Since ending 2018 on a low point, 2019 has seen a return to glory with the S&P 500 reaching new record highs of $2,940, good for a year-to-date-return of 18%. At the start of the year I recommended my top 3 dividend plays for 2019, and with Q1 now in the books I figured it would be a good idea to recap how my picks are doing.
Performance To Date
To begin, let's recap the top 3 picks and see how they have done through April 23rd.
Source: Created by author
As you can see, two of the picks have been performing tremendously, meanwhile, the last of my picks has been in the doghouse along with many other healthcare related stocks in 2019.
In the sections below, I will discuss the company's performance to date and also detail whether the stock is currently a buy, sell, or hold.
Dividend Stock #1 - Exxon Mobil
Let's begin with my top performing pick, Exxon Mobil (XOM). Exxon is the world's largest vertically integrated oil company. The company operates via three business segments: Upstream, Downstream and Chemicals. The Upstream segment explores, produces, transports, and sells crude oil and natural gas. The Downstream division manufactures, transports, and sells petroleum products. The Chemical division develops and sells petrochemicals. In fact, if Exxon were their own country, they would be the 8th largest oil producer in the world!
In late December, Exxon hit levels not seen since 2010, and the oversold lights were flashing as bright as can buy. The market was enduring a market wide selloff due to fears of rising rates and a global economic slowdown, which provided many opportunities for patient investors. In late December 2018, XOM shares hit below $65 and offered a 5% dividend yield on shares in a quality company performing well.
Exxon Mobil is a Dividend Aristocrat that has been paying dividends for quite some time, in fact, they have paid a dividend every year since 1882! For those doing the math, that is over 130 YEARS! In addition, over the last 36 years, the company has grown that dividend at an annual rate of 6.2%. Over the last five years, the company has hovered around a 7.2% annual growth rate for the dividend.
The company currently yields a dividend yield of 4.1% compared with their 5-year average of 3.40%. This is metric I often quickly look at when valuing consistent dividend payers like XOM. In addition to the high yield you receive right now, the stock only has a payout ratio of 67%, which is the lowest it has been in the last couple of years. This gives me confidence as an investor that the dividend increases should continue going forward. Another area to look at when assessing dividend reliability or safety is the company's free cash flow or FCF. FCF is a company's cash flow from operations less any cash used on capital expenditures. For XOM, their FCF has increased nearly 50% in the last five years from $11.2 billion in 2013 to $16.4 billion in 2018. The company is performing extremely well from a cash flow perspective, so the dividend seems well covered at this point.
The stock has certainly had a nice run to start the year, so many of you may be asking the question right now, is it worth owning at current levels. Let's take a look! XOM currently trades at a trailing P/E of 17.1x, which is much lower than the 22x multiple the company has traded at on average over the course of the last five-years. I still like the prospects of Exxon going forward. Yes, it was trading at an amazing price back in late December/early January, but current levels still have me rating XOM a BUY.
Dividend Stock #2 - The Walt Disney Company
The Walt Disney Company (DIS) was the second-best performing stock to date with an amazing 21.6% return through April 23rd. Much of the gain was made once the company announced the pricing plan for the upcoming Disney+ streaming service set to release later this year.
Overall, the company is hitting on all cylinders right now and has a lot to look forward to. The studio segment is gearing up for the release of Avengers Endgame, which will instantly be a blockbuster hit making new records. The Parks segment is gearing up for the opening of the new Star Wars Land at Disneyland late next month. ESPN+ has been a hit with consumers and I expect Disney+ to be an even bigger hit come release time later this year. I know in my family will be subscribing.
Parks and Resorts brought in revenues of $20.3 billion on the year, which was a 10% increase from prior year. The segment now accounts for 34% of total revenues at the company. Star Wars Land is expected to open late next month at Disneyland, followed then by Walt Disney World, which will keep revenues flowing in the segment.
The Studio Entertainment segment has been on FIRE (in a good way). During FY '18, the company's Studio Entertainment segment brought in revenues of $10 billion, which was a 19% increase from prior year and the company's All-Time high for the segment. At the conclusion of Q4, this segment now accounts for 19% of total company revenues, which is a huge jump from 2013 when it accounted for only 6%. The film pipeline is loaded, so I am expecting to see continued growth coming from the DIS filmmakers.
The third point that really excites me about DIS going forward is their movement into OTT services. In 2018, the company launched ESPN+, which is a sports app for consumers to watch directly from their phones thousands of sporting events that otherwise may not be within their cable plan or not on TV at all. The new service seems to have resonated well with the consumer as the company reported having over 1 million subscribers thus far. Based on the company's Q4 earnings call, management seems to be "very encouraged" with the growth to this point.
