Investor optimism increased considerably with moderating inflation rates and a slowdown in the Fed’s interest rate hikes. Sentiments were rekindled further by stable economic growth.
In addition, the job market remains strong, with the unemployment rate dropping to a 53-year low after the U.S. economy added 517,000 non-farm payrolls, far higher than the 187,000 market estimate.
However, the market lapsed after Fed Chair Jerome Powell expressed concerns over the employment data, and a new streak of volatility might have set in. He believes that the process of bringing down inflation won’t be smooth and will take "quite a bit of time," signaling interest rate hikes in the near term.
On the other hand, economists and investors are in a dilemma amid unusual cohabitation of diminishing inflation and falling unemployment.
Former Federal Reserve economist and founder of Sahm consulting, Claudia Sahm, commented, "The Phillips Curve is wrong. Unemployment remains low, and inflation has come down notably. We are not yet at the Fed’s 2% target, but the progress is undeniable and without a recession."
Therefore, given the volatile market scenario, investors could opt for dividend stocks that conventionally provide consistent returns. Over the past year, the SPDR S&P Dividend ETF’s (SDY) marginal gains outpaced the S&P 500, which plunged 10.2%.
Hence, investors could scoop up fundamentally strong dividend stocks, yielding over 4%, BHP Group Limited (BHP), Honda Motor Co., Ltd. (HMC), and Rent-A-Center Inc. (RCII) to secure a stable return.
BHP Group Limited (BHP)
Headquartered in Melbourne, Australia, BHP operates as a resources company in Australia, Europe, China, Japan, India, South Korea, the rest of Asia, North America, South America, and internationally. It operates through Petroleum; Copper; Iron Ore; and Coal segments.
On December 12, 2022, BHP collaborated with I-ROX, under which the companies would work together to accelerate the development of I-ROX’s technology and business, and BHP would be offered direct access to this potentially disruptive technology. BHP also made an equity investment in and collaborated with I-Pulse to identify new applications for pulsed-power technology in a mining context.
The collaboration with I-Pulse and I-ROX is expected to enhance BHP’s growing portfolio of options with the potential to improve the competitiveness of its business and help decarbonize it.
On September 22, BHP paid its shareholders a dividend of $1.75 per share. Its forward annual dividend of $7 translates to a 10.52% yield on current prices. BHP’s four-year average dividend yield is 7.84%. Its dividends have grown at 37.6% and 33.1% CAGRs over the past three and five years, respectively.
In terms of forward EV/EBIT, BHP’s 6.72x is 38.7% lower than the industry average of 10.97x, while its forward EV/EBITDA of 5.53x is 28.9% lower than the industry average of 7.78x.
For the fiscal year that ended June 30, 2022, BHP’s revenues increased 14.4% to $65.10 billion. Its underlying attributable profit and underlying basic earnings per ordinary share came in at $23.82 billion and $4.71, increasing 39.5% and 39.4% year-over-year, respectively. Also, its underlying EBITDA came in at $40.63 billion, up 15.9% year-over-year.
For the fiscal year 2023 (ending June 2023), Street expects BHP’s EPS to increase 10.9% year-over-year to $5.22. Its revenue is expected to come in at $54.87 billion.
Over the past six months, the stock has gained 23.7% to close the last trading session at $66.68. Moreover, it has gained 28% over the past three months.
BHP’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
It has an A grade for Quality and a B for Value, Sentiment, and Stability. Among 37 stocks in the Industrial – Metals industry, it is ranked first.
Click here to see the other ratings of BHP for Growth and Momentum.
Honda Motor Co., Ltd. (HMC)
Headquartered in Tokyo, Japan, HMC develops, manufactures, and distributes motorcycles, automobiles, power products, and other products in Japan, North America, Europe, Asia, and internationally. It operates through four segments: Motorcycle Business; Automobile Business; Financial Services Business; and Life Creation and Other Businesses.
