The major stock indexes are hovering around record highs, but there are plenty of sectors that have had their fair share of struggles so far this year.
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Upstream exploration and production (E&Ps) such as Devon Energy (NYSE: DVN) And APA (NASDAQ:APA) are down significantly on the year.
In the meantime, Goal (NYSE: TGT) has erased all gains since the beginning of the year (and some of them) by plummeting after the third quarter earnings release.
This is why all three dividend stocks are worth buying in December.
Lee Samaha (Devon Energy): Down 15.5% year-to-date (YTD) at the time of writing, and many investors appear to have thrown in the towel on Devon Energy. However, this would be a mistake, as the company continues to generate cash flow, which is used to pay down debt, buy back shares and pay dividends to investors. At the same time, management has acquired assets this year in the form of purchases of Grayson Mill Energy (Baken region) and investments in core assets in the Permian region have led to productivity improvements, resulting in an increase in full-year production expectations. .
I have discussed Devon Energy in more detail elsewhere; Suffice it to say that based on an oil price of around $70 per barrel (which corresponds to the price at the time of writing) and the current share price, management believes it has approximately 9% of its market capitalization in free cash flow ( FCF) will generate. ) next year. That gives management ample opportunity to pay down more debt or increase the variable dividend. Furthermore, even if it chooses to use the cash flow to opportunistically repurchase shares, the reduction in the number of shares will increase the claim of existing shareholders on future cash flows.
As such, the market appears to be too pessimistic about Devon’s acquisition of assets in the Bakken (where it can generate cost synergies when combined with its existing Bakken assets) and too dismissive of the potential to increase dividends in the future. If oil prices remain relatively high, investors can expect good returns if they buy Devon Energy shares at these levels.
Scott Levine (APA Corporation): Down 36.8% YTD at the time of writing, E&P APA Corporation stock is giving the bears much more energy than the bulls. But that’s not to say there aren’t compelling reasons to add this oil dividend darling to your buying list. Furthermore, with APA shares trading at a discount to their historical valuation, investors have an excellent opportunity to purchase APA shares with a 4.4% forward dividend at an attractive price.
Much of the skepticism surrounding APA shares this year stems from concerns about the company’s activities in the North Sea. In its second quarter 2024 financial results, management forecast lower production from the North Sea as the company focused on maintenance activities. Subsequently, management stated in the third quarter earnings presentation that it plans to cease production in the North Sea by the end of 2029.
Those who have decided to hit the sell button on APA shares because the company is ceasing production in the North Sea are short-sighted. First, APA integrated its operations following the acquisition of Callon in April – an acquisition that resulted in a 40% increase in Permian acreage. The acquisition strengthens the company’s position in the Permian, and management expects the integration of Callon to result in $225 million to $250 million in cost synergies.
For those looking for additional evidence that the company is well positioned: Standard & Poor’s APA was upgraded to BBB-, giving the company an investment-grade credit rating from all three rating agencies. In terms of the company’s cash flow, investors will find that APA consistently generates strong cash flows from which it can earn its dividend, providing further evidence that the company’s dividend is safe.
With APA shares trading at 1.9 times operating cash flow – a discount to their five-year average cash flow multiple of 2.7 – now is a good time to jump into the oil patch with APA stock.
Daniel Foelber (goal): The target stock fell 21.4% in one session after reporting third-quarter earnings results on November 20. It has since recovered some of these losses, but Target is still in the red this year compared to the big gains for the broader indices. As of this writing, Target is up just 8.6% from its 52-week low and down 51% from its all-time high. Goal is out of favor, while his colleague, Walmartis at a record high. A major reason is Target’s poor forecasts.
When Target reported second-quarter results in August, it revised its full-year guidance. Still, in Target’s recent earnings report, the company lowered full-year expectations to a level lower than its May forecast. Wall Street hates uncertainty, and Target is giving investors little reason to trust its projections. Despite this problem, there is reason to believe the sell-off in Target stock has gone too far.
Target’s latest guidance expects 2024 adjusted earnings per share (EPS) of $8.30 to $8.90. At the mid-$8.60 mark, that would be a 3.8% decline from 2023 adjusted earnings per share. But Target is still a highly profitable cash cow company. Target pays a quarterly dividend of $1.12 per share for a run rate of $4.48 per year. So even with lower profits, profits are still almost double the dividend payout. With a yield of 3.4%, Target stands out as a viable source of passive income for patient investors. Target is a Dividend King with 53 consecutive years of dividend increases, so investors who buy the stock today should see their dividend income grow over time.
Perhaps most importantly, Target is a very cheap company, with a price-to-earnings ratio of 13.8. People who are pessimistic about the company may say that it must be cheap if profits continue to decline. But if you dig into management’s commentary for this quarter, you’ll see that Target acknowledges some of its pricing and inventory management issues and still believes its long-term strategy will succeed. Target Circle’s loyalty program isn’t perfect, but it continues to grow. And Target is working to expand e-commerce, curbside pickup and other omnichannel strategies.
All told, the long-term investment thesis is intact, making Target an attractive dividend king to buy in December.
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Daniel Foelber has no position in any of the stocks mentioned. Lee Samaha has no positions in the stocks mentioned. Scott Levine has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Apa, S&P Global, Target and Walmart. The Motley Fool has a disclosure policy.
3 Dividend Stocks Down 8%, 16% and 37% to Buy in December was originally published by The Motley Fool
