THE Dow Jones Industrial Average had a rebound year in 2023. The stock market’s iconic benchmark rose about 14% (recovering from a nearly 11% decline in 2022).
However, not all Dow Jones stocks were in rally mode in 2023. Several stocks lagged the index last year, led by Walgreens Boot Alliance (NASDAQ:WBA), Chevron (NYSE: CVX)And Johnson & Johnson (NYSE:JNJ). These declines have pushed up the dividend yields of these “The dogs of the Dow Jones” above. Here’s why dividend investors will want to buy stocks in 2024.
Walgreens shares have fallen nearly 29% in 2023, the biggest decline among Dow Jones stocks. This selloff pushed the dividend yield of healthcare, pharmacy and retail companies to 7.2%. The company has an excellent history of paying dividends. It has paid them for 364 consecutive quarters (91 years) while increasing its payments for the last 47 consecutive years.
While dividend growth has been anemic in recent years (Walgreens only gave investors a 0.5% increase in 2023), it could accelerate again in the future. The company is in the midst of a major transformation as it aligns its core business, builds its next growth engine with consumer-centric healthcare solutions, and optimizes its portfolio. It sold several non-core assets, including its significant stake in Cencora, to invest in the development of its growth engine. The company has also floated the idea of launching an IPO of its UK-based pharmacy chain, Boots.
These actions weighed on its profit growth and its balance sheet. However, coupled with transformational cost reductions, these measures should ultimately revive the company’s growth rate. This growing cash flow will give Walgreens more money to invest in growing its core businesses, paying down debt and paying dividends. This would also help take some of the weight off its stock price.
An agreement that shakes things up on the horizon
Chevron’s stock price has fallen about 15% in 2023, the second-worst performance on the Dow. Lower oil prices were the main catalyst for the selling.
There’s not much Chevron can do about oil prices. However, what is it can What it needs to do is reduce its costs and increase its ability to generate more cash at lower oil prices. This is what he has done over the past year. The company increased its size by acquiring oil companies to reduce costs and increase cash flow and growth potential.
Chevron purchased PDC Energy in 2023 for $7.6 billion. The company expects to realize more than $100 million in cost savings. This supports its view that the deal will increase its free cash flow by more than $1 billion (assuming oil averages $70 per barrel, which is close to the recent price).
Meanwhile, Chevron signed an even bigger deal in October, agreeing to buy Hesse for almost 60 billion dollars. The company expects to realize $1 billion in annual savings from the acquisition. It also expects the transaction to improve its free cash flow growth profile while extending its outlook into the 2030s.
This improvement in free cash flow growth has Chevron thinking it will increase its 4% dividend by another 8% in 2024. This would be its 37th consecutive year of dividend growth.
Slim to grow faster
Johnson & Johnson declined about 11% in 2023, the third worst performance in the Dow. This crisis pushed its dividend yield up to 3%. The company increased its payout by 5.3% in 2023, its 61st consecutive year of dividend growth.
One factor that weighed on the stock was the reprieve from the spinoff of its former consumer health care business, Kenvue. Johnson & Johnson completed an IPO of this company, then swarmed most of the shares remaining to its investors. It holds a minority stake which it ultimately intends to monetize.
The healthcare giant’s sales and cash flow declined following the split. However, the company expects its growth to reaccelerate in 2024 by focusing on its faster-growing pharmaceutical and MedTech divisions. It sees operating sales growing 5-6% next year, with adjusted earnings per share growth of 7.3% at the midpoint. Meanwhile, the company expects operating sales growth of 5-7% and similar earnings per share growth over 2025-2030, with free cash flow returning to its pre-Kenvue level by 2026.
Acquisitions could generate even faster growth in the years to come. Johnson & Johnson has one of the strongest balance sheets in the world. It benefits from AAA-rated credit and ended the third quarter with $24 billion in cash versus $30 billion in debt. She also owns 9.5% of Kenvue’s stock, worth about $4 billion.
This gives it enormous financial flexibility to make deals. It recently agreed to pay $400 million to buy Laminar to bolster its MedTech offerings.
These “dogs” could bring in a higher return in 2024
Walgreens, Chevron, and Johnson & Johnson were the worst-performing Dow Jones stocks of 2023. Falling stock prices helped boost their dividend yields. This makes them appear attractive income stocks to buy in 2024.
In addition to this income, they offer significant upside potential when their stock prices eventually rebound. For this reason, they could produce strong total returns in 2024, making them great Dow stocks to buy now.
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Matthew DiLallo holds positions at Chevron, Johnson & Johnson and Kenvue. The Motley Fool posts and recommends Kenvue. The Motley Fool recommends Chevron and Johnson & Johnson. The Mad Motley has a disclosure policy.
3 Beaten Dow Jones Stocks Dividend Investors Should Pick Up in 2024 was originally published by The Motley Fool