Consumer sentiment has been buoyed by the recent cooldown in inflation and encouraging economic data. However, with interest rate hikes expected to continue, the risk of the economy tipping into a recession remains. Hence, fundamentally strong stocks Coca-Cola (KO), Merck & Co (MRK), and Valero Energy (VLO) that pay reliable dividends might be solid buys. Read on.
Easing inflation and a strong labor market are helping consumers feel better about the economy this month. Moreover, the preliminary consumer sentiment index released by the University of Michigan shows an upward movement.
While economists were expecting the headline index to increase slightly to 65, according to consensus estimates on Refinitiv, the preliminary consumer sentiment index for February rose to 66.4 from 64.9 in January, the university reported Friday.
On the other hand, the number of Americans filing new unemployment claims rose to 196,000 for the week ended February 4, the Labor Department said on Thursday, higher than the 190,000 expected by economists. However, the labor market is still tight.
The Federal Reserve Chair Jerome Powell recently said that the US central bank’s fight to tame inflation could last “quite a bit of time,” in a nod to January’s blowout job gains. Since March, the Fed has hiked its policy rate by 450 basis points from near zero to a 4.50%-to-4.75% range, and prolonged interest rate hikes might tip the economy into a recession.
The Coca-Cola Company (KO)
KO, the beverage giant company, manufactures, markets, and sells various non-alcoholic beverages worldwide. The company also provides sparkling soft drinks, flavored and enhanced water, sports drinks, juice, dairy, plant-based beverages, tea and coffee, and energy drinks.
In September 2023, KO and Molson Coors Beverage Company (TAP) expanded their exclusive agreement to develop and commercialize Topo Chico Spirited, a line of spirit-based, ready-to-drink cocktails. It is set to be launched in more than 20 markets across the country in 2023, which should benefit the company.
KO’s four-year average dividend yield is 3.06%, and its annual dividend of $1.76 translates to a 2.93% yield at the current price level. Its dividend payouts have grown at a 3.2% CAGR over the past three years and a 3.5% CAGR over the past five years. Also, the company has a record of 60 consecutive years of dividend growth.
KO’s non-GAAP net operating revenues increased 10% year-over-year to $11.05 billion in the fiscal third quarter that ended September 30. Its non-GAAP gross profit rose 6.5% from the prior-year quarter to $6.54 billion.
Also, the company’s non-GAAP net income increased 6.7% year-over-year to $3.01 billion, while its non-GAAP EPS came in at $0.69, representing an increase of 6.2% year-over-year.
Analysts expect KO’s EPS and revenue to increase 7.4% and 10.7% year-over-year to $2.49 and $42.80 billion, respectively, in the fiscal year 2022. It has surpassed the consensus EPS and revenue estimates in each of the trailing four quarters, which is impressive.
The stock has declined marginally intraday to close its last trading session at $59.62. It has a 24-month beta of 0.61.
KO’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, which equates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
KO is also rated an A for Sentiment and a B for Stability and Quality. Within the B-rated Beverages industry, it is ranked #15 of 37 stocks.
To see additional POWR Ratings for Value, Growth, and Momentum for KO, click here.
Merck & Co., Inc. (MRK)
MRK operates as a healthcare company worldwide. It operates through two segments: Pharmaceutical and Animal Health.
On January 27, MRK announced that the U.S. Food and Drug Administration (FDA) had approved KEYTRUDA, its anti-PD-1 therapy, as a single agent, for adjuvant treatment following surgical resection and platinum-based chemotherapy for adult patients with stage IB II, or IIIA non-small cell lung cancer. This should boost the company’s revenue streams.
While MRK’s annual dividend of $2.92 yields 2.69% on the prevailing price, its four-year average yield is 2.95%. The company has paid dividends for 12 consecutive years. Its dividend payouts have increased at 9.1% CAGR over the past three years.
MRK’s total sales rose 2.3% year-over-year to $13.83 billion for the fourth quarter that ended December 31, 2022. Its Pharmaceutical segment revenue increased marginally year-over-year to $12.18 billion. Its non-GAAP net income stood at $4.13 billion, and its non-GAAP EPS came in at $1.62.
MRK’s EPS and revenue are expected to come in at $7.18 and $58.28 billion for the current fiscal year, 2023. The company has surpassed the consensus EPS estimates in all four trailing quarters.
Over the past year, the stock has gained 41.8% to close the last trading session at $108.57. Its 24-month beta is 0.18.
It is no surprise that MRK has an overall rating of B, which equates to a Buy in our POWR Ratings system.
MRK has a B grade for Value, Stability, and Quality. MRK is ranked #20 out of 172 stocks in the Medical – Pharmaceuticals industry.
Beyond the POWR Ratings above, we have also given MRK grades for Growth, Sentiment, and Momentum. Get all MRK ratings here.
Valero Energy Corporation (VLO)
VLO manufactures, markets, and sells transportation fuels and petrochemical products. The company operates through its three broad segments – Refining; Renewable Diesel; and Ethanol.
On January 31, 2023, VLO and Darling Ingredients Inc. (DAR) announced that the companies had made the final investment decision on the sustainable aviation fuel (SAF) project at the DGD Port Arthur plant, owned and operated by Diamond Green Diesel Holdings LLC, a 50/50 joint venture between VLO and Darling.
After completion of the project in 2025, the plant will be able to upgrade approximately 50% of its 470 million gallons annual production capacity to SAF. Post-completion, DGD will be one of the largest SAF manufacturers in the world.
VLO’s Chairman and CEO Joe Gorder said, “This project is a natural extension of our liquid fuels manufacturing expertise and demonstrates our growth strategy through innovation in renewables.”
Moreover, on the same day VLO announced an increase in the company’s regular quarterly cash dividend on common stock from $0.98 per share to $1.02 per share. The dividend is payable on March 16, 2023.
VLO pays a $4.08 per share dividend annually, which translates to a 2.90% yield on the current price. Its dividend payments have grown at a CAGR of 2.5% and 6.4% over the past three and five years. The company has a four-year average dividend yield of 5.02%. Also, it has paid dividends for 25 consecutive years.
During the fourth quarter that ended December 31, 2022, VLO’s revenues increased 16.3% year-over-year to $41.75 billion. Its operating income rose 169.5% year-over-year to $4.30 billion. Adjusted net income attributable to VLO increased 226.6% year-over-year to $3.23 billion. In addition, its adjusted EPS came in at $8.45, representing an increase of 250.6% year-over-year.
Street expects VLO’s EPS to increase 189.6% year-over-year to $6.69 for the current quarter ending March 31, 2023. Its revenue is likely to rise 2.6% year-over-year to $39.54 billion for the current quarter. It has surpassed the consensus EPS estimates in each of the trailing four quarters.
Over the past year, the stock has gained 56.6% to close the last trading session at $140.73. VLO has a 24-month beta 0.51.
VLO’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system.
The stock has an A grade for Momentum and a B for Growth, Quality, Sentiment, and Value. Within the B-rated Energy – Oil & Gas industry, it is ranked #5 out of 91 stocks.
Click here to access VLO’s rating for Stability.
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KO shares were unchanged in premarket trading Monday. Year-to-date, KO has declined -6.27%, versus a 6.70% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor’s degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
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