Growth stocks like Nvidia and Meta Platforms deserve their medals for driving the S&P 500 and Nasdaq Composite indexes to all-time highs. But there are plenty of other valuable, industry-leading companies that are contributing the market’s broader gains.
Walmart (NYSE: WMT), 3M (NYSE: MMM), and ExxonMobil (NYSE: XOM) are all hovering around 52-week highs — with Walmart and 3M tied for the best-performing components in the Dow Jones Industrial Average so far in 2024. Despite their run-ups, here’s why all three dividend stocks are still worth buying in September.
The cat is out of the bag on this former value stock
Daniel Foelber (Walmart): After underperforming the broader stock market for years, Walmart is up a staggering 45% year to date. In the following chart, you can see that Walmart’s sales have kicked into a new growth gear while its operating margin didn’t take long to rebound from the inflation-induced collapse in 2022 and 2023.
However, Walmart’s stock price is up nearly threefold in the last decade, which may seem overextended given that its results are good, but maybe not so good that they justify such a meteoric rise in the stock price. This is where context is key.
Walmart could be much more profitable if it wasn’t spending so much on capital expenditures (capex). But it believes its investments in store remodels, new stores, internal improvements, automation, generative artificial intelligence, and more will help the business improve over the long term.
In the last five years, Walmart’s operating expenses and revenue have grown at around the same rate, or 25.5% and 27.6%, respectively. But capex has nearly doubled — up more than $10 billion in five years. By comparison, Walmart’s net income for the trailing-12-month period is just $28.2 billion. Simple math tells us that Walmart would be generating 10-year-high operating margins if it wasn’t supporting such an expensive capex program.
Long-term investors care more about where a business is going than where it has been or what it is doing today. Focusing too much on Walmart’s results without considering its higher spending or growth plans misses the big picture.
Walmart is charting a path toward even faster growth in the coming years. Unfortunately, the stock is significantly more expensive than its historical average valuation. Walmart shares sport a forward price-to-earnings ratio of 31 — which is higher than the five-year median of 28.9. This means that if Walmart brings in consensus analyst estimate earnings over the next 12 months, it would still be more expensive than its historical valuation. And that’s assuming the stock price stays the same.
Walmart is an excellent business that is a Wall Street darling right now, so investors will have to pay a premium price if they want a slice. The higher stock price has also pushed the dividend yield down to just 1.1% — meaning Walmart is no longer a viable passive income source for dividend investors.
New management brings new approaches to 3M
Lee Samaha (3M): Trading at its 52-week high at the time of writing, 3M stock has performed well for investors over the last year, and I think there’s more to come. There are three reasons for optimism.
First, its cyclical end markets (such as semiconductors, automotives, and consumer electronics) look likely to bottom through 2024. Second is a combination of its pre-existing restructuring program (which is already expanding profit margins) and new CEO William Brown’s determination to fundamentally restructure the company. Third, the valuation remains attractive.
The cyclical turn in its end markets will inevitably improve given a lower interest rate environment in 2025 — auto sales and investment in consumer electronics should improve. Meanwhile, Brown’s initial plans for 3M have already won favor with investors. For example, as noted previously, improving its inventory-to-sales ratio would free up cash, and hitting Brown’s target could arguably lead to a 28% increase in valuations.
Finally, 3M’s valuation remains attractive at 18.1 times its estimated 2024 earnings. That might seem high for a value stock, but consider that this is likely to prove a trough year, and if Brown can turn the company’s operational performance around, the company could be heading toward multi-year earnings expansion.
ExxonMobil has decades of dishing higher dividends to shareholders
Scott Levine (ExxonMobil): Don’t let ExxonMobil’s stock price fool you. While shares of the oil supermajor are changing hands about 7% below the 52-week high they reached in the spring, today is still a great time to click the buy button and bolster your passive income stream with its 3.2% forward-yielding dividend.
Part of the attraction of ExxonMobil as a dividend play is the company’s long-standing devotion to boosting the payout higher. For 42 consecutive years, ExxonMobil has raised its dividend — an achievement not shared by any other company in its peer group, such as Chevron, BP, Shell , and TotalEnergies. Taking a shorter look in the rearview mirror, investors will find that ExxonMobil distinguishes itself among its peer group in another way: the stock’s total return.
Of course, this doesn’t imply that ExxonMobil will continue to outperform its peers in the coming years, but it’s certainly noteworthy and illustrates management’s success at growing shareholder value.
Evidence for the sustainability of ExxonMobil’s dividend is visible in several ways. For one, ExxonMobil is achieving strong results from its production assets in the Permian Basin and Guyana, and from its acquisition of Pioneer Natural Resources, which accounted for $500 million in earnings in the second quarter of 2024.
Looking ahead, management projects daily upstream production will rise from the 3.8 million barrels of oil equivalent it reported in 2023 to more than 5 million barrels of oil equivalent in 2027.
Also, ExxonMobil has implemented a corporate cost-saving initiative that will provide it more flexibility to return capital to shareholders. After achieving $9.7 billion in cumulative cost savings in 2023, the company expects to recognize another $5 billion in savings from 2024 through 2027.
Should you invest $1,000 in Walmart right now?
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Daniel Foelber has no position in any of the stocks mentioned. Lee Samaha has no position in any of the stocks mentioned. Scott Levine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends BP, Chevron, Meta Platforms, Nvidia, and Walmart. The Motley Fool recommends 3M. The Motley Fool has a disclosure policy.
3 Dividend Stocks That Just Hit 52-Week Highs but Could Still Be Worth Buying in September was originally published by The Motley Fool
