $87.64
- The 52 week range is $81.40 to $102.22
- Earnings estimates for 2012: $5.58 per share
- Earnings estimates for 2013: $6.15 per share
- Annual dividend: $2.80 per share which yields 3.1%
Disclaimer: Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.