Day: October 21, 2024

By Lisa Pauline Mattackal, Purvi Agarwal and Carolina Mandl

(Reuters) -The Dow Jones Industrial Average and S&P 500 closed lower on Monday, retreating from Friday’s record high closes and six straight weekly gains as Treasury yields rose and investors wary of high valuations awaited earnings from major companies.

“It’s not at all unusual for the market to want to take a little bit of a breather after six weeks of continually record highs,” said Carol Schleif, chief investment officer at BMO Family Office.

According to preliminary data, the S&P 500 lost 9.89 points, or 0.17%, to end at 5,854.78 points, while the Nasdaq Composite gained 50.45 points, or 0.27%, to 18,539.37. The Dow Jones Industrial Average fell 338.80 points, or 0.78%, to 42,932.84.

The yield on the benchmark 10-year Treasury jumped as high as 4.17%, a 12-week high.

“The rise in the 10-year yield is causing confusion that maybe the economy is growing too rapidly and that employment remains too resilient,” said Sam Stovall, chief investment strategist at CFRA Research. “As a result, the Fed might end up being slower to lower interest rates.”

On Friday, the Dow and the S&P 500 both closed at record highs as all three major indexes closed out a sixth consecutive week of gains, their longest winning streak this year.

Many rate-sensitive megacap technology stocks slipped, such as Tesla.

After a fairly upbeat start to earnings season, the focus was on the 114 S&P 500 companies scheduled to report this week. These include Tesla, Coca-Cola and Texas Instruments.

Ahead of a busy week for earnings, some investors likely took some profits, according to analysts. David Laut, chief investment officer at Abound Financial, said the market was looking at how stretched valuations are.

Of companies that have reported so far, 83.1% beat earnings estimates, according to data compiled by LSEG on Friday.

Monday’s declines were broad, with almost all 11 major S&P 500 sectors in the red.

The rate-sensitive Real Estate sector dropped as yields rose, while the technology sector was lifted by a jump in chip heavyweight Nvidia, which touched a fresh record high.

The economically sensitive small-cap Russell 2000 dropped.

Investors also looked ahead to the U.S. presidential election, with polls showing chances improving for former President Donald Trump, the Republican candidate. [MKTS/GLOB]

“As the election date approaches, even small changes in tight polls could drive seemingly erratic swings in market sentiment,” Danske Bank analysts said.

Story continues

Meanwhile, Boeing jumped after news that workers could vote on a new deal to end a costly five-week strike.

Spirit Airlines skyrocketed 51.7% after the company reached an agreement to extend a debt refinancing deadline by two months.

Humana slipped after a report said Cigna had resumed merger talks with the health insurer. Cigna’s shares also fell.

Home sales, flash PMI and durable goods reports are on the data docket through the week, as is the Fed’s Beige Book.

(Reporting by Lisa Mattackal and Purvi Agarwal in Bengaluru, and Carolina Mandl in New York; Editing by Pooja Desai and David Gregorio)

One of my favorite pairings when looking for passive income on the stock market is to find companies with safe, steady operations with dividend yields that are near 10-year highs. While finding this combination isn’t exactly common, chocolatier The Hershey Company (NYSE: HSY) and quick-service food franchisor MTY Food Group (OTC: MTYF.F) currently meet these requirements.

With Hershey and MTY down 12% and 20% from their 52-week highs — and 33% and 39% below their all-time highs — investors would be wise to consider these two magnificent dividend stocks at discounted prices.

Here’s why buying Hershey and MTY makes for a compelling investment proposition, with their 2.9% and 2.3% dividend yields near a decade-long high.

Hershey: Safety and stability in chocolates and snacks

Perhaps the most persuasive reason to consider buying The Hershey Company is its stability. Operating in the recession-resistant industries of chocolates and sweet and salty snacks, Hershey is undeniably steady, as evidenced by its 0.37 five-year beta.

Beta measures a stock’s volatility compared to the broader market, and a beta below 1 implies that a stock is less likely to plunge during bear markets. Stocks with a beta as low as Hershey’s are what I would consider “bedrock” types of holdings that you can use as a foundational piece in any of your portfolios — which is why it is one of my daughter’s nine core portfolio positions.

With that said, the company’s current 33% drawdown from its all-time high is its third-largest of the last three decades, only smaller than its 50% and 40% drops during the 2008 and 2000 crashes.

So, does this drop show that Hershey is damaged goods since the broader market is still up?

