As inflation climbed higher than economists’ anticipation, equities signal extreme volatility and dashing hopes of a Fed pivot. With the likelihood of a downturn in upcoming months, adding more of fundamentally sound Dow stocks Walmart (WMT), Cisco Systems (CSCO), and McDonald’s (MCD) could help garner significant returns. Keep reading….
So far this year, the stock market has been seesawing amid growing concerns over a Fed-induced recession and other macro uncertainties. Thus, we think investing in Dow-listed blue-chip stocks Walmart Inc. (WMT), Cisco Systems, Inc. (CSCO), and McDonald’s Corporation (MCD) this month could help cushion one’s portfolio against market risks by generating a steady income stream.
The major market indexes have been experiencing high volatility lately due to investors’ concerns over rising inflation, the possibility of further aggressive interest rate hikes, and a looming recession. The Dow Jones Industrial Average (DJIA) is down by 3.5% over the past three months.
Despite robust retail figures and labor data, results point to persisting inflationary pressures that could eventually give birth to a recession. The overall Personal Consumption Expenditures (PCE) index advanced 5.4% year over year, beating expectations.
As evidenced by the hawkish tone of the minutes, the Fed’s fight against inflation has signaled larger rate hikes in the coming months. Last week, Cleveland Fed President Loretta Mester said that the central bank would need to bring its fund rate above 5% and keep it there. “Setting aside what financial market participants expected us to do, I saw a compelling economic case for a 50 basis-point increase,” she added.
Some experts anticipate that such persistent interest rate hikes could trigger a recession. Economist David Rosenberg recently renounced investors’ hopes for a “no landing” scenario. He said that the idea that the United States can maintain strong growth while avoiding a recession or a slowdown is a “fairy tale.’
Amid such pessimism, the stock market will likely remain volatile for some time now. Hence, it might be wise to invest in fundamentally sound dividend-paying stocks WMT, CSCO, and MCD to weather the probable recession by generating a steady income stream.
Walmart Inc. (WMT)
Retail giant WMT operates supercentres, supermarkets, hypermarkets, warehouse clubs, cash and carry stores, discount stores, membership-only warehouse clubs, and e-commerce websites, including walmart.com and Walmart.com.mx flipkart.com, and others. The company operates through three segments: Walmart U.S.; Walmart International; and Sam’s Club.
Recently, Citi collaborated with WMT to introduce the Bridge built by Citi® platform to its 10,000 small- and medium-sized businesses (SMBs) in its U.S.-based supplier network. By leveraging this platform, WMT’s suppliers can have better access to capital through a network of over 70 lenders, which includes 20+ diverse financial institutions. This is expected to boost the company’s long-term growth prospects.
On January 12, Walmart Commerce Technologies and Walmart GoLocal announced a partnership with Salesforce Inc. (CRM) to give retailers access to the tools and services that enable frictionless local pickup and delivery for customers globally.
Last year in December, WMT Canada announced its plans to open a first-of-its-kind distribution center in Quebec in addition to two distribution centers that opened earlier that year. Another distribution center in Mexico is strengthening its logistics and supply chain networks across the entire Southeast region.
Such investments in infrastructure, logistics, and supply chains should enable the company to bolster its distribution networks and offer a brisker shopping experience to its customers.
On February 21, the company raised its annual dividend by 2% to $2.28 per share, marking the 50th consecutive year of dividend increase. WMT’s four-year average dividend yield is 1.67%, and its forward annual dividend of $2.28 translates to a 1.61% yield on prevailing prices. Its dividend has grown at a 1.8% CAGR over the past three years and a 1.9% CAGR over the past five years.
The stock’s trailing-12-month ROCE of 14.60% is 48.2% higher than the 9.85% industry average. Likewise, its trailing-12-month ROTC of 8.71% is 41.2% higher than the industry average of 6.17%.
For the fiscal fourth quarter that ended January 31, 2023, WMT’s total revenues increased 7.3% year-over-year to $164.05 billion. Its adjusted operating income grew 6.3% from the year-ago value to $6.37 billion, while its adjusted EPS came in at $1.71, representing an increase of 11.8% year-over-year. Also, the company’s attributable net income stood at $6.28 billion, up 76.2% year-over-year.
Street expects WMT’s revenue for the first quarter (ending April 30, 2023) to increase 4.9% year-over-year to $147.26 billion. Its EPS is expected to increase by 3.7% per annum over the next five years. Moreover, the company surpassed the revenue estimates in each of the trailing four quarters, which is promising.
Shares of WMT have gained 10.6% over the past nine months and 5.2% over the past year to close the last trading session at $142.13.
WMT’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, translating to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It also has an A grade for Stability and a B for Growth, Value, Sentiment, and Quality. Among the 38 stocks in the A-rated Grocery/Big Box Retailers industry, it is ranked #3. Click here to see WMT’s rating for Momentum.
Cisco Systems, Inc. (CSCO)
CSCO designs, manufactures, and sells Internet Protocol-based networking and other communications and information technology products. In addition, it provides infrastructure platforms, including networking technologies of switching, routing, wireless, and data center products.
