Day: September 15, 2024

For investors, dividend-paying stocks offer an immediate return, and those with consistent, rising payouts have performed even better, with less volatility than the benchmark S&P 500. One explanation could be that annual dividend increases compel management to maintain disciplined capital allocation while also signaling strong confidence to investors in the company’s future growth.

Let’s dive into two dividend-paying stocks, priced at a combined $500, that appear undervalued and either recently began paying dividends or have a strong history of increasing them.

1. Alphabet

Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) is down approximately 5% over the past month as the tech giant faces increasing calls for regulation in its search and advertising business. Additionally, investors fear Alphabet may be behind in the artificial intelligence (AI) arms race against competitor Microsoft, which owns a significant stake in Open AI, the company behind ChatGPT.

While long-term trepidation may be holding down the stock price, Alphabet’s business is generating more revenue and profit than ever before. Through the first half of 2024, the company generated $165.3 billion in net sales and $47.3 billion in net income, representing a year-over-year increase of 14.5% and 41.5%, respectively.

Alphabet’s balance sheet shows that as of its most recently reported quarter, the company held $88.9 billion in net cash. The excess cash likely gave management confidence to initiate its first-ever dividend earlier this year. The company currently pays a quarterly dividend of $0.20 per share, equating to an annual yield of 0.53%.

Notably, Alphabet’s payout ratio — the percentage of a company’s income paid out as dividends — is incredibly low at 2.8%, meaning management will have plenty of room to raise its dividend in the future.

Management also returns capital to shareholders through share repurchases, which increase investors’ ownership stakes without requiring additional purchases. In the first half of 2024, Alphabet spent $31.4 billion on share buybacks, lowering its outstanding shares by 1.2%. Given that Alphabet’s outstanding share count has decreased 10.9% over the past five years, and it announced a new $70 billion share repurchase in April, it looks as if management will continue to prioritize this capital allocation method for its shareholders for the foreseeable future.

Returning to the perceived threat to Alphabet’s business, management understands the significance of AI and is pouring cash into the transformative technology. CEO Sundar Pichai underscored Alphabet’s investments into AI on the company’s most recent earnings call, adding, “The one way I think about it is when you go through a curve like this, the risk of underinvesting is dramatically greater than the risk of overinvesting for us here.”

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The company poured $25.2 billion in capital expenditures for the first half of 2024, most of which it earmarked for its AI development. For comparison, Alphabet spent $13.2 billion capital expenditures in the first half of 2023.

Even if it is considered behind in the AI boom, Alphabet remains a market leader in ads and search and owns valuable properties like YouTube. Based on the price-to-earnings (P/E) ratio, which compares a company’s earnings over the past 12 months to its stock price, Alphabet appears undervalued. That’s because the stock currently trades at roughly 22.3 times earnings, well below its five-year P/E ratio average of 26.8.

2. Caterpillar

Caterpillar (NYSE: CAT) stock has been stagnant of late, generating a total return of only 1.5% over the past six months. Still, the world’s largest construction equipment manufacturer is a dividend stalwart, paying a quarterly dividend since 1989 and raising it for 31 consecutive years. Today, Caterpillar pays a quarterly dividend of $1.41 per share, representing an annual dividend yield of roughly 1.7%. Additionally, with a payout ratio of 23.7%, investors can reasonably expect management to continue its impressive dividend hike streak in the coming years.

Similar to Alphabet, Caterpillar repurchases its stock hand over fist. Management lowered its outstanding shares by 2.9% in 2024 and 12.3% over the past five years.

Caterpillar’s management regularly states its plans to use “substantially all” of its free cash flow from machinery, energy, and transportation (ME&T) on dividends and share repurchases. For 2024, it projected that metric to be within the range of $7.5 billion to $10 billion. While an impressive outlook on the surface, Caterpillar generated $10 billion in ME&T free cash flow in 2023, which is perhaps why some investors are timid about the stock.

Yet, there is a reason behind the stagnation: Higher sustained interest rates are weighing on global demand for construction projections. As of its most recently reported quarter, Caterpillar generated $16.7 billion in net sales, and its backlog stood at $28.6 billion, representing a decrease of 4% and 7% year over year, respectively.

The good news is that interest rates are on track to ease in the coming months, which management believes will help some areas of its business, like building warehouses or other rate-sensitive projects. In the long term, Caterpillar will benefit from U.S. government-related infrastructure projects and demand for new housing in North America. Specifically, Caterpillar continues to receive a windfall from the $1.2 trillion Infrastructure Investment and Jobs Act signed into law in 2021 and the fact that America has underbuilt an estimated 4.5 million homes since the Great Recession.

Similar to Alphabet, Caterpillar also trades at a depressed valuation when compared to historical averages. Today, the construction-focused company trades at 15.5 times earnings, below its five-year P/E ratio median of 16.9.

CAT PE Ratio data by YCharts

Should you buy these dividend stocks?

