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Motley Fool Issues Rare “All In” Buy Alert
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With the broader indices hovering around their 52-week lows, investors are likely wondering when the market will stop going down. And although no one knows when the sell-off will end, it can be comforting to know that bear markets tend to be some of the best buying opportunities for patient investors.
One of the simplest ways to outlast a bear market is to do nothing. But that's easier said than done. However, dividend stocks incentivize patience by providing passive income without the need to sell stock. Cummins (CMI -1.24% ) , Allegion PLC (ALLE -2.11% ) , and Watsco (WSO -3.62% ) stand out as three excellent companies that also pay growing dividends.
Investing in equal parts of each stock produces a dividend yield of 2.8% -- which isn't a particularly high yield. However, each of these companies more than makes up for a lower yield with consistency. Here's what makes each company a good buy now.
Daniel Foelber (Cummins): Cummins is one of the largest industrial machinery manufacturers in the U.S. Unlike companies like Deere or Caterpillar that provide full packaged solutions in construction, agriculture, and other industries (like the software and hardware for a tractor or an excavator), Cummins specializes in engines, powertrains, and components. Its engines are mainly used in the transportation sector through trucking, light-duty automotive, and off-highway applications. It also has a large aftermarket segment, provides emissions solutions, and is involved in power generation through integrated power systems and generators.
In Q2 2022, 58% of sales were in the U.S. and Canada. But the company has a global distribution network that spans around 190 countries and territories. Due to the nature of its business and its international exposure, Cummins' performance can be cyclical. But the company looks like a great buy for long-term investors.
Cummins sees an ample opportunity in decarbonizing the industries it serves. The company was early to the "net-zero by 2050" trend. In fact, it launched its Planet 2050 strategy in November 2019, which was ahead of its industry peers. In addition to its 2050 net-zero pledge, the company has several goals it wants to accomplish by 2030, such as generating 25% less waste in facilities and operations, reusing or recycling 100% of packaging plastics, and eliminating single-use plastics.
Cummins was founded over 100 years ago, so it has plenty of experience that can be instrumental in developing and implementing low-carbon solutions. There's no denying that the transportation segment remains heavily dependent on diesel and is a primary contributor to greenhouse gas emissions. Transitioning its legacy diesel and natural gas business toward alternative fuels and hydrogen will take time. But Cummins is one of the best-positioned companies to make that transition a reality. Down 26% from its all-time high, the company has just a 14.3 price-to-earnings ratio and a dividend yield of 3.1%, making it an inexpensive stock that can provide a reliable passive income stream.
Lee Samaha (Allegion): The doors, locks, and access system controls company's stock is down a whopping 40% from its all-time high. However, falling stock prices often create good buying opportunities, and Allegion currently trades at a rarely seen valuation. This chart shows its enterprise value (market cap plus net debt) to earnings before interest, taxation, depreciation, and amortization (EBITDA) valuation.
The reason why Allegion usually trades on a higher valuation multiple comes down to the convergence of mechanical and electrical security products. The increasing adoption of electronic and wireless-enabled locks and doors brings significant benefits to users. For example, with digitally interconnected locks, commercial building managers can monitor, control, and grant access to personnel within a building. This helps increase security and productivity and can cut back on theft. Similarly, the proliferation of digital technology can increase accessibility in the home environment without a corresponding security compromise.
Meanwhile, the addition of Stanley Black & Decker's access technologies (security doors) adds complementary solutions to Allegion's existing doors, locks, and security software.
Trading on less than 15 times estimated 2023 earnings, Allegion looks like a good value stock, and investors can enjoy a 1.8% dividend yield while they wait for Allegion's long-term growth prospects to be realized.
Scott Levine (Watsco): With the first days of autumn upon us, turning on the air conditioning is most likely not the thing on most people's minds right now. But that doesn't mean that it's not worth taking a look at a leader in heating, ventilation, and air conditioning (HVAC) like Watsco -- especially considering the fact that the market has cooled on bidding the stock higher in 2022. Down 19% from its all-time high, shares of Watsco are currently on sale, making it a smart choice for investors who can keep a cool head while this HVAC stock and its forward-yielding dividend of 3.3% remains out of favor.
Skeptics may question the appeal of a stock that has plunged nearly 20% in 2022. But savvy investors know that some of the most profitable investments are made when equities are out of favor. And being out of favor seems to be the situation that Watsco finds itself in -- not some fundamental flaw in the company's business.
Besides the overall bearish sentiment pervading the market recently, the decline in Watsco's stock can be attributed to the company coming up short of analysts' second-quarter 2022 revenue and earnings per share estimates. An analyst's downgrade of the stock in June, moreover, provided fodder for the bears to click the sell button.
Taking the long view, however, investors will find that Watsco has outperformed the market considerably. Over the past 10 years, for example, the S&P 500 has provided a total return of 214%, while Watsco has provided a total return of more than 403%. Watsco's resilient business model is illustrated by its strong presence in providing aftermarket products; for example, the company has relationships with more than 1,200 original equipment manufacturers and suppliers. With the installed base of HVAC units rising at a compound annual growth rate of 3.5% since 1980, there are plenty of opportunities for Watsco to provide replacement parts.
Naturally, the stock's previous performance doesn't mean that it will continue to trounce the S&P 500 in the same way, but then again, there's no such guarantee with any stock. Management's track record of success and dedication to rewarding shareholders, as well as the company's strong balance sheet, suggests that Watsco is a smart consideration for income investors right now.
Daniel Foelber has no position in any of the stocks mentioned. Lee Samaha has no position in any of the stocks mentioned. Scott Levine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Watsco. The Motley Fool recommends Cummins and Deere & Company. The Motley Fool has a disclosure policy.
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