Anxiety about global stock markets, triggered by the Chinese economic slowdown and a slump in oil prices, has hammered the U.S. stocks. Some of the big companies reported earnings in recent weeks, of which Apple (AAPL) reported its most profitable quarter in its history but forecasted for declining sales in March.
Yesterday’s Federal Reserve meeting, the first meeting since the US central bank raised interest rates for the first time in December 2015, confirmed rates would remain at current levels. While interest rates remain so low, investing in dividend paying stocks is an alternative way to increase your income apart from saving.
Investors should consider the current volatility as an opportunity to buy high quality companies which are ‘on sale’. We pick five US stocks that paying an attractive dividend yield, through Morningstar Select.
Chevron Corp (CVX)
Chevron is an integrated energy company with exploration, production, and refining operations worldwide. With production of 2.6 million of barrels of oil equivalent a day (67% oil), Chevron is the second-largest oil company in the United States. Its refineries are located in the United States, South Africa, and Asia for total refining capacity of almost two million barrels of oil a day. Proven reserves at year-end 2014 stood at 11.1 billion barrels of oil.
Despite of oil price slump due to oversupply in the market, Chevron is expected to increase its growth after 2015 because of the start-up of several projects, Morningstar analyst Allen Good says. The investment in LNG production, while primarily gas volumes, has prices indexed to oil, which should allow Chevron to preserve its peer-leading liquids exposure.
Also, projects like LNG, with long-plateau production levels that require little additional capital expenditure, help reduce decline rates while generating significant free cash flow to support reinvestment elsewhere or shareholder returns, Good says. However, to achieve its growth, Chevron has spent more on a per-barrel basis than peers, while at the same time experiencing budget overruns on the Gorgon project. As a result, Good expects returns to fall in the coming years on a combination of lower earnings and increased capital employed, which should offset the benefit of greater production and higher downstream earnings. The stock is rated as four stars by Morningstar analysts, which is considered as undervalued.
General Motors (GM)
General Motors designs, builds and sells cars, trucks and automobile parts. The company remains the market leader in the United States with about 18% share in 2014. It has 11 brands and operates under five segments: GM North America, GM Europe, GM South America, GM international operations, and GM Financial. GM Financial became the company's captive finance arm in October 2010 via the purchase of AmeriCredit.
GM's earnings potential is excellent because it finally has a healthy North American unit and can focus its U.S. marketing efforts on just four brands instead of eight, Morningstar analyst David Whiston says. Whiston expects the company to report excellent earnings growth as vehicle demand comes back during the next few years. Thus General Motors makes products that consumers are willing to pay more for than in the past. The company also increased its quarterly dividend by 6% to $0.38 per share. The stock is rated four stars by Morningstar analysts.
Ford Motor (F)
Ford Motor manufactures automobiles under its Ford and Lincoln brands. The company has about 14.9% market share in the United States and about 7% share in Europe. Sales in North America and Europe made up 61% and 22% of 2014 auto revenue, respectively. Its business is divided into two segments: automotive and financial services.
Ford continues to raise its dividend and has received an investment-grade credit rating from all major rating agencies, according to Morningstar analyst David Whiston. For 2015, the company expects earnings to be in the upper half of its pretax total company income guidance of $10-$11 billion and 2016 is guided to be equal to or higher than this amount.
However the industry is full of strong competition from foreign automakers. Barriers to entry are not as high as in the past, and automakers from emerging markets are looking to enter the US market, such as China and India. Also the auto industry is so cyclical that in bad times even the best automakers cannot avoid large declines in return on invested capital and profit, Whiston says.
Las Vegas Sands (LVS)
Las Vegas Sands Corp is the world’s largest operator of fully integrated resorts featuring casino, hotel, entertainment, food and beverage, retail, and convention center operations. The company owns the Venetian Macao, Sands Macao, Sands Cotai Central, Four Seasons Hotel Macao, and Parisian in Macau, the Marina Bay Sands resort in Singapore, and the Venetian and Palazzo Las Vegas and Sands Bethlehem casinos in the U.S. The company generates 87% and 92% of its revenue and EBITDA from Asia. The company's casino operations generate 82% of revenue.
The company is well positioned for long-term growth in the gaming industry because of its exposure to long-term growth opportunities in the attractive Asia casino market. The company is at a dominant position in the highly profitable gaming markets in Singapore and Macau, where have a limited licenses possession. The company is one of those companies that are capable to win gaming licenses.
However the Macau and Chinese governments are interested in transitioning the region toward a nongaming destination-resort site, as opposite to one dominated by high-end gaming, which is resulting in a near-term revenue declines. The regulation in Singapore also saturated its market growth as the company was unable to further expand existing properties. The stock is rated four stars by Morningstar analyst.
Philip Morris International (PM)
Philip Morris International is the world's second-largest tobacco company, behind China National Tobacco, and holds 28% of the global market, excluding China. The firm is the largest publicly traded tobacco company in the world. It owns seven of the leading 15 international brands. Marlboro, the company's flagship brand, accounted for about one third of total volume in 2014. Other key brands include L&M, Philip Morris, Bond Street, Chesterfield, Parliament, Virginia Slims, and Lark. The stock is rated four stars by Morningstar analyst.
Philip Morris International is one of the strongest businesses in the consumer defensive coverage, Morningstar analyst Philip Gorham says. The company's profitability in emerging markets is a key differentiator against its competitors, and it has a strong presence in Asia. The advantage of selling in emerging markets is that volumes are in some cases, increasing. This should help to slow the firm's decline in volumes over the next decade.
Morningstar analysts’ uncertainty rating for Philip Morris International is low. Evidence from the recent economic volatility suggests that the industry and manufacturers' cash flows remain stable.
Thus although the businesses are stable, the threat of government intervention through large excise tax increases. Also with pricing power intact, the greatest operational risks are the risk of plain packaging measures in large markets and foreign exchange risk. Gorham concludes that any investor owning tobacco stocks should have the stomach for fat-tail risk.
