How Did These 3 Great Post-Brexit Buys Perform After the Dust Settled?
After Brexit, it was time to buy some great dividend stocks at a discount. Have they lived up to their promise since the Brexit route?
The Brexit wasn't all that it was hyped up to be. The financial world did not collapse. Doom and gloom did not win the day. Instead, stocks rebounded. Level-headed investors were presented with an opportunity to buy into great blue-chip businesses at a discount.
Fear over "what if" scenarios can scare markets. Many investors became so caught up in the hype of the Brexit they forgot to ask what would actually happen if the United Kingdom did leave the European Union. The answer: Not a whole lot. At least not yet.
Not unless you're a savvy investor, in which case you could have done very well. Here are how the three top dividend stocks I picked post-Brexit did after their initial swoons.
Brexit Winner No. 1: Eaton (ETN) - Get Report
Shares of Eaton closed at $55.57 on June 27. As of the market closing on Friday, July 8, the stock has gained 11.4%. Gains of 11.4% in just 8 trading days do not come around often.
Eaton shares surged as the market recovered from its post-Brexit pessimism. It's easy to see why investors have jumped back into Eaton.
The first thing that stands out about the stock is its above average 3.7% dividend yield. The S&P 500 currently yields just 2.1%, for comparison.
Eaton's payout ratio is reasonable at 54%. The company's sensible payout ratio protects investors from potential dividend cuts if earnings were to fall somewhat in the future. High yield stocks with reasonable (or better yet, low) payout ratios have historically performed very well.
Eaton also has a low price-to-earnings ratio of 15.0. The company's forward price-to-earnings ratio is even lower at 13.5. For comparison, the S&P 500 is currently trading for a price-to-earnings ratio of 24.8. Eaton is trading at a sizable discount to the market despite its recent price run up.
Company's with lower price-to-earnings ratios should carry more risk or have lower return potential than stocks with higher price-to-earnings ratios, all things considered.
The market appears to have unfairly appraised Eaton with a low price-to-earnings ratio.
Eaton has a long history of success. The company has paid steady or increasing dividends for 33 consecutive years. The company has also grown its earnings-per-share at around 6% a year over the last decade. Eaton's historical earnings-per-share growth rate combined with its dividend yield gives investors expected total returns of nearly 10% a year going forward.
Eaton should appeal to dividend investors looking for exposure to the electrical and industrial manufacturing industry.
Brexit Winner No. 2: Caterpillar (CAT) - Get Report
Caterpillar's share price has increased 5.9% from market close price on June 24 through July 8. The company's stock has certainly benefited from the post Brexit bounce.
Caterpillar is the global leader in manufacturing construction equipment. The company was founded 91 years ago, in 1925. Today, Caterpillar has a market cap of $43.82 billion.
The company should appeal to investors looking for consistently high-paying dividend stocks thanks to its 4.0% dividend yield.
At first glance, Caterpillar's future dividend payments seem in question. The company has an unsustainably high payout ratio of 142%. A payout ratio over 100% means the company is paying out more in dividends than it is making in earnings. Obviously, this can't happen for long.
On closer expectation, however, Caterpillar's dividend is not in any danger. GAAP earnings make the company's dividend look unsustainable, but adjusted earnings tell a different story.
Caterpillar has adjusted earnings-per-share over the last 12 months of $3.43. The company is currently paying out a dividend of $3.08 per share, for a payout ratio (using adjusted earnings) of 90%. While high, this is a sustainable payout ratio. Caterpillar's adjusted earnings do not take into account restructuring costs -- of which the company has quite a lot of due to cost cutting.
The reason Caterpillar is cutting costs is because the company is in a cyclical trough. Caterpillar's earnings fluctuate with demand for construction equipment, mining equipment, and agricultural equipment. Unfavorable macroeconomic trends have temporarily depressed earnings.
Caterpillar will see its earnings-per-share surge when macroeconomic trends go in its favor (which they will eventually). The company's payout ratio will fall significantly when this occurs.
Caterpillar has a long history of rewarding investors with dividends. The company has paid steady or increasing dividends for 33 consecutive years.
Brexit Winner No. 3: American Express (AXP) - Get Report
American Express is one of the largest credit companies in the world. The company was founded in 1850 in Buffalo, N.Y. by Henry Wells and William Fargo.
Do those last names sound familiar? They should -- Wells and Fargo founded another S&P 500 corporation: Wells Fargo.
Wells Fargo is a holding in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. See how Cramer rates the stocks here. Want to be alerted before Cramer buys or sells WFC? Learn more now.
It's interesting to note that both American Express and Wells Fargo are long-time Warren Buffett holdings. Both are members of his 20 highest-yielding stocks.
American Express shares have gained 6.6% (not including American Expresses' June 29 dividend payment) from the market close on June 27 (the height of Brexit fears) through the market close on July 8. Despite solid gains, American Express stock still looks cheap -- especially for a high quality business with a strong reputation-based competitive advantage.
American Express is currently trading for a price-to-earnings ratio of 12.3. The company's forward price-to-earnings ratio is even lower at 11.1. American Express is trading for less than half of the S&P 500's current price-to-earnings ratio of 24.8.
The company's dividend yield is a bit underwhelming at 1.9%, but it's payout ratio is very low at just 23%.
American Express has compounded its earnings-per-share at 7.0% a year over the last decade. American Express' long corporate history shows that it offers a timeless product; namely, credit.
How likely is it that consumers stop buying on credit? In my estimation, very unlikely. The more consumers in general (especially in the United States) demand to buy things on credit, the more American Express will grow.
The company has built a well-known and trusted brand. It extracts a small percentage of every transaction when card holders use its credit cards. This business model and brand based competitive advantage are likely why Warren Buffett has held American Express since the 1960's.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.