Expectations and stories can drive share price movements. If a company fails to live up to expectations, it can lead to investor disappointment and a poorly performing stock. Honeycomb (NASDAQ: FAIR), United Parcel Service (NYSE: UPS)And Chevron (NYSE: CVX) may be leading companies in their sectors, but they have all disappointed investors recently, causing their share prices to decline.
Despite their challenges, all three of these dividend stocks are worth a closer look right now. Here’s why.
Honeywell has failed to capitalize on megatrends
Honeywell has been discussing the growth potential of the Industrial Internet of Things (IIoT) for several years, which is essentially the intersection of software and hardware. Instead of monitoring the performance of standalone machines, the IIoT can connect a fleet using sensors and electronic components. An integrated system can provide data-driven insights, allowing operators to be proactive rather than reactive to equipment performance and maintenance cycles.
In addition to opportunities in the IIoT space, Honeywell has focused on the energy transition and the need for smarter buildings and warehouses that automate functions and use less energy than older buildings and warehouses. It has a growing oil and gas, hydrogen and liquefied natural gas business.
Honeywell’s largest segment is aerospace. It provides parts, components, controls, integrated solutions and more for the commercial aerospace and defense industries. It even has a $5 billion quantum computing business.
But despite its exposure to all these exciting themes, Honeywell’s results have disappointed. Revenue has recovered from pandemic lows, but is still below pre-crisis levels. Operating margins and diluted earnings per share (EPS) are also rising, albeit slowly.
Management has implemented an aggressive capital allocation program focused on mergers and acquisitions (M&A) and share buybacks to fuel earnings per share growth. A core strength of Honeywell is its balance sheet, but leverage is likely to increase as it pursues its plan to spend billions more on M&A and share buybacks.
Honeywell has increased its dividend every year since 2011, and its price-to-earnings (P/E) ratio is now below its three-, five-, and seven-year median levels. Given its growing dividend and reasonable valuation, Honeywell appears to be a valuable turnaround play for investors who believe its recent string of acquisitions will fuel growth in its targeted themes.
The worst may be over for UPS
UPS shares have soared during the pandemic as consumers shifted from in-person shopping to home delivery. The shipping and logistics giant expanded routes, thinking that growth in package delivery volumes would remain strong even after the pandemic, but that prediction has been painfully wrong.
Add to that expensive pension obligations and messy contract negotiations with the Teamsters union, and it’s not hard to see why UPS stock fell out of favor.
In March, UPS launched a three-year plan to get the company back on track. But so far, it has made no meaningful progress toward its goals. The company has done a lot wrong in a short period, resulting in a 45% drop from its all-time high. But there is reason to believe that the worst may be over.
In the second quarter, UPS returned to U.S. volume growth for the first time since Q4 2021. This is a positive sign in the short term. The outlook for its healthcare-related business is positive in the medium term. UPS expects healthcare to contribute half of its growth over the next three years as it focuses on temperature- and time-sensitive deliveries.
Longer term, UPS has a strong position in domestic and international shipping and logistics. The stock has been sold off to the point where its forward P/E ratio is now just 17 and its dividend yield is 5.1%. UPS could be attractive to investors looking for a value stock that can turn things around and an investment that can increase their passive income.
Chevron is an extremely reliable dividend payer
Unlike Honeywell and UPS, Chevron hasn’t disappointed investors by missing expectations. But it does have a big question mark that could hold back its stock price.
On October 23, 2023, Chevron announced an agreement to acquire an oil and natural gas exploration and production company Hess for 53 billion dollars. However, ExxonMobil has held up that deal, pointing to nuances in the contractual language regarding rights to a shared asset off Guyana’s coast.
Meanwhile, crude prices have fallen to their lowest levels in 2024 on lower demand expectations and higher production levels. Chevron hasn’t made the operational mistakes of Honeywell or UPS. Still, uncertainty over the fate of the Hess deal and lower oil prices have pushed the stock to a 52-week low.
At a price-to-earnings ratio of just 13.9, the valuation seems dirt cheap, but that ratio could rise to more expensive levels if lower oil prices lead to lower profits. Overall, Chevron is fairly valued and has a streak of 37 consecutive years of dividend increases and a dividend yield of 4.6% — making it another passive income powerhouse to consider right now.
Responsible ‘charging’
Investors may look at Honeywell, UPS or Chevron and be inclined to back the truck in the hope that they will recover. And while it may be a good idea to buy all three stocks, it is important to maintain diversification in a balanced portfolio.
Betting too heavily on just a few stocks or correlated themes can expose a portfolio to the risk of excessive declines when the market goes south. A better approach is to allocate larger portions of your portfolio to only your highest-conviction ideas and build those positions gradually over time.
Jumping into a stock too quickly can lead to stress, poor decision-making, and exhausted purchasing power. No one knows when the next big stock market sell-off will happen, but when it does, it’s wise to be comfortable with your positions.
The best way to prepare for this is to be aware of your asset allocation and ensure that no position becomes so large that a bad move in one sector could detract from the performance of your portfolio and prevent you from achieving your financial goals.
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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron. The Motley Fool recommends United Parcel Service. The Motley Fool has a disclosure policy.
3 Struggling Dividend Stocks You Should Buy Right Now was originally published by The Motley Fool
