Earnings Season Shows What to Buy for Dividends & Growth
April 25, 2019
Each quarter in the US, public companies enter earnings season. And much like the calendar seasons, companies in varied industries will show whether they are in bloom or not.
We’re right in the thick of reporting season—this is the busiest week for earnings so far. At this point, 190 companies out of the 505 members inside the S&P 500 Index have turned in their report cards.
Overall, the news is OK. Sales growth on average across the varied sectors is up by 4.70%. And earnings growth is up by 3.38% on average for the quarter. These numbers are down from last year when sales gains were near 10% and earnings were expanding at a rate above 20% in the second quarter.
This slowdown is what the stock market was fearing—along with the threat of an aggressively tightening Federal Reserve—during the fourth quarter last year before hitting a bottom on Dec. 24.
The S&P has risen dramatically since then—up 24.05%, or 24.86% including dividends. This comes with a Fed that has remained on the sidelines, a bond market that’s credit friendly and expectations for improvements in quarterly revenue and earnings growth for the current and remaining quarters of 2019.
S&P 500 Index Summary of Revenue & Sales Growth & Expectations—Source: Bloomberg Finance, L.P.
There are plenty of companies left to report. But there are some sectors that are leading in sales growth and showing impressive earnings expansion. In these sectors, there are some quality dividend-paying stocks that are solid buys for income now and growth to follow.
Industrial companies show sector gains in revenue of 5.04%, with earnings gaining at 3.12%. This comes as companies are providing goods for the expanding economy. One to take a look at is United Technologies (UTX).
United Technologies is continuing its plan to separate its aviation and industrial units from its HVAC (Carrier) and building systems (Otis) units. This will unlock more value in the underlying stock prices for the proposed free-standing or sold units.
In the meantime, trailing annual revenues are up by 11.10%, with operating margins running at 12.90%. Lots of cash and little debt—the shares are a bargain. The dividend should be better. But, at 2.10%, it’s good enough.
Healthcare companies show revenue gains of 4.18% and earnings gains of 7.65%. This is not surprising given the graying of America and these firms’ pricing power.
Drug companies were strong market performers last year, including during the fourth quarter, before slipping in April. Merck (MRK) is one of the leaders and will report on April 30.
I see further improvement in its income statement, including its impressive operating margins. It pays a dividend of 2.90%, with further price gains to come.
The utilities sector was also a good performer last year—particularly during the challenging fourth quarter. The balance between reliable regulated service revenue and growth from their unregulated businesses makes for income and growth through thick and thin.
So far, the sector has reported sales gains of 1.68% and earnings gains of 11.58%. One of my favorites in a collection of good utilities is NextEra Energy (NEE).
The regulated provider of services for Florida coupled with its massive unregulated alternative energy business has been great for investors.
It just reported this week, and revenues are up 5.49% on a GAAP (generally accepted accounting principal) basis. Operating profit is up 8.40%. Yielding 2.62%, it makes for a great buy for income and growth.
Real estate investment trusts (REITs), like utilities, were the reliable performers last year and into this year. And the segment shows revenue gains so far of 2.30%, with earnings gains of 9.56%.
One to look at in this sector is American Campus Communities (ACC), which owns properties for university facilities and residences.
It just reported revenue gains of 9.93% and operating profit gains of 17.04%. Yielding 3.89% and projected to increase its distribution for the next payout, it makes for an attractive buy here.
Just a Sampling
While I’ve identified a collection of dividend-paying stocks in industries with improving revenues and earnings above, I have many additional opportunities with even more dividend income in my Profitable Investing advisory.
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