OWe’re only five weeks into the 2022 business year, and it’s already been a wild ride. We tend to look at the stock market in general and see big swings in major tech stocks and overall S&P500 and Nasdaq Compound. But income investors know there is another way to invest in the US stock market.
Industry-leading dividend-paying companies offer a different risk/return profile with an investment anchored in the growth of the global economy and the prospect of generating passive income streams. United Parcel Service (NYSE: UPS), Stanley Black & Decker (NYSE: SWK)and caterpillar (NYSE: CAT) are the top three dividend-paying stocks that seem like good buys now.
Big News on Big Brown’s Dividend
Scott Levine (UPS): Although it hasn’t risen to the lofty rank of a dividend aristocrat, UPS deserves respect for the level of commitment it has shown to shareholders with its dividend. Since 1999, when the company went public, UPS has maintained or increased its dividend every year, a pretty impressive feat. But that’s not the only reason UPS should be on the radar of dividend-hungry investors. Earlier this week, the company announced during its fourth quarter earnings report that it was increasing its quarterly payout to $1.52 per share. Representing a 49% increase per share from the $1.02 in dividends paid each quarter of 2021, the company’s dividend increase is the largest quarterly increase in its dividend in the company’s history. As a result, UPS now offers a forward dividend yield of 2.7%.
Suppose you have to pay a premium to buy stocks? Think again. Stock can actually be found hanging on the shed rack. Currently, UPS is trading at 13.4 times operating cash flow, cheaper than its five-year average cash flow multiple of 15.7. For those who prefer to gauge the price in terms of earnings, the stock still looks cheap, trading at 15.6 times earnings, a notable discount to its five-year average price-to-earnings (P/E) ratio. of 27.4.
Delivering a strong performance in 2021, UPS anticipates continued success in the year ahead. Management expects the company to have revenue of approximately $102 billion in 2022 and free cash flow (FCF) of $9 billion. For investors concerned that the recent dividend increase could jeopardize the financial health of the company, perhaps management’s target payout ratio of 50% of adjusted earnings per share will allay their concerns – a goal that management said it is on track to reach in 2022.
Stanley Black & Decker offers great value
Lee Samaha (Stanley Black & Decker): In a market that still seems expensive, Stanley Black & Decker stands out as a beacon of value. The industrial tools and parts maker recently released its fourth quarter 2021 results and gave its guidance for the full year 2022. The numbers look very good.
For 2022, management expects adjusted earnings per share of $12-12.50 and FCF of $2 billion. Those numbers would put the company on a P/E ratio below 14.6 times the earnings guidance midpoint and a price/FCF multiple of 14.4 times. These valuations seem cheap, and to put it in some context, the price/FCF multiple implies that Stanley will generate nearly 7% of its market capitalization in FCF by the end of 2022. In theory at least, that’s what it could pay in dividends while growing the business.
That said, the company is certainly not a low-growth cash cow. On the contrary, the company has many growth opportunities thanks to the growth of its recent acquisition MTD (lawn and garden products). In addition, an easing of supply chain issues and raw material costs will contribute to margin expansion.
Meanwhile, its core tools business may grow with the release of new products and the development of brands like Craftsman, and Stanley may continue to participate in industry consolidation through its acquisition strategy. Add in a multi-year recovery in the automotive and aerospace end markets, and Stanley’s industrial business (engineered fasteners, products and fittings) can also grow.
It all adds up to a company that will emerge from 2022 in much better shape than it currently looks, and it makes sense to buy ahead of a solid year of profit and revenue growth.
Caterpillar could be a coil spring for your wallet
Daniel Foelber (Crawler): Caterpillar is a cyclical business with revenues and profits tending to fluctuate with the broader economy. This can make its P/E ratio very cheap one year and expensive the next. For me, Caterpillar is not undervalued because its P/E is currently only 16.8. It is undervalued because it is posting record results despite major headwinds.
After the U.S.-China trade war derailed what likely would have been a years-long recovery in Caterpillar’s business, the company patiently waited for the next sustained bull run. As the economy rebounds from the COVID-19 pandemic, Caterpillar is already seeing demand for its products increase around the world. In the fourth quarter, it increased sales in all regions and in its three main segments: energy and transportation, construction and resource industries. However, Caterpillar’s profit margin was hit as it had to pay higher freight charges and ramp up many orders to meet demand.
The company also cited supply chain contractions as a key factor behind business inefficiencies. To be fair, predicting when and how well the economy would rebound was no easy task. Couple that challenge with inflation, and it’s understandable that Caterpillar lacks demand to meet supply. That’s what happened in the fourth quarter, as the company struggled to cut near-term costs as it rerouted components and sought to improve its assembly process.
Zoom out, however, and it’s impressive to see how well Caterpillar’s business is doing despite these challenges. The company posted record earnings per diluted share of $11.83, and it wouldn’t be surprising if it broke that record in 2022 as it seeks to improve margins. Like many industrial companies, Caterpillar’s business is susceptible to headwinds from rising inflation. But Caterpillar’s business is currently in an excellent position.
Caterpillar’s energy and transportation segment is its largest division. And it thrives on a booming oil and gas industry. Couple that strength with a stable construction market and raw material demand that’s driving demand for its mining equipment, and you’ve got a company that’s a coil spring. Caterpillar’s strong business underpins its more than 27 consecutive years of increasing dividends, making it a dividend aristocrat.
Caterpillar’s stock looks like a great buy now. And its 2.2% dividend yield is a cherry on top of a healthy underlying business.
10 stocks we like better than United Parcel Service
When our award-winning team of analysts have stock advice, it can pay to listen. After all, the newsletter they’ve been putting out for over a decade, Motley Fool Equity Advisortripled the market.*
They just revealed what they think are the ten best stocks investors can buy right now…and United Parcel Service wasn’t one of them! That’s right – they think these 10 stocks are even better buys.
View all 10 stocks
* Portfolio Advisor Returns as of January 10, 2022
Daniel Foelber has no position in any of the stocks mentioned. Lee Samaha has no position in the stocks mentioned. Scott Levine has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.