Investing

5 Contrarian Dividend Stocks to Buy as Market Rips to All-Time Highs

Lee Jackson

Published: February 13, 2020 6:50 am

Every day it seems that the market hits new all-time highs. Most targets for the S&P 500 from the start of the year have been blown through already, forcing Wall Street strategists to lift their targets higher, and we are in mid-February. One huge reason for the gains is an end-of-cycle blow-off that is being driven by the dreaded FOMO (the fear of missing out).

In addition, with active managers getting crushed by passive investing, they are now chasing performance by adding the FANG stocks and Microsoft, which is helping to drive indexes even higher.

We decided to screen the sectors that have underperformed since last fall, which include materials, industrials and energy. We then cross-screened those sectors in the Merrill Lynch research universe database looking for Buy-rated stocks that are liquid and would participate in global growth of gross domestic product. We found five that offer long-term growth and income investors some outstanding value now.

Caterpillar

This large-cap leader was hit by trade worries in 2019 and is offering a very solid entry point. Caterpillar Inc. (NYSE: CAT) is the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. It is also one of the most valuable brands in the world.

The company principally operates through three primary segments (Construction Industries, Resource Industries and Energy & Transportation). It also provides financing and related services through its Financial Products segment.

Fourth-quarter results may have been the catalyst for investors to get off the bench and start adding shares. The analysts said this:

Investor expectations were definitely much lower than consensus, but the EPS outlook of $8.50-10 was still about 5% below that. Decks could finally be cleared for some EPS upside in 2020 if our lead indicators are correct, and trends start to improve. Caterpillar has more work to do on dealer destocking, but the quarter was actually OK helped by 2.4% of margin expansion for Energy and Transportation.

Shareholders receive a 3.03% dividend. Merrill has a $150 price target for the stock, while the Wall Street consensus target is $146.59. Caterpillar stock closed Wednesday at $139.50, up 2.5% on the day.

ConocoPhillips

This stock may offer solid upside potential, and the company recently gave investors a massive dividend increase. ConocoPhillips (NYSE: COP) explores for, produces, transports and markets crude oil, bitumen, natural gas, liquefied natural gas and natural gas liquids worldwide.

Conoco’s portfolio includes resource-rich North American tight oil and oil sands assets; lower-risk legacy assets in North America, Europe, Asia and Australia; various international developments; and an inventory of conventional and unconventional exploration prospects.

Many Wall Street analysts feel Conoco can accelerate growth from a reloaded portfolio depth in the Bakken and Eagle Ford, with visibility on future growth from a sizable position in the Permian.

The company reported fourth-quarter profits of $0.76 per share, which was 37 cents lower than in the same quarter last year. Earnings of $0.80 per share for the quarter were anticipated by 19 analysts providing estimates. The company also reported revenue of $8.14 billion, which was higher than the estimated $7.71 billion.

Investors receive a 2.86% dividend. The massive $80 Merrill Lynch price target compares to the $74.17 consensus estimate. ConocoPhillips stock closed up almost 2% on Wednesday at $59.76.

DuPont

This is the ultimate old-school company, though it has gone through a vast metamorphosis over the past few years, and offers an outstanding entry point. DuPont de Nemours Inc. (NYSE: DD) is the former Specialty Products segment of DowDuPont, a diversified specialty chemical company.

DuPont operates through four primary reporting segments: Electronics & Imaging, Nutrition & Biosciences, Transportation & Advanced Polymers and Safety & Construction. These businesses are allocated based on process technology, product application and end-market exposures.

The company posted less than stellar results, but the Merrill analysts say it offers a great entry point for a quality company. They noted this:

Operational performance in DuPont’s fourth quarter was soft as margins missed our estimates across three of the four reporting segments. 2020 EPS guidance range of $3.70 – $3.90 falls below our below consensus estimate of $3.90/share. However share price already discounts poor operating performance, we see opportunity at these levels.

Shareholders receive a 2.25% dividend. The Merrill price objective is a stunning $72, in line with a $72.82 consensus target. DuPont stock closed at $53.55.

LyondellBasell

This top chemical company with a sterling balance sheet is another solid play for conservative investors. LyondellBasell Industries N.V. (NYSE: LYB) manufactures chemicals and polymers, refines crude oil, produces gasoline blending components and develops and licenses technologies for production of polymers. After getting crushed in the late summer, the stock has rallied back nicely.

Over half of earnings are generated in the company’s Olefins and Polyolefins Americas segment, where costs are linked to the price of cheap natural gas in the United States, while selling prices are correlated with the price of oil. The company has pursued a strategy of low-cost, high return on invested capital debottlenecks coupled with cash returns to shareholders.

Note that debottlenecking is the process of identifying specific areas or equipment in oil and gas facilities that limit the flow of product (known as bottlenecks) and optimizing them so that overall capacity in the plant can be increased.

Results were slightly below street expectations, but the analysts remain very positive:

Fourth quarter came in below expectations largely due to significant PE margin pressure. We are lowering our EBITDA estimates, and our price objective, but maintain our Buy as the stock has de-risked in line with our estimates. Though Chinese capacity remains a threat to price, we note that the company is building a substantial position in the region.

LyondellBasell offers investors a 4.92% dividend. Merrill lowered its $104 price target to $90. The consensus target is $98.16, and shares rose almost 2% on Wednesday to $85.61.

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Valero Energy

This Wall Street and Merrill Lynch favorite is a solid energy play for more conservative balanced accounts. Valero Energy Corp. (NYSE: VLO) is the largest independent petroleum refining and marketing company in the United States. It is based in San Antonio, Texas; owns 13 refineries in the United States, Canada and Europe; and has a total throughput capacity of around 2.5 million barrels per day.

Valero also is a joint venture partner in Diamond Green Diesel, which operates a renewable diesel plant in Norco, Louisiana. Diamond Green Diesel is North America’s largest biomass-based diesel plant.

Valero sells its products in the wholesale rack or bulk markets in the United States, Canada, the United Kingdom, Ireland and Latin America. Approximately 7,400 outlets carry Valero’s brand names.

Valero posted very solid fourth-quarter results and the analysts said this late last month:

Fourth quarter strong results, were led by a jump in gulf coast margin capture, validates the company as our preferred name for IMO exposure. Valero is one of the few refiners with both the kit and the geography to exploit discounts in high sulfur feedstock. In our view, IMO will likely create a surplus of high sulfur products that will take time to absorb. Reiterate Buy rating.

The dividend yield is 4.65%. Merrill Lynch has set a $108 price target, and the consensus target is right in line at $108.82. Valero Energy stock closed at $85.04 on Wednesday.

These five top stocks are way down from 52-week highs, pay solid dependable dividends and offer investors a way to play the energy and industrial/cyclical underperformance with a much lower risk profile. For balanced accounts looking for growth and income, these are outstanding picks, especially at the top of the market.