You can argue whether investors are still in a state of euphoria over November’s elections and a series of Wall Street-friendly executive orders, or you can argue that earnings really are on the upswing. Either way, Wall Street is driving stocks higher, from small-caps to the biggest Dow Jones Industrial Average stocks.
The Dow is done flirting with 20,000. The blue-chip index has surged some 4% so far in this young year and now sits around 20,600. So it might seem silly to fight the tape and bet against the hot-running Dow Jones stocks.
But there are a few laggards in the Dow … and worse, their underperformance is nothing new.
Today, we’re going to look at three Dow Jones stocks that, despite whatever investor sentiment might otherwise suggest, have lagged the broader markets for some time now and don’t have the catalysts to change their fates.
Over the past year, the S&P 500 has put up roughly 23% gains. Over the past three years, it has averaged 12% annual gains, and that number is closer to 14% over the past five. These three Dow Jones stocks haven’t really come close.
And they probably won’t do much better looking forward.
Here’s a look at three Dow Jones stocks that will continue lagging the market going forward.
Dow Jones Stocks Holding You Back: Coca-Cola (KO)
1 Year KO/S&P 500 Total Return: 0.51%/22.77%
3-Year Average KO/S&P 500 Total Return: 6.93%/12.02%
5-Year Average KO/S&P 500 Total Return: 6.94%/13.71%
The biggest problem for The Coca-Cola Co (NYSE:KO) over the past few years is one of the simplest problems a company can have: lack of growth.
In fact, the top line is headed in the opposite direction.
Coca-Cola brought in $46.8 billion in revenues in 2013, which shrank to $46 billion in 2014, $44.3 billion in 2015 and finally $41.8 billion in 2016. And it’s about to get a lot worse: Analysts expect the top line to shrink 16% to $35.1 billion this year, before falling another 13% to $30.5 billion next.
The bottom line has shrunk considerably, too, though KO is at least expected to return to profit growth next year — a whole 3% of it.
Coca-Cola’s biggest problem is that the younger generations of the world are moving away from sugary Coke and toward other drinks. And yes, Coca-Cola has other brands to help offset the declines in Coke and Diet Coke, but it’s not nearly as diversified as rival PepsiCo, Inc. (NYSE:PEP), which also has its snack business to help generate growth.
The strong dollar isn’t helping Coca-Cola any, either, as currency translations are a quarterly issue.
At the end of the day, KO pays a consistent dividend, but it’s just 3.4% — not too attractive, especially considering the potential for one or more interest-rate hikes this year. And investors can’t expect much in the way of significant dividend hikes, as KO pays out almost 85% of its earnings in dividends already.
Coca-Cola might be one of the most well-known Dow Stocks, but it’s low on potential.
Dow Jones Stocks Holding You Back: Verizon (VZ)
1 Year KO/S&P 500 Total Return: 0.48%/22.77%
3-Year Average KO/S&P 500 Total Return: 5.99%/12.02%
5-Year Average KO/S&P 500 Total Return: 9.43%/13.71%
All the while, Verizon continues to throw off big dividends, but ultimately underperform.
Verizon’s revenues slipped a bit last year, and the bottom line has been messy, bouncing around a lot over the past few years, including a 26% decline in 2016.
Verizon has spent almost $100 billion on wireless network and infrastructure buildout over the past five years. Meanstwhile, it’s trying to figure out other avenues of growth amid a saturated telecom market. That has led to buyouts of tech cast-off AOL for $4.4 billion, the fiber business of XO Communications for $1.8 billion, and $4.8 billion for Yahoo! Inc. (NASDAQ:YHOO) … though that could end up being roughly $250 million less thanks to several data breaches.
Verizon is shelling out money for its network, for growth and (of course) to shareholders in the form of a generous 4.8% dividend.
However, dividend growth has slowed to a crawl — Verizon’s payout has advanced just 11% in the past five years. Meanwhile, it’s increasingly unclear just how much of a positive effect the Yahoo deal will actually have.
If you’re OK with collecting your nearly 5% in dividends every year and calling it a day, that’s fine. But there are far better Dow Jones stocks for higher total returns.
Dow Jones Stocks Holding You Back: General Electric (GE)
1 Year KO/S&P 500 Total Return: 6.84%/22.77%
3-Year Average KO/S&P 500 Total Return: 10.03%/12.02%
5-Year Average KO/S&P 500 Total Return: 12.27%/13.71%
It’s been close to eight years since General Electric Company (NYSE:GE) stunned income investors with a cut to its long-paid dividend. That was all part of facing the music: The company was too reliant on GE Capital, which was a recipe for disaster that resulted in a government bailout.
GE stock tanked from the low $40s in 2007 to about $7 per share by the bottom in 2009. Its dividend? Reduced from 31 cents per share to a meager dime.
Both, of course, have mostly recovered. Shares are back in the low $30s, and the dividend is now up to 24 cents to help GE yield a respectable 3.1%. Meanwhile, GE has spun off or sold most of its financial-related holdings.
Hope lies with CEO Jeffrey Immelt’s narrative of GE as a leader in the internet of things, but the company is being weighed down by its oil and gas division, which the company is hoping to merge with Baker Hughes Incorporated (NYSE:BHI) and spin off as its own independent unit. Last quarter, the division was off 22% both sequentially and year-over-year. But what’s left? A transportation division that was off 21% year-over-year, or the energy connections and lighting division that was off 7%?
Heck, GE Capital actually contributed $218 million in earnings last quarter. It also paid dividends of $20 billion to its parent company, which General Electric used to repurchase a ton of stock.
I like the purchase of Alstom’s power and grid businesses, which should yield benefits to the power systems group, but otherwise, GE has very little going for it. It’s certainly leaner than it was during the financial crisis crash, but it’s not much meaner.
As of this writing, Marc Bastow did not hold a position in any of the aforementioned securities.