Today I am reviewing 6 Dow stocks to buy on the dip. They might be able to produce excellent returns for the long-term investor. The main reasons are they have low valuations, good earnings growth, and high dividend yields.
The Dow Jones Industrial Average (DJIA) is down 14.74% YTD, not including dividends paid out, as of July 13. These six stocks have done better than that.
The Index is market-cap-weighted. So for example, this is not a median or even a mean average performance. It means the average performance is heavily skewed by the larger stocks. The stocks that beat this average may be smaller than the average market cap, which may give them a slight advantage.
Source: Mark R. Hake, CFA
But we are interested in the low P/E multiple Dow stocks with good earnings growth, and dividend yield. The average P/E of the stocks in this group is just 11.8x and their dividend yield is 3.43%. Over the long term that should give investors a good performance.
Let’s dive in and look at these stocks.
The Travelers Companies, Inc
Merck & Co.
International Business Machines
Chevron Corp (CVX)
Source: tishomir / Shutterstock.com
Market Cap: $275.7 billion
Chevron Corp (NYSE:CVX) has a forward price-to-earnings multiple of just 7.8x for 2022 and slightly higher for 2023 at 8.6x. Moreover, the oil company’s dividend yield is very attractive at 4.09% at today’s price of $140.56(July 13).
The company recently raised its dividend to $1.42 per quarter, with the third payment at this level likely to be declared at the end of July. In fact, it has raised its dividend per share every year for the past six years. This should give investors confidence that it will likely do so again in January 2023.
The truth is that if the world is really in a recession, it is not likely to be as extensive as the last one. But the stock price seems to reflect that worry. In fact, CVX stock is down 19% in the past 30 days.
TipRanks reports that the average price target of 14 analysts is $179.79. This is 28.3% over today’s price. That presents an ideal opportunity for value investors to buy CVX. It is one of the best Dow stocks to buy on the dip.
The Travelers Companies (TRV)
Market Cap: $39.4 billion
The Travelers Companies, Inc (NYSE:TRV) is an almost $40 billion market cap property and casualty company with excellent earnings growth. This year it is forecast to make $13.23, which is below the $13.94 earnings per share (EPS) last year. But for 2023, analysts forecast EPS will rise over 10% to $14.77.That lowers its 12.5x multiple this year to just 11.2x for next year.
Moreover, the company recently hiked its dividend to 5.68% to 93 cents quarterly or $3.72 annually. The gives TRV stock, at $164.45 an annual dividend of 2.21%.
The company has a combined ratio of 91.3% as of Q1 2022. That is a very important and common measurement used in the P&C insurance business. Any ratio below 100% is desirable, as it indicates that the company’s operating and insurance result expenses are below the amount of premium revenue it is collecting. It also means that its investment income can help power the earnings higher.
Moreover, its adjusted book value grew over 11% in the past year to $112.19. So at today’s price of $$164.45, it is trading for just 1.59x adj. book value.
The company is also very shareholder-friendly as it has been buying back shares. Last quarter it spent $559 million on share repurchases, putting it on a $2.236 billion annualized buyback run rate. That works out to 5.55% of its 40.25 billion market valuation.
This is a very good return for long-term shareholders, as it will allow TRV to raise its dividends and earnings per share. No wonder the stock is down just 1.8% in the last 30 days, a significantly better performance than most other DJIA stocks.
Merck & Co. (MRK)
Source: Atmosphere1 / Shutterstock.com
Market Cap: $93.55 billion
Merck & Co. (NYSE:MRK) is a stable earnings pharmaceutical company that is cheap at just 12.7x earnings. It generates a large amount of free cash flow (FCF), almost $13 billion in the last 12 months (LTM) ending March. which works out to about 23.6% of its $54 billion in sales in the LTM period to March.
Merck uses that FCF to pay a healthy dividend of $2.95 per share to shareholders. That gives the stock, at $93.56, a dividend yield of 2.93% going forward. Moreover, it has hiked its dividend in every year in the past 12 years, so shareholders can count on that happening again.
Moreover, Merck also uses its FCF to buy back stock as well as make acquisitions and pay down debt. This makes MRK stock one of the best Dow stocks to buy on the dip. So far that has not happened. The stock is actually up over 8.8% in the last 30 days. But long term investors should be on the lookout for an opportunity to dollar-cost average in the stock.
American Express (AXP)
Market Cap: $102.96 billion
American Express Company (NYSE:AXP) trades for just 14.3x earnings. However, analysts forecast that its 2023 earnings are likely to rise 14.8%. That will lower the P/E to just 11.3x.
Moreover, American Express pays a growing dividend that results in a 1.49% dividend yield. This is because it produces a large amount of free cash flow (FCF) by only allowing the highest-quality borrowers to use its cards. Last quarter it generated over $3.433 billion in FCF, which was over 29% of its Q1 $11.768 billion in revenue.
In addition, American Express has a very healthy share buyback program. Last quarter it spent over $1.5 billion in share repurchases. That works out to $6.1 billion annually or 5.7% of its $106.75 billion market valuation.
AXP stock is down 11.3% in the last 30 days. All of these factors make AXP one of the best Dow stocks to buy on the dip.
Int’l Business Machines (IBM)
Market Cap: $122.9 billion
International Business Machines (NYSE:IBM) is very cheap at just 14x forecasts for this year’s earnings. Moreover, analysts forecast an 8.8% growth next year in EPS which lowers its P/E to just 13.1x.
In addition, IBM pays a healthy dividend of $6.6, which it just raised. In fact, the company has a consistent record of raising its dividend every year for the past 23 years. This gives IBM an attractive dividend yield of 4.68% now, at its price of $137.14 on July 13.
Just like American Express Co, which has the same stock price, IBM produces a large amount of FCF. It generated almost $3 billion in FCF last quarter (slightly lower than American Express’s $3.4 billion). However, unlike AXP, IMB uses most of its FCF to pay a high dividend to shareholders. It spent almost half ($1.475 billion) on dividend payments.
Source: Ken Wolter / Shutterstock.com
Market Cap: $212.0 billion
Verizon uses its roughly $1 billion quarterly FCF ($4 billion annually) to pay its healthy dividend. That works out to 2% of its annual market cap. Since this is lower than its 5% dividend yield, the company has been borrowing to cover the dividend. It must expect that earnings will turn around significantly in order to allow it to keep doing this.
Otherwise, it may have to lower the dividend. If that happens, there will be a huge dip in the stock. Investors should be careful there and possibly wait for that dip to happen first before buying VZ stock.
On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.