Equity markets spiked up in the first four months of 2019, pricing in a possible trade deal resolution between the U.S. and China. However, on May 5, investors woke up to the reality that the U.S. was not happy with the progress in the negotiations. President Trump and members of the administration suggest that China is now trying to water down the previous offers, especially on patent protection and enforceability measures.
While the broader markets have been jittery and in a decline since May 6, not every quality stock has been as adversely affected as many momentum and tech stocks. Today, I am going to discuss three dividend stocks in three different sectors.
General Motors (GM)
Let us first look at General Motors, the largest automaker out of Detroit. What puts GM in the spotlight for me is mainly its subsidiary, Cruise, which has the second place for autonomous driving commercial services in the U.S.
The global market for self-driving vehicles and services is expected to grow in double-digits in the next several years. More specifically, analysts estimate that the industry will grow more than tenfold from $54.23 billion in 2019 to $556.67 in 2026.
In August 2016, GM bought a majority stake in Cruise for $1 billion. In three years, Cruise’s valuation has reached $19 billion. It is worth remembering that GM’s own market cap currently stands at $53 billion.
GM Cruise is currently testing its driverless vehicles in California. Alphabet’s (NASDAQ:GOOGL, NASDAQ:GOOG) Waymo and GM Cruise make their California road safety reports publicly available. The 2018 data for both companies showed marked improvements over a year ago, increasing speculation that GM Cruise may soon be able to reach commercialization at scale.
On Apr. 30, GM reported Q1 2019 earnings that saw profits increase. The group earned $1.41 per share, 30 cents better than what Wall Street was expecting. The company benefited from increased SUV and truck sales, especially considering that they’re some of its most lucrative models. General Motors also said that its restructuring and cost-cutting efforts were on track, a development which investors saw as positive for the stock.
With a trailing price-to-earnings ratio of 5.7, GM stock is also likely to catch the attention of value investors. In the meantime, its current dividend yield of 4.08% could also make the company an important addition to an income-generating portfolio.
Almost a decade ago, General Motors emerged from the ashes of bankruptcy. Yet I expect the next decade to be a lot different and positive for the company. Therefore, I’d consider buying GM not only for its dividends, but for the potential growth in stock price.
Since the trade war rhetoric impacts the auto industry too, in the next few weeks, there may be choppiness and even some profit-taking in GM stock. However, as the dust settles, GM shareholders will likely be well rewarded.
McDonald’s operates in the fragmented food service industry, which includes competitors like Restaurant Brands International (NYSE:QSR), Starbucks (NASDAQ:SBUX) and Yum Brands (NYSE:YUM). It has over 36,000 restaurants in over 100 countries.
McDonald’s latest earnings results on Apr. 30 came in better than expected. Group revenues of $4.95 billion topped analysts’ estimates of $4.94 billion. Management gave an upbeat outlook on long-term growth and profitability.
In addition to the acceleration of U.S. sales, McDonald’s stock has benefited from international growth. Comparable U.S. store sales rose 4.5%. Similarly, global comparable-store sales rose 5.4%, mostly thanks to promotions mixed-priced deals, as well as renovated stores.
As one of the largest fast food chains around the globe, over 90% of the restaurants are currently franchised. The franchising business gives McDonald’s a significant competitive edge as the initial franchise fees and on-going royalties mean high margins. Its operating margins now stand around a healthy 30%. As the franchisees carry the operating costs and business risks, McDonald’s does not have to worry about the expenses of running those operations.
The group — globally recognized as “the Golden Arches” — also collects rent from the franchisees as the company owns most of the properties where the restaurants operate. It leases those out to the franchisees, often at significant markups. It may not be wrong to say that the company is in the real estate business as much as food services.
As part of its efforts to improve shareholder value, McDonald’s has been increasing dividend payments since its first-ever dividend payment in 1976. The next dividend payment of $1.16 per share is expected to be paid out on June 17. The current dividend yield stands at over 2.3%.
On May 19, MCD stock price saw an all-time high of $200.36. Year-to-date, the stock is up 12%. Although there might be some weakness and profit-taking in the MCD stock price in the coming weeks, especially around the $200-level, I’d regard any dip in price as an opportunity to go long the shares. The company is a core consumer staples holding for a well-diversified portfolio.
Royal Dutch Shell (RDS.A, RDS.B)
My final stock is the oil and gas supermajor Royal Dutch Shell. Investors will note that there are two separate tickers for the company: the A-shares, RDS.A, fall under Dutch law, whereas the B-shares RDS.B are subject to U.K. law. Which one to invest would depend on individual tax considerations regarding dividends. As a U.S. resident, I’d personally prefer the RDS.B stock. However, I’d urge our readers to check with their brokers as well as tax advisors as to which stock would be better suited for their portfolios.
On May 2, Royal Dutch Shell released its first-quarter 2019 results which beat analysts estimates. Profit of $5.3 billion was down just 2% year-over-year but compared favorably with the $4.5 billion forecast. EPS came at 65 cents and the results showed an impressive $12.1 billion of cash flow. Management highlighted several projects for 2020 and beyond that are expected to impact growth positively.
The group’s diversified operations are divided into four main segments: Integrated Gas, Upstream, Downstream and Corporate.
Integrated Gas covers the production, marketing and trading of liquefied natural gas (LNG) and gas-to-liquids (GTL) products. This business also manages the New Energies portfolio, such as advanced biofuels, hydrogen and charging for battery-electric vehicles. Many analysts believe that the division will be a key driver of RDS.B’s long-term value.
Upstream activities include oil and natural gas exploration, field development and production, while Downstream manages Royal Dutch Shell’s manufacturing, distribution and marketing activities for oil products and chemicals. Finally, the Corporate segment covers the non-operating activities supporting the group.
Demand, supply, quantity and commodity prices all affect the earnings of an energy group. During the quarter, lower oil prices (with an average price of $63) have continued to be a significant challenge across the business for RDS.B. Yet strong contributions from trading helped offset the impact of lower oil prices.
And as the U.S. tightens sanctions on Iran while we also approach the summer months, oil prices are heading higher — Brent crude is now over $72. Any uptick in the price of oil would help increase Royal Dutch Shell’s quarterly earnings.
Dividends and stock repurchases concern shareholders because they affect investment returns. Royal Dutch Shell has an enviable track record as an income stock. Long-term RDS.B shareholders enjoy a current dividend yield of 5.8%. And that amount looks safe as it has dividend cover of 1.4X. The group has not cut its dividend even once since the end of World War II. The next dividend payment date is June 24.
The company also announced that the board had approved a new tranche of share repurchases and will now buy back $2.75 billion in shares before July 29.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.