Whether it’s the start of a dividend journey or 30-plus years into it, these two stocks are well positioned to continue to reward shareholders with a rising dividend. Again, according to research, this is a key factor in a stock outperforming the market over the long term. Couple that history with what appears to be fair valuations, and Alphabet and Caterpillar are two stocks to buy for any portfolio.

Should you invest $1,000 in Alphabet right now?

Before you buy stock in Alphabet, consider this:

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*Stock Advisor returns as of September 9, 2024

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Collin Brantmeyer has positions in Alphabet, Caterpillar, and Microsoft. The Motley Fool has positions in and recommends Alphabet and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

The Smartest Dividend Stocks to Buy With $500 Right Now was originally published by The Motley Fool

While you’ve probably had a consistent experience going to the pharmacies operated by Walgreens Boots Alliance (NASDAQ: WBA) over the years, that doesn’t make it a company that’s in stasis. In fact, within the next three years, there’s a very high chance that it’ll be changing in a handful of ways that are relevant to investors.

But even if the retail experience doesn’t shift much, there’s reason to believe that the stock’s value will continue to deteriorate as a result of what its management plans to do. If all goes well, there could be a brighter future ahead in due time — but that is far from guaranteed.

Here’s a grounded projection for where the stock could be in late 2027.

Will the plan work?

The story of Walgreens’ recent past is a doleful one. Measured by total return, its shares are down by 76% over the past three years, and its quarterly operating income fell a staggering 92% in the same period, slipping to $67 million in its fiscal third quarter (ended May 31).

There’s likely more than one culprit for Walgreens’ operational challenges. Management points to tighter consumer budgets, presumably caused by inflation, as putting downward pressure on revenue in its retail segment. In contrast, its core pharmacy segment in the U.S. — which is to say, the main driver of people to visit its stores — is struggling with declining profitability. This is linked to its reimbursement from insurers bringing in less cash than before, as well as its sale leaseback real estate transactions being less lucrative.

Management sees these headwinds persisting into its next fiscal year, and it is reasonable to expect them to continue beyond that as well, as it has not yet proposed any concrete plan to mitigate them, aside from scaling down somewhat. Over the coming years, it expects to reposition or close 25% of its existing retail footprint. Around $1 billion in cost savings should be realized before the end of this fiscal year. Given that its trailing-12-month operating losses are just over $1.4 billion, that won’t be enough to stabilize the company.

In other words, it is very unlikely that this business will be able to grow its market share or top line anytime soon, as it will have fewer and fewer productive assets to operate. Further losses are likely, even if its operating efficiency improves in keeping with the cost-cutting campaign.

So, at least in the near term, expect it to sell off more of its equity investments to make up for its losses, as it has been doing over the last few years. That will further reduce its total assets, and reduce its financial flexibility to borrow money at an attractive interest rate, as it will have less collateral.

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On the bright side, Walgreens’ healthcare segment, which delivers treatment direct to consumers, generated adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $23 million for the first time in Q3. Though getting things up and running cost plenty of scarce cash, over the next few quarters it may be a contributor to the bottom line instead of a detractor, which will be a desperately needed change.

Still, as the entire segment only brought in $2.1 billion in the third quarter, barely up at all from a year prior, it won’t be enough to carry the company’s shares aloft by much, if at all.

Check back in three years

Given how things are looking right now, the smart expectation for 2027 is for Walgreens to be a much smaller and somewhat more efficient operator that doesn’t really have any way of growing beyond its diminished state.

And, with $33.6 billion in debt, it may well have to further liquidate assets and dramatically curb its expenses by even more than it has planned to do so far. Over the last 12 months, it repaid $26.8 billion in debt while issuing $24.1 billion more. If it continues to deleverage at roughly the same rate moving forward, it will be many years before it reaches a more sustainable debt burden. And that’s a long-term impediment to growth, as well as to returning capital to shareholders.

In a best-case scenario, the company will be producing enough earnings in late 2027 to gear up for another growth push in the years after that, but it’s hard to know which segments it’ll be targeting or how effective its attempt will be given its diminished state. It is not at all certain that it will be in a better situation three years from now. Therefore, Walgreens is not a stock you should invest in today.

Should you invest $1,000 in Walgreens Boots Alliance right now?

Before you buy stock in Walgreens Boots Alliance, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Walgreens Boots Alliance wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $729,857!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of September 9, 2024

Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Where Will Walgreens Boots Alliance Be in 3 Years? was originally published by The Motley Fool

Market News and Data brought to you by Benzinga APIs

© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.

For the average American, healthcare in retirement will cost more than they have in their entire savings account.

And unfortunately, Medicare won’t help.

Healthcare, of course, is the single biggest line item that most retirees need to prepare for. Recently, a study released by the EBRI (the Employee Benefit Research Institute) emphasized how important that is. The institute’s data finds that despite the coverage offered by Medicare, retirees should expect to pay significant out of pocket costs for their healthcare during retirement. These costs cover a range of expenses, including insurance premiums, program deductibles and prescription drug treatments.

