– By Nathan Parsh
One way to take advantage of market volatility is to maintain a watchlist of stocks that you want to buy. I maintain a watchlist of stocks I own and those I’d consider buying at the right price. In this article, I will discuss four stocks currently near the top of my watchlist.
McDonald’s
McDonald’s Corp. (NYSE:MCD) is one of the largest quick service restaurants chains in the world. The company has operations in more than 100 countries and more than 39,000 stores worldwide. More than 90% of stores are run by franchisees. Slightly less than two-thirds of revenue and more than half of operating income come from international markets. McDonald’s has a current market capitalization of $167 billion.
PNC Financial last raised its dividend by 21% for the Aug. 5, 2019 payment. The next dividend will be paid out on Nov. 5 and has an ex-dividend date of Oct. 16. The bank has been aggressive at raising its dividend as the average annual increase is almost 15% over the last decade. The bank has maintained its current payout for the past six quarters.
The Fed hasn’t let the banks raise dividends or buy back stocks due to the impact of Covid-19 on the economy. PNC Financial will need to raise its dividend sometime in 2021 to maintain its growth streak, which currently stands at nine years.
PNC Financial’s dividend yield is 4% today, nearly double the 10-year average yield of 2.2%.
Using the annualized dividend of $4.60 and expected EPS of $14.01, PNC Financial has a projected payout ratio of 33% for the year. This is in the vicinity of the bank’s 10-year average payout ratio of 28%. This low payout ratio shows that PNC Financial has been very successful at growing its bottom-line considering the high dividend growth rates over the last decade.
The bank trades hands at $116 today. Using 2020 EPS estimates, the forward price-earnings ratio is 8.3. This is a significant discount to the stock’s average price-earnings ratio of 12 since 2010.
PNC Financial appears to be a solid investment opportunity. Income investors will find the yield compelling while value investors should be attracted to the low price-earnings ratio. Despite the near-term uncertainty with regards to the pandemic, I believe PNC Financial is a buy today.
S&P Global
S&P Global (NYSE:SPGI) is a global provider of financial services and business information. The company’s businesses include ratings, market intelligence and indices. S&P Global purchased the S&P Dow Jones Indices in 2012. The company is worth $86 billion today.
The company raised its dividend by 18% for the payment made this past March 11. This was S&P Global’s 47th consecutive year of dividend growth, one of the longest streaks in the financial sector. The next dividend will be paid on Dec. 10 for investors holding the stock prior to Nov. 24. If S&P Global sticks to its usual track record, then the next dividend raise will be announced at the end of January. The 10-year average increase is 6.4%
S&P Global’s current dividend yield is just 0.7%. The stock has never been much of an income play, with the long-term average yield just above 1%.
The company will distribute $2.68 of dividends per share in 2020. Expected EPS is projected to be $11.08, which equates to a payout ratio of just 25%. This is just below the long-term average payout ratio of 27%.
S&P Global has a current stock price of $358, resulting in a forward price-earnings ratio of 32 using 2020 EPS estimates.
S&P Global’s valuation is rich in large part due to the recent strength of the stock indices. This has propelled the stock considerably higher this year. The company’s dividend track record is nearing five decades, but I would wait for a better entry point before purchasing.
Starbucks
With more than 32,000 stores around the world, Starbucks Corp. (NASDAQ:SBUX) is truly a global leader in the area of specialty coffee. The company has more than 10,000 company-owned stores in the U.S. and 6,200 stores in international markets. Starbucks also licenses nearly 16,000 stores around the world. The company’s brands include the namesake Starbucks brand, Seattle’s Best Coffee and Ethos Water. Starbucks has a market capitalization of $105 billion.
Starbucks raised its dividend by 9.8% for the upcoming Nov. 27 payment. Investors looking to capture this increase should purchase the stock prior to the Nov. 10 ex-dividend date. This latest increase gives the company 11 years of dividend growth. The average increase over the last decade was 21%.
Shares of the coffee giant yield 2% at the moment, which is a higher rate than the 10-year average yield of 1.5%. Were Starbucks to trade with the current yield for an entire year it would be the second highest average since the company began paying a dividend in 2010.
Starbucks will pay out $1.68 of dividends in 2020. With expected EPS of $0.96, the payout ratio is 175%. Like McDonald’s, Covid-19 severely limited Starbucks’ business operations for a large portion of the year. Analysts expect the company to produce $2.70 of EPS next year as the environment hopefully normalizes.
Using the annualized dividend of $1.80 and next year’s earnings estimates, the payout ratio drops to 67%. This is a much better projected payout ratio, but still higher than the 10-year average of 40%. This is probably the reason behind the lower than usual dividend raise.
Trading at ~$90 today, Starbucks has a price-earnings ratio of almost 94 based on EPS estimates for this year. The price-earnings ratio is 33.4 based on next year’s estimates. This is still above the 10-year average price-earnings ratio of 26.
Starbucks struggles in the near-term due to the pandemic, but the business should bounce back next year. The company’s dividend growth has slowed in recent years, but the most recent increase was still almost 10%. The stock’s yield, while low, is actually high compared to its historical average. The valuation is rich even using next year’s EPS, but I believe Starbucks to be the leader in its industry and would bet on a comeback in the ensuing years. I’d be willing to add to my position on a slightly better price.
Final thoughts
Maintaining a watchlist at all times is a great way to find values in the market. McDonald’s and S&P Global have dividend growth streaks that have survived several recessions, but are expensive based on this year’s estimates. Starbucks, while expensive, offers a higher than usual yield. PNC Financial is the cheapest of the stocks on this list and has a dividend yield that is almost twice as high as its 10-year average. Of the names discussed in this article, I am waiting for a better entry point for McDonald’s, S&P Global and Starbucks, but find PNC Financial has a solid investment opportunity.
Author disclosure: The author has a long position in McDonald’s and Starbucks.
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This article first appeared on GuruFocus.
