There’s a lot of stocks catching your eye out there, I’m sure of it.
Beaten down growth stocks have been attractive value-wise for months.
But, as the landscape changes, so does that valuation metrics those judgements are based on.
And dividend stocks are going through the same conundrum as we speak.
Today, we’ll look at Verizon (NYSE: VZ) with its 7% yield and Phillip Morris (NYSE: PM) with its 6% yield and talk about what I’m seeing in both.
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Verizon Communications Inc. (NYSE: VZ)
Earnings: October 21, Before the Open.
Consensus: EPS $1.28, Revenue $33.81B.
Avg. Analyst Rating: 2.9 (Hold), Price Target $50.69.
Verizon’s stock has fallen off a cliff as interest rates shoot higher.
The reason is because the wireless phone carrier holds $179.18 billion in debt.
Debt on the books is 90 times larger than cash on balance sheet.
With a significant amount of debt, the company is at a direct risk to interest rates that are shooting higher.
Investors are concerned and rightfully so. The longer rates stay this high, heavily burdened companies like internet utility in Verizon, are at risk of carrying an expense load of debt.
Take a look at the decline in the stock from the IPO in mid-90s to today.
It’s nasty.
The dotcom and financial crisis don’t show a decline like this.
That’s because we haven’t experienced anything like this in the past few decades.
There’s not been a situation where we are popping multiple bubbles at one time. The growth bubble popped over the last 12 months. Now the low-interest rate bubble is popping. It’s going to create waves across leveraged stocks, housing and even pension funds and bonds.
This is a truly unique time to be investing.
And because of that, I’m not buying this dip.
I don’t care about the 7% yield.
If the stock falls another 50%, that’s worthless. Not to mention these companies with massive amounts of debt to fund dividends are likely going to end up cutting dividends to manage it.
And that’s why this week, the impact of rates so far makes these two companies’ top stocks to watch.
Next up, Phillip Morris…
Phillip Morris International Inc. (NYSE: PM)
Earnings: October 20, Before the Open.
Consensus: EPS $1.36, Revenue $7.31B.
Avg. Analyst Rating: 2.4 (Hold), Price Target $103.85.
Phillip Morris, the tobacco company, had turned into a steady dividend paying machine.
Shares, more or less, were trending sideways yielding about 6% after the latest declines. It’s nowhere near as bad as it is for Verizon, take a look:
The stock has held up well since 2012, trending sideways for the better part of the decade. And, when you generate a dividend over 5% per year, that’s great to see.
But with the stock trading in a downtrend during the recent volatility, it follows some of the same sentiment we saw in Verizon.
Not as sharp.
And not as much debt.
PM is currently sitting on $28.05B of debt, compared to $5.04B in cash. Less debt than Verizon and more cash, making it better financially.
For 2022, both companies are cash flow positive, which speaks to why they’ve been able to rack up a sizeable portion of debt.
As long as the Fed is still pushing rates higher, it’s not time to dive into dividend stocks.
Stay patient and wait for better opportunities after the Fed pivots. Maybe not right away, but we will be closer to the right time to buy these companies once the Fed starts reducing interest rates.
Don’t fight the Fed.
That’s wraps up earnings edge for this week.
The day is still young.
Let’s get it!
Chad Shoop, CMT
Editor, Bank It or Tank It ELITE