Seeking Alpha

2 Industry-Leading Dividend Stocks To Buy Before 2020

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Includes: CCL, CSCO
by: Hawkinvest
Hawkinvest
Value, contrarian, dividend investing
Summary

When industry-leading companies are on sale, it makes sense to buy.

Tax-loss selling pressure will end in less than 4 weeks and that means a rebound in beaten-down stocks could be looming.

Tax-loss selling pressure will end in less than 4 weeks and that means a rebound in beaten-down stocks could be looming.

These two stock picks offer value at current prices, plus generous dividend yields that will pay you while waiting for a higher share price.

As the markets reach new highs, it is getting tougher to find stocks that are worth buying, however, there are still select stocks that offer great value. The names I have listed below are industry leaders. Even better is the fact that these stocks also offer dividend yields that are enticing, especially since interest rates on U.S. Treasury bonds have been declining.

It is not just the dividends that have prompted me to buy these stocks, it is also the potential upside for capital gains. Both of these stocks recently tumbled when earnings results and guidance were released. This selling pressure has also probably also caused more investors to pile on and sell for tax-loss purposes since these stocks are both well below the 52-week highs. This is the time of year when investors and fund managers sell for tax-loss purposes, but it will only be about 3 weeks before that comes to an end. Because of this, it makes sense to buy these industry-leading dividend stocks now and hold for the income and rebound potential that they offer into 2020.

Carnival Cruise Lines

Carnival Cruise Lines (CCL) is an industry heavyweight and it owns not just Carnival Cruises, but also Princess Cruises, Holland America Line, Cunard, Seabourn, Aida, Costa, and P&O Cruises. These various brands specialize in different segments of the cruise line market as well as in different geographical regions. This gives the company a diverse stream of revenues and significant buying power when it comes to everything from food to linens.

The Chart:

As the chart below shows, this stock was trading for around $60 per share earlier this year. It appears to have bottomed out in the $40 range and has started to show some strength. The 52-week high is $62.52, so it is still trading about 30% below this level and only for a few dollars above the 52-week low of $39.92. This means the stock is probably being impacted by some tax-loss selling until year-end. However, it is starting to rebound and that means further gains could be possible when tax-loss ends and also when short sellers potentially cover their positions in January. A short seller that has a gain in this stock might choose to wait until January to cover, so that any taxes on the gains are deferred for another calendar year. This can help fuel a "January Effect" rally in beaten-down stocks like Carnival Cruise Lines.

This Stock Appears Undervalued After Post Earnings Selloff:

Analysts expect Carnival Cruise Lines to earn about $4.26 per share for 2019 and around $4.60 per share in 2020. That means these shares are trading for just about 10 times forward earnings which is a deep discount to the multiple for the S&P 500 Index (SPY) which is currently trading for about 23 times earnings. For the third quarter of 2019, the company earned U.S. GAAP net income of $1.8 billion or $2.58 per share which compares favorably to the $1.7 billion or $2.41 per share that it earned in the prior year period. However, the company lowered full-year 2019 earnings guidance to be in the range of $4.23 to $4.27 per share, which is down from the guidance given in June of $4.25 to $4.35 per share. Based on this slight downward revision in guidance and with the stock trading for just about 10 times earnings, the selloff in the stock appears overdone.

The Dividend Yield Is Generous And Could Keep Rising:

The current quarterly dividend of 50 cents per share offers a yield of about 4.5%. The annual dividend of $2 per share is very well covered by more than $4 per share in earnings. Furthermore, the dividend been increasing over the past few years. For example, in 2015, the quarterly dividend was 25 cents per share, so it has doubled in just the past 4 years. The dividend was last raised to 50 cents per share from 45 cents per share after the February, 2018 dividend was paid, so another increase could be announced early in 2020.

Potential Downside Risks:

Like any stock, a correction in the stock market would put pressure on these shares although it might perform well on a relative basis since the stock has already declined to cheap levels. Oil prices could rise and that would be a negative for any cruise operator. Weather is another potential downside risk, as are geopolitical events. A recession is always a risk, however, cruise lines tend to do better than some investors expect. That's because cruising offers consumers significant value at a fixed price since it includes lodging, food, beverages and entertainment.