Not so much. First, prior to this decline, the company’s ratio of enterprise value (EV) to earnings before interest, taxes, depreciation, and amortization (EBITDA) was at an all-time high of 24. For perspective, Hershey’s current EV/EBITDA ratio is 15, and its historical average as a publicly traded stock is 18, which shows just how stretched its valuation had become.

Furthermore, the company is facing an array of short-term headwinds ranging from implementing a new enterprise resource planning system, cocoa prices briefly quadrupling in less than two years, and a cost-conscious consumer. Ultimately, however, when investors look back at these challenges 10 years from now, I’m confident that they will have proven to be temporary and that Hershey’s market-leading brands will have endured.

Anchored by the three most recognizable chocolate brands in the United States, according to Statista (Hershey, Kit Kat, and Reese’s), the company remains the leader of its niche. In addition to being the top banana in the chocolate world, Hershey’s recent acquisitions of Skinny Pop Popcorn and Dot’s Homestyle Pretzels are paying immediate dividends, with the new units growing sales by 13% and 65% annually since 2019.

Story continues

And speaking of dividends, despite Hershey’s challenges since early 2023, it’s hiked its dividend payments twice in three quarters, raising its payout by a hefty 32%. Even after this giant increase, the dividend only uses 55% of Hershey’s net income, leaving plenty of wiggle room to continue raising a dividend that is already at a decade-long high.

Make no mistake, Hershey won’t be a multibagger anytime soon. However, its 2.9% yield, leadership position, success with recent acquisitions, and steady results in the face of a multitude of short-term issues make it a magnificent bedrock holding to buy and hold for decades.

MTY Food Group’s diversification throughout all seasons and varieties

Whereas Hershey’s safety stems from focusing on the resilient chocolate and snacking niche, MTY Food Group’s stability is thanks to its wide-ranging diversification. MTY’s portfolio of roughly 90 quick-service food brands is incredibly well diversified across all four seasons and almost every imaginable cuisine.

Dramatically oversimplifying its well-rounded portfolio, MTY’s litany of frozen treats and smoothies brands lead the way in the summer, while labels like its Wetzel’s Pretzels and Papa Murphy’s do more of the heavy lifting in colder months.

In addition to this diversification, MTY’s focus on being a franchisor — with all but about 200 of its roughly 7,000 locations franchisee-operated — makes it a uniquely safe investment proposition. Offloading the bulk of the risk and capital requirements to its franchisees, MTY is an asset-light operator with stable free-cash-flow (FCF) margins.

Even during the middle of the pandemic, MTY maintained a 20% FCF margin, which is actually higher than its current 15% mark. While lower consumer confidence has continued to weigh on the company’s FCF margins somewhat, MTY’s FCF growth over the last decade borders on art.

Making 27 acquisitions worth more than $1.7 billion in just the last decade, MTY has proven masterful at redeploying its rising FCF totals in new ventures that create even more — a beautiful flywheel effect in motion.

However, MTY doesn’t spend all of its FCF on mergers and acquisitions. Currently, the company’s 2.3% dividend yield is at its highest level of the last decade outside of the 2020 crash. What makes this yield even more exciting is that it only uses 14% of MTY’s FCF, meaning that the company could triple its yield to 7% and still have cash left over.

But, with shares trading with an EV/FCF ratio of only 10, management has leaned into buying back shares at a deep discount to the market. With management displaying an appetite for buying back shares after sell-offs over the last five years, MTY’s current 39% drop from its all-time highs should keep it repurchasing shares hand over fist.

Since 2019, MTY has lowered its share count by 1.2% annually — a nice addition to the cash returned to shareholders with dividends.

Altogether, MTY’s steady FCF generation and serially acquisitive ways combine for a powerful compounding machine that should continue to reward investors with growing dividends for decades to come.

Don’t miss this second chance at a potentially lucrative opportunity

Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.

On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:

• Amazon: if you invested $1,000 when we doubled down in 2010, you’d have $21,285!*

• Apple: if you invested $1,000 when we doubled down in 2008, you’d have $44,456!*

• Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $411,959!*

Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.

See 3 “Double Down” stocks »

*Stock Advisor returns as of October 14, 2024

Josh Kohn-Lindquist has positions in Hershey and MTY Food Group. The Motley Fool has positions in and recommends Hershey and MTY Food Group. The Motley Fool has a disclosure policy.

2 Magnificent Dividend Stocks Down 33% and 39% to Buy Right Now While Their Dividend Yields Are Near Once-in-a-Decade Highs was originally published by The Motley Fool