After beginning the year strongly, investor sentiments have taken a hit on renewed recession fears, leading to a 2.7% year-to-date decline for the Dow Jones Industrial Average (DJIA). However, this has created opportunities to enter fundamentally strong Dow stocks like Verizon Communications Inc. (VZ), Amgen Inc. (AMGN), and International Business Machines Corporation (IBM) at reasonable prices.
Before explaining why I am bullish on these stocks, let’s discuss why investors’ sentiment has taken a hit and what factors could keep the stock market under pressure this year.
A slowing inflation boosted investor sentiment last year. The momentum was built further as Federal Reserve Chairman Jerome Powell said, “the disinflationary process, the process of getting inflation down, has begun, and it’s begun in the goods sector, which is about a quarter of our economy.”
However, the positive sentiment soon turned sour as the January CPI showed a sequential rise of 0.5%, marking the fastest monthly gain since October 2021. Moreover, the Fed’s closely tracked inflation parameter, the Personal Consumption Expenditure (PCE), rose 0.6% for the month and 4.7% year-over-year.
Earlier this week, central bank Chair Jerome Powell said, “The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated.”
“If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes,” he added.
With the central bank keen to bring down inflation by increasing interest rates, the economy might enter a recession this year. The fears of a recession are expected to keep the stock market highly volatile in the upcoming months.
Amid this backdrop, let’s evaluate why investing in fundamentally strong and dividend-paying Dow stocks VZ, AMGN, and IBM could be wise.
Verizon Communications Inc. (VZ)
VZ and its subsidiaries offer communications, technology, information, and entertainment products and services worldwide to consumers, businesses, and governmental entities. Its segments are Consumer and Business.
On November 30, 2022, VZ announced a global Network-as-a-Service (NaaS) partnership with Wipro Limited (WIT). VZ’s Senior VP and Chief Revenue Officer, Global Enterprise and Public Sector, Massimo Peselli, said, “Our partnership with Wipro will enable businesses to future-proof their network in a manner that is more flexible, agile, and predictive, centered around their specific needs.”
It has increased its dividend for 18 consecutive years. VZ pays a $2.61 per share dividend annually, translating to a 7.14% yield on the current share price. Its four-year dividend yield is 4.76%. The company’s dividend payouts have grown at CAGRs of 2% and 2.1% over the past three years and five years, respectively. VZ is expected to pay a quarterly dividend of 65.25 cents per share on May 1, 2023.
In terms of the trailing-12-month gross profit margin, VZ’s 56.79% is 14.4% higher than the 49.63% industry average. Likewise, its 36.70% trailing-12-month EBITDA margin is 95.4% higher than the industry average of 18.78%. Furthermore, the stock’s 16.87% trailing-12-month Capex/Sales is 349.4% higher than the industry average of 3.75%.
VZ’s total operating revenues increased 3.5% year-over-year to $35.25 billion in the fourth quarter ended December 31, 2022. Its adjusted EBITDA declined marginally to $11.75 billion. The company’s net income increased 41.4% from the prior-year quarter to $6.70 billion. In addition, its EPS came in at $1.56, representing an increase of 40.5% year-over-year.
Analysts expect VZ’s revenue for the quarter ending March 31, 2023, to increase 1.2% year-over-year to $33.95 billion. For fiscal 2024, its EPS is expected to increase 1.6% year-over-year to $4.76. It surpassed the Street EPS estimates in three of the trailing four quarters. Over the past three months, the stock has declined 2.3% to close the last trading session at $36.55.
VZ’s POWR Ratings reflect solid prospects. The company has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a B grade for Value and Stability. It is ranked #4 out of 19 stocks within the Telecom – Domestic industry. Click here to see the additional ratings of VZ for Growth, Momentum, Sentiment, and Quality.
Amgen Inc. (AMGN)
AMGN is a biotechnology company that discovers, develops, manufactures, and delivers various human therapeutics. It focuses on inflammation, oncology/hematology, bone health, cardiovascular disease, nephrology, and neuroscience areas.
On December 12, 2022, AMGN announced that it was acquiring Horizon Therapeutics for approximately $27.80 billion. AMGN’s Chairman and CEO Robert A. Bradway said, “The acquisition of Horizon is a compelling opportunity for Amgen and one that is consistent with our strategy of delivering long-term growth by providing innovative medicines that address the needs of patients who suffer from serious diseases.”