For help planning your retirement, including how to pay for healthcare, consider working with a financial advisor.

Healthcare Cost Details

Exactly how healthcare costs for retirees can go ranges. One of the biggest challenges with determining retirement finances is the slipperiness of the data. A researcher’s results will change based on mortality assumptions, local costs of living, updated government programs, market returns and much more. The EBRI’s study attempts to correct for that, running a model that assumed the latest version of Medicare and a large population with varying lifespans based on standard demographics.

In that context, EBRI found that, even with supplemental insurance (generally known as “Medigap” insurance), on average men will need $166,000 in dedicated savings to pay for their healthcare needs in retirement. For women, with longer expected lifespans, that number climbs to $197,000, and an average $318,000 for two-person households.

These are large numbers on their own. What makes the EBRI’s findings even more stark, however, is how they compare with how much people have in total savings.

The median household at retirement age (65 years or older) has $87,725 in total savings. This is supplemented by Social Security income, which varies and pays more to higher-earning households. Regardless of supplemental income, though, most financial experts consider this far too low to pay for the average household’s costs in retirement.

It’s also less than half of what someone will need for their healthcare spending alone.

The Role of Medicare

Much of the reason for this has to do with the Medicare program.

Medicare has a reputation for simplicity. Many, if not most, Americans believe that this is a simple universal healthcare program for retirees. Yet the reality is that this program does not, and never has, provided comprehensive health insurance. Instead, it has always been a patchwork of options focused on paying for hospital stays and the occasional doctor’s visit. Although the government has updated some parts of this program over time, such as adding partial-payment for prescription drugs through Medicare D, individual retirees have always been expected to pick up the slack.

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Most households cover this through a combination of supplemental insurance, Medicaid (which, remember, is a different program) and (while uncommon) employer health insurance plans. Together, it makes for a potentially expensive network of premiums and out-of-pocket spending.

Arguably the single biggest determinant of costs is which version of Medicare someone enrolls in. The program has two versions, known as Traditional and Advantage. Traditional Medicare includes hospital stays, doctor’s visits and some drug costs (Parts A, B and D respectively). It covers fewer services, and includes more out of pocket expenses, but it’s also accepted by virtually all providers.

Medicare Advantage includes coverage that Traditional Medicare does not, such as more prescription drugs and dental coverage. It has fewer out of pocket costs than Traditional Medicare, and more caps on overall spending. However the program is also run by private insurers, which leads to lower payments and higher overhead costs, so Advantage is also accepted by far fewer providers.

For retirees who can handle the reduced choice, the EBRI found that Medicare Advantage does make a big difference in overall spending. Men enrolled in this program only need around $96,000 to meet their spending needs in retirement, while women need $113,000 on average. While this is still more than most people have in total assets at age 65, it’s significantly less than the money spent by those enrolled in Traditional Medicare.

A financial advisor can help you navigate Medicare. Get matched with with SmartAsset’s free tool.

The Big Problem

Yet no version of Medicare offers comprehensive healthcare. From drug costs to long-term care, the program has hard limits. This is why, as one Kaiser Foundation study found, around 90% of all retirees have some form of supplemental health plans in place. Low-income retirees can qualify for Medicaid, while many other retirees choose to enroll in supplemental third party insurance plans known as “Medigap.” These are health insurance programs that cover costs that Medicare typically omits, and they tend to have premiums ranging from around $130 to $300 per month.

Whatever you choose, all retirement health programs come with additional cost. Even Medicare itself requires deductibles, copays and premiums, many of which come as a surprise to retirees who expect it to provide completely free health insurance. Supplemental insurance requires out of pocket costs, most Medicaid programs require some form of patient contributions, and often a retiree will need treatment that no program covers.

It adds up, and the EBRI expects that these costs will only continue to rise. As healthcare gets more expensive, lifespans get longer and both employers and the government consider cutbacks to traditional benefits programs, many households will need to prepare for health insurance to consume more of their retirement account than ever before. Consider speaking with a financial advisor about projections and options for your retirement.

The Bottom Line

A new study by the Employee Benefit Research Institute has some hard numbers about what it will cost to pay for your health care in retirement, costs which are larger than the average retirement account altogether.

Retirement Planning Tips

• Medical expenses are, to a large degree, non-negotiable spending in retirement. So any good retirement plan should calculate exactly how much you’ll have left after paying the doctor. 

• A financial advisor will help you plan for your own retirement needs. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

• Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.

• Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and offers marketing automation solutions so you can spend more time making conversions. Learn more about SmartAsset AMP.

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The post Healthcare Will Cost More Than Most Retirees Have: Here’s Why Medicare Isn’t the Answer appeared first on SmartAsset Blog.