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The U.S. stock market continues to climb the wall of worry, despite persistent inflation and elevated geopolitical risks. The Wilshire 5000 index (a broader gauge of the total U.S. stock market) has gained 21% in the past year, not including dividends.The stock market rally has caused dividend yields to fall. The S&P 500, on average, currently yields just 1.5%. Valuations are elevated across the S&P 500 as well, with the major index sporting an average price-to-earnings ratio of 27.6.However, these 3 dividend stocks have reasonable valuations and above-market dividend yields, which could lead to high total returns going forward.
Starbucks Corp. (SBUX)
Starbucks began with a single store in Seattle’s Pike Place Market in 1971 and now has more than 37,000 stores worldwide. Nearly half of the stores are in the U.S. and nearly 20% of the stores are in China. The company operates under the namesake Starbucks brand, but also holds the Teavana, Evolution Fresh, and Ethos Water brands in its portfolio. The company generated $36 billion in annual revenue in fiscal 2023.In late January, Starbucks reported (1/30/24) financial results for the first quarter of fiscal year 2024 (Starbucks fiscal year ends the Sunday closest to September 30th). The company maintained its strong business momentum and grew its comparable store sales more than 5% thanks to 5% growth in North America and 7% growth in international markets. Same-store sales in China grew 10%.Adjusted earnings-per-share grew 20%, from $0.75 in the prior year’s quarter to $0.90, but missed the analysts’ consensus by $0.04. The headwinds from the lockdowns in China and high inflation have subsided. Starbucks reaffirmed its full-year guidance for 15%-20% growth of earnings-per-share, in line with its long-term guidance.Starbucks has a strong growth trajectory available over the long-term thanks to a growing U.S. and International store count, where the company is still in the early innings of expansion, coupled with pricing power.Starbucks has increased its dividend for 14 consecutive years and now has a current dividend yield of 2.6%. The stock is also undervalued, with a 2024 P/E of 20, compared with our fair value estimate of 23. Therefore, total returns could reach 16% at the current valuation.
Sonoco Products (SON)
Sonoco Products provides packaging, industrial products and supply chain services to its customers. The markets that use the company’s products include those in the appliances, electronics, beverage, construction, and food industries. The company generates nearly $7 billion in annual sales. Sonoco Products is now composed of two major segments: Consumer Packaging and Industrial Packaging.Sonoco is a Dividend Champion, as it has increased its dividend for 41 consecutive years. SON stock currently yields 3.7%.On Feb. 14, 2024, Sonoco Products announced fourth quarter and full year results. For the quarter, revenue declined 1.8% to $1.64 billion, but this was $20 million above expectations. Adjusted earnings per share of $1.02 compared unfavorably to $1.27 in the prior year. For 2023, revenue decreased 6% to $6.8 billion while adjusted EPS of $5.26 compared unfavorably to $6.48 in the prior year. This was, however, the company’s second-best adjusted EPS result in its history.Sonoco Products provided an outlook for 2024 as well, with the company expecting adjusted EPS of $5.10 to $5.40 for the year. The company has grown earnings per share at a rate of 8.4% since 2014. We maintain our forecast growth rate of 5% for annual EPS.SON stock is undervalued. Based off company’s guidance for the year, shares trade with a price-to-earnings multiple of 10. We reaffirm our 2029 target P/E of 16 to reflect the quality of business results over the past few years. As a result, total returns could exceed 16% per year.
Baxter International (BAX)
Baxter International develops and sells a variety of healthcare products, including biological products, medical devices, and connected care services devices used to monitor patients. Its products are used in hospitals, kidney dialysis centers, nursing homes, doctors’ offices, and patients at home under physician supervision.On February 8th, 2024, Baxter International reported Q4 and full year results for the period ending December 31st, 2023. For the quarter, revenue declined 0.3% to $3.89 billion, but this was $80 million above expectations. Adjusted earnings-per-share of $0.88 matched last year’s result, but beat estimates by $0.02.For 2023, revenue from continuing operations grew 2% to $14.8 billion while adjusted earnings-per-share of $2.60 compared to $3.50 in the prior year. Starting with Q3 2023, the company now has four business segments. Despite headline figures, most businesses within the company showed growth from the prior or had similar sales totals.Medical Products & Therapies grew 4% to $1.32 billion, Healthcare Systems & Technologies improved 7% to $795 million, and Pharmaceuticals was higher by 7% to $596 million.Baxter has seen growth across its product lines and across its geographic segments over the past 5 years. We maintain our five-year projected earnings-per-share growth rate of 10% due to the quality of the company as well as the low base of earnings that 2023 is expected to see.BAX currently yields 3.0%. Shares trade for a 2024 P/E of 13, compared with our fair value estimate of 20. An expanding P/E multiple along with EPS growth and dividends, could generate total returns above 18% per year for BAX stock.More By This Author:3 High Beta Stocks To Outperform A Market Rally
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