“Additionally, the potential new medicines in Horizon’s pipeline strongly complement our own R&D portfolio. The acquisition of Horizon will drive growth in Amgen’s revenue and non-GAAP EPS and is expected to be accretive from 2024,” he added.
AMGN pays an $8.52 per share dividend annually, which translates to a 3.77% yield on the current share price. Its four-year dividend yield is 2.89%. The company’s dividend payouts have grown at CAGRs of 10.1% and 10.8% over the past three years and five years, respectively. AMGN is expected to pay a quarterly dividend of $2.13 per share on June 8, 2023.
In terms of the trailing-12-month gross profit margin, AMGN’s 75.66% is 36.6% higher than the 55.40% industry average. Likewise, its 51.23% trailing-12-month EBITDA margin is significantly higher than the industry average of 3.39%. Furthermore, the stock’s 0.42x trailing-12-month asset turnover ratio is 22.7% higher than the industry average of 0.34x.
For the fiscal year ended December 31, 2022, AMGN’s total revenues increased 1.3% year-over-year to $26.32 billion. Its non-GAAP operating income rose 21.3% over the prior-year period to $12.76 billion. The company’s non-GAAP net income increased 20% year-over-year to $9.57 billion. Also, its non-GAAP EPS came in at $17.69, representing an increase of 27.1% year-over-year.
For fiscal 2023, analysts expect AMGN’s EPS and revenue to increase 0.8% and 1.5% year-over-year to $17.84 and $26.71 billion, respectively. It surpassed the Street EPS estimates in three of the trailing four quarters. Over the past year, the stock has declined 2.5% to close the last trading session at $225.79.
AMGN’s POWR Ratings reflect solid prospects. The stock has an overall A rating, equating to a Strong Buy in our proprietary rating system.
It has an A grade for Quality and a B for Value and Stability. It is ranked #8 out of 400 stocks in the Biotech industry. To see the other ratings of AMGN for Growth, Momentum, and Sentiment, click here.
International Business Machines Corporation (IBM)
IBM is a technology company engaged in providing hybrid cloud and artificial intelligence (AI) solutions. It offers integrated solutions and products that use data and information technology (IT) in industries and business processes. The company operates through four business segments: Software, Consulting, Infrastructure, and Financing.
On February 8, 2023, IBM announced the acquisition of StepZen, Inc. StepZen has developed a GraphQL server that helps developers build GraphQL APIs with less code and faster time to value. The acquisition complements IBM’s organic development in key areas, including integration, API management, data fabric, and data management.
IBM pays a $6.60 per share dividend annually, which translates to a 5.23% yield on the current share price. Its four-year dividend yield is 4.93%. The company’s dividend payouts have grown at CAGRs of 2.2% and 2.9% over the past three years and five years, respectively.
In terms of the trailing-12-month EBIT margin, IBM’s 12.50% is 112.6% higher than the 5.88% industry average. Likewise, its 20.43% trailing-12-month EBITDA margin is 82.2% higher than the industry average of 11.22%. Furthermore, the stock’s 16.04% trailing-12-month levered FCF margin is 135.4% higher than the industry average of 6.81%.
IBM’s total revenue for the fiscal year ended December 31, 2022, increased 5.5% year-over-year to $60.53 billion. Its non-GAAP gross profit rose 3.6% year-over-year to $33.37 billion. The company’s income from continuing operations increased 16.1% year-over-year to $8.33 billion. In addition, its non-GAAP EPS came in at $9.13, representing an increase of 15.1% year-over-year.
Analysts expect IBM’s revenue for the quarter ending March 31, 2023, to increase 1% year-over-year to $14.34 billion. Its EPS for fiscal 2023 is expected to increase 3.9% year-over-year to $9.49. Over the past month, the stock has declined 5.7% to close the last trading session at $126.16.
IBM’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, translating to a Buy in our proprietary rating system.
It has a B grade for Growth and Quality. Within the Technology – Services industry, it is ranked #19 out of 80 stocks. Click here to see the other ratings of IBM for Value, Momentum, Stability, and Sentiment.
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VZ shares rose $0.10 (+0.27%) in premarket trading Friday. Year-to-date, VZ has declined -5.55%, versus a 2.63% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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