On February 27, the company partnered with Mercedes-Benz AG to provide an optimal mobile office experience in its new Mercedes-Benz E Class vehicles. The vehicles would be equipped with Webex Meetings and Calling and utilize Webex AI audio capabilities to enable greater flexibility for the hybrid workforce, along with modern luxury and intuitive features.
In the same month, CSCO introduced powerful new cloud management tools for industrial IoT applications, simplified dashboards to converge IT and OT operations, and flexible network intelligence to see and secure all industrial assets. With these new innovations, the company should be able to provide greater visibility and control over networks.
On January 31, CSCO exhibited its new range of collaboration devices for Microsoft Teams and unveiled the new Cisco Table Microphone Pro, a digital and multi-directional table microphone for hybrid workspaces, along with audio interoperability advancements.
Such innovations are expected to advance hybrid workers’ experience by delivering more inclusivity and choice for meetings while improving the manageability, configuration, and security required by IT.
On February 15, the company declared a quarterly dividend of $0.39 per common share, representing an increase of 3% from the previous quarter. This dividend is payable on April 5, 2023. It pays a $1.56 per share dividend annually, which translates to a 3.20% yield on the current price. Its four-year average dividend yield is 2.99%.
The company’s dividend payouts have grown at a 2.8% CAGR over the past three years and a 5.6% CAGR over the past five years. Moreover, CSCO has a record of 11 years of consecutive dividend growth.
CSCO’s trailing 12-month net income margin of 21.26% is 636.2% higher than the industry average of 2.89%. Likewise, the stock’s trailing-12-month EBIT margin and EBITDA margin of 26.58% and 29.74% compare to the industry averages of 6.17% and 11.28%, respectively.
For the fiscal second quarter that ended January 28, 2023, CSCO’s total revenue increased 6.9% year-over-year to $13.59 billion, and its gross margin grew 4.7% from the year-ago value to $8.43 billion. Its non-GAAP operating came in at $4.41 billion, up 1.1% year-over-year.
Furthermore, the company’s non-GAAP net income increased 2.6% year-over-year to $3.64 billion, while its adjusted EPS came in at $0.88, an increase of 4.8% year-over-year.
The consensus EPS estimate of $0.97 for the third quarter (ending April 30, 2023) represents an 11.6% improvement year-over-year. The consensus revenue estimate of $14.40 billion for the current quarter indicates a 12.2% increase from the prior-year period. The company has an excellent earnings surprise history, as it surpassed the consensus EPS estimates in each of the trailing four quarters.
It has gained 6.1% over the past nine months to close the last trading session at $48.42.
CSCO’s solid prospects are reflected in its POWR Ratings. The stock has an overall A rating, which equates to a Strong Buy in our proprietary rating system.
It also has an A grade for Quality and a B for Stability and Sentiment. Within the B-rated Technology – Communication/Networking industry, it is ranked #2 out of 49 stocks. Click here to see the additional ratings of CSCO (Growth, Value, and Momentum).
McDonald’s Corporation (MCD)
MCD operates and franchises McDonald’s restaurants owned and operated by independent local business owners. Famous for its hamburgers and cheeseburgers, the company also offers chicken sandwiches and nuggets, wraps, fries, salads, desserts, soft serve cones, soft drinks, coffee, and other beverages.
On February 3, the company declared a quarterly cash dividend of $1.52 per share of common stock payable to its shareholders on March 15, 2023. MCD’s four-year average dividend yield is 2.26%, and its forward annual dividend of $6.08 translates to a 2.31% yield on prevailing prices.
Its dividends have grown at 6.4% and 8.2% CAGRs over the past three and five years, respectively. The company has a record of 21 years of consecutive dividend growth.
MCD’s trailing 12-month net income margin of 26.65% is 457% higher than the industry average of 4.78%. Likewise, the stock’s trailing-12-month EBITDA margin, ROTC, and ROTA of 52.69%, 14.77%, and 12.25% compare to the industry averages of 11.34%, 6.38%, and 4.12%, respectively.
During the fourth quarter that ended on December 31, 2022, MCD’s revenues amounted to $5.93 billion. The company’s operating income grew 7.7% from the year-ago value to $2.58 billion. Its non-GAAP net income rose 13.3% year-over-year to $1.90 billion, while non-GAAP EPS came in at $2.59, indicating a 16.1% year-over-year increase.
For the fiscal second quarter (ending June 2023), MCD’s EPS is expected to increase 4.4% year-over-year to $2.66. Its revenue is expected to increase 6.5% year-over-year to $6.09 billion in the next quarter. MCD surpassed Street EPS estimates in each of the trailing four quarters.
Over the past year, the stock has gained 7.8% to close the last trading session at $263.91.
MCD’s POWR Ratings reflect its solid prospects. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. It has an A grade for Quality and a B for Stability and Sentiment.
Out of 45 stocks in the B-rated Restaurants industry, it is ranked #7. To see the other ratings of MCD for Growth, Value, and Momentum, click here.
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WMT shares were trading at $140.12 per share on Wednesday morning, down $2.01 (-1.41%). Year-to-date, WMT has declined -1.18%, versus a 3.17% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta’s profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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