The next phase of the company's plan is to launch Disney+ in the later part of this year, which will go toe-to-toe with the likes of Netflix (NFLX) and Amazon (AMZN). Disney+ will offer a rich array of content from the likes of Pixar, Marvel, Star Wars, and National Geographic, along with the company's long list of Disney favorites. Disney is also currently shooting original content that will be available on the Disney+ platform as well. The stock catapulted 13% a few weeks back when the company released the pricing plan for Disney+ which will start at $6.99/mo or $69.99/yr, which got investors excited. They strategically priced under Netflix, which was the expectation going in, but this confirmed it.
Being the king of content already, Disney will look to build upon that with many new ideas to be provided. One series that is already in production is The Mandalorian, which is the world's first live-action Star Wars series being produced by Jon Favreau, who produced the live-action Jungle Book film a few years ago and is also working on a live-action Lion King re-make. Animation will also be a big part of new content being created for the platform, as the company has plans to launch the next season of Clone Wars and a new series based on the popular Monsters, Inc. franchise.
I love Disney and the stock, but the recent charge in stock price had me take some off the table for the time being. I do not think you could go wrong taking some off the table as well or just holding the stock outright but buying the stock at current levels is not something I am recommending at this point. I currently rate the stock a HOLD.
Dividend Stock #3 - AbbVie, Inc.
Now let's move to our laggard of the group, AbbVie Inc. (ABBV). AbbVie has long been a stock I have liked, but wavered on for a little while. The main reason I had initial doubts about the company in the past was the "one trick pony" slogan they have carried with them based on their drug Humira. The AbbVie bears, and rightfully so, do not like the prospects of ABBV going forward due to the heavy reliance the company places on Humira sales. For those of you that do not follow the company closely, Humira is the #1 drug sold in the world. Humira's sales for 2018 reached new record highs of $20 billion. The next closest drug, in terms of sales on the market is Revlimid from Celgene, which is supposed to peak at $15 billion in 2022. That is a WIDE gap that will naturally close over time, but that time is not particularly close at the moment. As of the end of 2018, Humira sales made up 60.9% of total ABBV revenues, which is down from 65.3% in 2017.
Humira is obviously the clear leader in the company's drug portfolio, but there are some up and coming stars as well recently released combined with a loaded pipeline. The company currently possess the second largest potential drug pipeline in the pharmaceutical industry, of $21.2 billion by 2024, according to Evaluate Pharma. Two of the leading drugs in the pipeline are Upadacitinib and Skyrizi.
The psoriasis drug Skyrizi picked up its first global approval this week in Japan, which is positive news moving forward. Sales for Skyrizi are projected to reach $1.74 billion in 2023, assuming the drug is granted a timely approval. During clinical trials for patients with moderate to severely affected psoriasis, the drug rendered a 90% improvement in 73% of the patients who were administered the drug.
Upadacitinib is another exciting drug the company and investors are looking to make a splash in years to come as Humira sales slow. Annual sales for this drug are expected to reach $2.2 billion in 2023.
Now, the risks in the pharmaceutical industry is that the pipeline does not come to fruition, which is currently something ABBV is dealing with regarding Rova-T. Rova-T was acquired in 2016 for $9.2 billion through AbbVie's acquisition of Stemcentrx. The drug ran into FDA issues in their early testing phase, which caused the company to book at $4 billion write-down related to the acquisition as the drug is projecting to be a failure.
Source: ABBV Investor Presentation
The other reason we are high on the company is based on them being a solid income play for those of you looking for dividend growth. The company currently pays a dividend yielding 5.3% and management has increased that dividend nearly 170% since being spun off from Abbott Labs (ABT). The dividend is well covered as well, as the company currently has a payout ratio of only 54%, which indicates further dividend growth in the future, as long as cash flows remain strong and debt levels do not continue their steep assent.
The stock currently trades at a P/E of 9.9x, which is well below their five-year average of 14.7x. I am still high on the company and will be looking to pick up more shares in the mid to low $70 range. The stock has been trading in a condensed range between $83 and $77 for much of the year. I like the current valuation on the stock, thus I am rating it a BUY.
Two of our picks thus far have performed EXTREMELY well, which I am happy with, but ABBV has been a laggard thus far, which can be attributed to softness in the industry as a whole. Healthcare stocks have been beaten up pretty good to start the year, but I think that will reverse as time goes on.
ABBV is offering great valuation at current levels backed by a 5.3% dividend yield. I also still like Exxon's valuation, but would sit tight when it comes to Disney.
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Disclosure: I am/we are long ABBV, XOM, DIS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.