On January 13, 2023, LG Energy Solution and HMC announced the formal establishment of a joint venture to produce lithium-ion batteries for electric vehicles produced by HMC. Batteries generated by the venture would ensure the successful launch of HMC EVs in North America and create high-value jobs in Ohio. Moreover, it is expected to benefit HMC in the near term.
In terms of forward EV/Sales, HMC’s 0.56x is 53.5% lower than the industry average of 1.21x, while its forward EV/EBITDA of 6.91x is 30.6% lower than the industry average of 9.96x.
HMC’s dividend yield of $1.42 per share translates to a 5.83% yield on current prices. Its dividends have grown at 6.7% and 1.2% CAGRs over the past three and five years, respectively. HMC’s four-year average dividend yield is 3.39%.
HMC’s sales revenue came in at ¥4.26 trillion ($31 billion) for the quarter that ended September 30, 2022, up 25% year-over-year. Its operating profit increased 16.2% year-over-year to ¥231.20 billion ($1.69 billion). Moreover, its profit came in at ¥189.20 billion ($1.39 billion), representing a 13.6% year-over-year rise.
Street expects HMC’s revenue to grow 396.9% year-over-year to $132.72 billion for the fiscal year ending March 2023. Its EPS is expected to come in at $2.36. Moreover, it surpassed revenue consensus in each of the trailing four quarters.
Over the past three months, the stock has gained 9.7% to close the last trading session at $24.54. It has gained 1.7% over the past month.
It’s no surprise that HMC has an overall A rating, which equates to a Strong Buy in our proprietary rating system.
In addition, it has an A grade for Value and a B for Stability and Quality. HMC is ranked #9 out of 61 within the Auto & Vehicle Manufacturers industry.
To see the additional POWR Ratings for HMC, click here (Growth, Momentum, and Sentiment).
Rent-A-Center Inc. (RCII)
RCII leases durable household goods to customers on a lease-to-own basis. The company also provides merchandise on an installment sales basis and lease-to-own transactions to consumers who do not qualify for financing from the traditional retailer through kiosks located within the retailer’s locations.
On January 7, 2023, RCII opened a new store in Lincoln, Nebraska, to offer its residents an option to acquire ownership of high-quality furniture, appliances, electronics, and computers.
On December 7, 2022, RCII announced that its board of directors had approved a quarterly cash dividend of $0.34, paid on January 10, 2023, to the company’s common stockholders.
Its annual dividend of $1.36 yields 4.76% on prevailing prices. The company’s dividend payouts have increased at a 75.9% CAGR over the past three years and 41.5% CAGR over the five years. RCII’s four-year average dividend yield is 2.89%.
In terms of forward non-GAAP P/E, RCII is trading at 8.01x, 45.5% lower than the 14.69x industry average. The stock’s forward EV/EBITDA multiple of 7.02 is 29.5% lower than the industry average of 9.96.
RCII’s total revenues came in at $1.02 billion for its fiscal third quarter (ended September 30, 2022). The company’s gross profit stood at $505.54 million, while its non-GAAP operating profit was $98.70 million. Also, its non-GAAP net earnings stood at $56.23 million and $0.94 per share.
Analysts expect RCII’s EPS and revenue to come at $0.69 and $1.02 billion for the fiscal first quarter ending March 2023. The stock surpassed Street EPS and revenue estimates in three of the trailing four quarters
RCII has gained 34.3% over the past three months and 13.1% over the past month to close its last trading session at $27.46.
RCII’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, equating to Buy in our proprietary rating system.
The stock has a B grade for Value and Quality. Within the B-rated 45-stock Specialty Retailers industry, RCII is ranked #14.
In addition to what we’ve just highlighted, one can see RCII’s ratings for Growth Momentum, Stability, and Sentiment here.
What To Do Next?
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BHP shares were unchanged in premarket trading Friday. Year-to-date, BHP has gained 6.96%, versus a 5.97% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
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