Marathon Petroleum and Prudential Have Dividend Appeal
Posted: October 15, 2019
With impeachment and trade war in the air, the stock market probably won’t roar ahead in the next 12 months.
Anything can happen, but my guess is that the coming 12 months will see a normal gain of 10%, or less. In that environment, wouldn’t it be nice to have a head start of three or four percentage points?
You can get that head start by choosing stocks with an above-average dividend yield. If Marathon Petroleum, for example, yields a little more than 3% in dividends, you are already more than 30% of the way to a 10% annual gain.
Here are five stocks that I deem to have dividend appeal now.
A refiner and marketer of petroleum products, and a pipeline operator, Marathon Petroleum (MPC) was spun off from Marathon Oil in 2011. With 16 refineries processing more than 3 million barrels of oil a day, it is the largest independent refiner in the U.S.
Marathon has increased its dividend by 18% a year over the past five years. The yield (dividend as a percentage of the stock price) is 3.3% at the moment.
Crucial to refiners is the spread between what it pays for oil and what it gets for gasoline and home heating oil. This is known as the crack spread. It can be measured in various ways, most often the price for two barrels of gasoline plus one barrel of heating oil, minus the cost of three barrels of oil.
The crack spread has recently been about $17; I would call it medium and increasing.
Carrying a 4.5% dividend yield, Prudential Financial (PRU) looks attractive to me. Interest rates have stayed lower for longer than most people (certainly including me) expected. That’s a curse to insurance companies like Prudential, because they can’t invest their float at high interest without taking undue risks. Prudential’s stock price is about the same as it was 13 years ago.
Nonetheless, Prudential has managed to increase its dividend by an average of more than 14% a year over the past five years. And there’s room for further increases, since the company pays out only 39% of its profits in dividends.
When will interest rates rise? That’s hard to say, but the Federal Reserve seemed inclined to push them up until the trade war with China came along.
Carnival (CCL), the cruise-line operator, has grown its dividend at a 15% clip in the past five years. The yield is 4.8%.
You might think of cruises as a luxury good that is in demand only when the economy is hot. Not so. Carnival’s earnings are steadier than you might expect. It has been profitable in each of the past 15 years, including during the Great Recession of 2007-2009.
Watch maker Movado Group (MOV), based in Paramus, New Jersey, has to compete with Apple’s smart watch, as well as traditional rivals. But I don’t think that will be its downfall. I think most people will use smart phones and tablets for computer functionality and applications rather than watches.
Meanwhile, the dividend yield here is 3.3% and dividends have increased at a 20% clip for the past five years.
Based in Clichy, France, Societe Bic SA (BICEY) makes Bic pens, razors and lighters. In the current environment, I like the steadiness of these items.
The yield is rich at 5.6%, but Bic’s history of dividend increases is not as strong as the other stocks mentioned above. Also, the payout ratio at Bic is higher, with dividends consuming 83% of Bic’s profits. That raises some doubts above whether dividends can be hiked in the future.
This is the 20th column I’ve written on stocks with dividend appeal, beginning in 1998. The average 12-month gain on my recommendations in this series has been 12.85%, compared to 9.46% for the Standard & Poor’s 500 Index. Of the 19 previous columns, 15 were profitable and 10 beat the index.
My picks from a year ago lost 3.98% while the S&P 500 returned 2.72%. A big loss in Macy’s (M) and a small loss in Argan (AGX) outweighed three advances.
Bear in mind that my column recommendations are theoretical and don’t reflect actual trades, trading costs or taxes. Their results shouldn’t be confused with the performance of portfolios I manage for clients. And past performance doesn’t predict future results.
Disclosure: I own Societe Bic personally and for most of my clients. I own Argan, Carnival and Movado for one or more clients, but not personally.