Potential Upside Catalysts and Price Targets:

The economy in Europe is starting to show improved results and that is a big positive for Carnival Cruise Lines since it has a significant customer base in Europe. Consumer spending in France is up thanks to recent tax cuts, and Spain's economy recently posted growth that exceeded expectations. In addition, oil prices have been easing lately and that is another positive. The post earnings selloff appears overdone and this stock appears poised to rebound into 2020 as tax-loss selling fades.

The generous 4.5% dividend yield should also help spur a higher share price especially as yields on government bonds have been declining. The consensus price target is $47.30 per share, which does not suggest much upside; however, I think the highest analyst price target of $59 per share is more reasonable given the industry-leading position this company has along with the rising dividend yield. Even if the stock only gets back up to $47.30 per share, that is still a gain of about 5% and when you couple that with a yield of around 4.5%, this could offer investors a gain of nearly 10% over the next year.

Cisco Systems

Cisco Systems (CSCO) is a global leader in telecom and other related equipment and software services. The shares of this company also experienced a post-earnings selloff after the company issued downbeat guidance. Management at this company is known for issuing conservative guidance or "sandbagging" so investors should keep this mind. Even if management is seeing some softness in the current quarter, this company has strong longer-term prospects and could benefit from 5G network upgrades in the coming years.

The Chart:

As shown below, Cisco shares were trading for about $58 in July, but have since plunged to about $45. With at 52-week high of about $58 per share and a low of around $40, this stock is well off the highs. It is now trading for just a few dollars above the lows of this year, so it is also probably being temporarily impacted by tax-loss selling.

This Stock Appears Undervalued After Post Earnings Selloff:

Cisco Systems posted solid earnings for Q1 fiscal year 2020, so it was the guidance for Q2 that caused the stock to drop. For Q2, the company said it expects revenues to drop by 3 to 5% and for earnings per share to come in between 75 to 77 cents. This was a bit below consensus estimates of 79 cents. For years, this company has been known to sandbag guidance so we should take this with a grain of salt. The company might be positioned to beat the Q2 guidance.

Analysts expect Cisco Systems to earn $3.10 per share in 2019 and $3.24 per share in 2020. That means the stock is trading for less than 14 times earnings which again is well below the current S&P 500 Index average of around 23 times earnings. After the recent decline, these shares are also a bit on the oversold side which means a rebound could be next. The below market price to earnings ratio, the generous and growing dividend, and the analyst price targets all suggest that this stock is undervalued at current levels.

The Dividend Yield Is Attractive And Could Keep Rising:

Cisco Systems has been increasing the dividend regularly. In 2015, the quarterly dividend was 19 cents per share, however, thanks to consistent increases in recent years, the quarterly dividend is now 35 cents per share, or $1.40 per share on an annual basis. That means the dividend has almost doubled since 2015. Investors could see another increase to the payout in the first half of 2020, since the company has a history of raising the dividend with the April payment. With a payout ratio of less than 50%, and with earnings growth, the company appears to have room to continue increasing the dividend aggressively.

Potential Downside Risks:

A global slowdown is the main macro risk for a tech company like Cisco, and this could be caused by the trade war with China if a "Phase One" deal is not reached soon. The trade war does seem to be impacting business confidence and IT spending which is probably why management issued downbeat guidance. However, a potential trade deal could lift these clouds rather suddenly and unleash global growth. At any rate, it appears that the stock has already priced in quite a bit of negative news, therefore any positive developments on the global economy or investor focus on the upcoming 5G network upgrade could lift the stock.

Potential Upside Catalysts and Price Targets:

On November 14, 2019, analysts at BofA/Merrill reiterated a buy rating, but lowered the price target from $62 to $56 per share. With the stock trading for about $45 per share now, this suggests upside potential of about 20%. With a dividend yield of more than 3%, investors who buy now will be paid generously while waiting for a higher share price.

If you want updates on these stocks in the future or other dividend, value and contrarian investing ideas, please consider following me. I have recently started posting updates on my Seeking Alpha Blog and by following me, you will have a chance to get these updates on stocks and investing strategies

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.

Disclosure: I am/we are long CCL, CSCO. 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.