Dividend stocks can be an important part of a long-term portfolio, especially for those looking towards creating a strong retirement account. Considering that stocks have been falling, it is important to consider stocks whose long-term value is likely to hold up and is likely to continue with strong cash flows that are sustainable, to maintain their dividend.
Here we look at three dividend stocks, two commodities, and one industrial stock, all of which have a strong asset base, and sustainable cash flows.
Dividend stocks are especially important to consider since the previous outperformance of stocks was primarily driven by liquidity, to create a wealth effect. Ever since inflation has taken hold the outperformance previously is not likely to continue and therefore, high dividends
By: Yourstockresearch.com 1 st September 2023
Three Dividend Stocks to Consider
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Southern Copper (SCCO). Dividend : 5.5%
Southern Copper engages in mining, exploring, smelting, and refining copper. Under the current environment, copper prices continue to remain elevated compared to 2019. Copper demand is increasingly rising as infrastructure demand, and demand from the green economy continue to be the key sources of demand. Southern Copper operates mines all over the world including, Chile, Mexico, and Argentina.
Historically demand has primarily stemmed from China, with China accounting for around 50% of the global copper demand, now with other Asian countries also increasingly investing in infrastructure such as the Philippines, Indonesia, India, and the prospect of soft demand from other underdeveloped countries, Copper will continue to remain on a strong footing.
Copper is also increasingly important to the green economy, with demand for vehicles, solar, wind, etc continuing to remain key to meeting goals set in the Paris Accords.
Copper prices are expected to increase above $9000 a tonne with demand and supply dynamics being out of sync. There isn’t enough capacity for copper to meet demand at the level, which keeps prices down, and prices have already been elevated as demand expectations continue to remain robust. Currently, levels of around $8500 are likely to be temporary, therefore.
Finally, in terms of valuation, SCCO continues to remain relatively inexpensive. Considering growth is expected to be in the 10% region for the year, and net income is expected to be around $3.3-$3.5 billion, putting forward P/E at around 19x, earnings make the stock relatively cheap.
Meanwhile, price-to-book remains slightly elevated at 7x, with a return on invested capital coming in at a healthy 20%. Return on equity has also increased with increasing copper prices and now stands at closer to 33%, which is healthy itself.
SCCO also has a healthy dividend at 5.5% which is quite high. Meanwhile, the price to free cash flow has remained relatively steady at 27x, which is not elevated considering the broader market levels.
Southern Copper should continue to outperform for a while especially as the company benefits from several tailwinds, and provides strong long-term prospects.
3M Company (MMM) Dividend : 5.8%.
The company operates through four segments: Safety and Industrial; Transportation and Electronics; Health Care; and Consumer.
The safety and industrial group provides global industrial, electrical, and safety markets adhesives and tapes. Business Group consists of personal safety, adhesives and tapes, abrasives, closure, and masking systems, electrical markets, automotive aftermarket, and roofing granules.
The transportation and electronics and original equipment consists of focusing on global transportation and electronic original equipment manufacturer customers, the Transportation & Electronics Business Group is made up of electronics (display materials and systems, electronic materials solutions), automotive and aerospace, commercial solutions, advanced materials, and transportation safety.
The healthcare segment serves the global healthcare industry and includes medical solutions, oral care, separation and purification sciences, health information systems, drug delivery systems, and food safety.
3M has been focussing on three main strategies as it moves to improve penetration for what is a global brand. First, 3M aims to streamline costs to ensure that margins improve. Secondly, the company is looking to improve and simplify its supply chains. Thirdly, it’s looking to improve its to-market models, so that the products are better in line with market needs, and finally prioritize geographies.
The company is increasingly looking to growth markets in Asia, Africa, and Latin America, where the average growth is likely to be around 5%, compared to global growth which is expected to be around 2.5%. Considering the wide range of products, and strong brand penetration growth for the company should remain robust for many years to come.
Considering that auto, medical dentistry work, and electronics, are just some examples of the deep product portfolio of the company, these products remain ubiquitous to global day-to-day needs. Therefore driven by emerging market penetration, the company should continue to see strong growth but more importantly consistent growth.
The company currently provides a dividend of around 6% and a P/E ratio of 10x. Considering growth for the next ten years is expected to be around 3-4%, that is not an expensive valuation. Currently, profit margins hover around 16%, and are likely to slightly increase to 18%, as the company continues to improve business operations. Net profit margins have consistently improved over the past decade mostly owing to the company’s continues investment in operations, which has then allowed it to improve net margins, from leaner operations.
Source (Macrotrends)
Meanwhile, the return on equity is also consistently high at around 36-37%, which is high for an industrial company. Should the company continue to maintain levels of cash flow, which it should, and considering the strength of the company’s operational strength, the long-term prospects for Manulife remain solid as a dividend stock.
Global penetration, strong brand, good management, and consistent cash flow make this dividend-paying stock a strong contender for long-term portfolios. Considering both growth, a relatively tepid valuation, and dividend, the returns could average around 9% over a longer period, which is high considering the previous outperformance of equities
Manulife (NYSE: MFC) Dividend: 5.75%
Manulife provides various financial products in Asia, North America, and Worldwide. They operate multiple segments Wealth Management, Insurance and Annuity Products, and other Corporate Services. Manulife’s primary segment is its insurance division, and the division is likely to continue to perform relatively well, despite an inflationary environment. Inflation products are not seen as conspicuous consumption and are well suited to overcoming losses in purchasing power.
Manulife has been struggling in recent times with a significant portion of its business coming out of Hong Kong, but now things are turning around slowly, as China re-opens. Overall the Asia market remains robust with the overall Asian economy expected to grow faster than the broader global economy. With China reopening, Japan’s economy remaining relatively steady for now, and with other Asian countries continuing to grow despite a global slowdown the Asian business will continue to do well in the medium to long term. Asia will play a key role in driving sales in the next few years especially if other regions slowdown.
Meanwhile, its North American business also continues to see strong flows despite a drop in APE, and new business CSM. The biggest gains are likely to continue to come from ‘core earnings’, which is their insurance business segment, and that should remain strong regardless of the broader market. Manulife could see some mark-to-market losses, as assets readjust to higher rates, but could also see higher returns from
Valuation-wise the company continues to be relatively cheap with growth picking up due to the base-effect of previous years. The forward P/E is expected to be around 7x, which makes the stock very cheap. Adding to the valuation is a dividend of 5.7-5.8%, which could be quite attractive to investors looking for both returns on investment from growth and dividend combined.
Long-term growth for the company is likely to be around 4-5%, when combined with the dividend the return on investment is likely to be quite decent.
Consider Manulife if you are looking for a strong brand with penetration in key developing markets and long-term growth prospects.
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