The COVID-19 pandemic has had a devastating impression on society and the economic system this 12 months. Some corporations closed their doorways for good, whereas many others struggled to make it via by chopping bills like dividends.
Nonetheless, after months of ready, we obtained a number of doses of fine information over the previous couple of weeks as knowledge on two main vaccine candidates was rolled out, with each proving to be extremely efficient in late-stage trials. This optimistic information means that we’ll be capable of return to some sense of normalcy within the coming months as these vaccines get distributed and convey the pandemic to an finish. That ought to present a giant shot within the arm for the worldwide economic system whereas placing many dividends again on stable floor. Three dividend-paying stocks that our contributors assume could possibly be among the many largest winners from these vaccines are Phillips 66 (NYSE:PSX), 3M (NYSE:MMM), and Honeywell Worldwide (NYSE:HON). This is why this trio stands out.
The catalyst wanted to gas a restoration in demand
Matt DiLallo (Phillips 66): Demand for gasoline and different refined merchandise fell off a cliff when governments shut down their economies to assist sluggish the unfold of the COVID-19 outbreak earlier this 12 months. Whereas consumption has recovered considerably, it is properly under its pre-pandemic stage as a result of persons are touring much less. That is hurting refiners like Phillips 66.
The corporate solely generated $491 million of cash through the third quarter, which was barely sufficient to cowl its $393 million dividend outlay, a lot much less the $552 million it invested into capital initiatives. Due to that, there was some concern concerning the sustainability of its 6%-yielding payout.
It is not producing sufficient cash proper now as a result of it is solely utilizing about three-quarters of its refining capability on account of weak demand and low margins. Because of this, its refining operations misplaced practically $1 billion within the third quarter, which it partially offset with its midstream, advertising and marketing, and chemical companies. Nonetheless, a extensively accessible vaccine would give individuals the boldness to journey once more, boosting gasoline consumption and refining profitability. That may allow Phillips 66 to generate extra cash and put its dividend on a firmer basis. Furthermore, the corporate would possible be capable of resume share buybacks, giving its stock — which continues to be down practically 50% this 12 months even after its latest vaccine rebound — extra gas to maintain rallying. Add that upside to Phillips 66’s high-yielding dividend, and it could possibly be a giant winner as a vaccine will get rolled out and will get the economic system rolling once more.
When issues get again to regular
Reuben Gregg Brewer (3M): Proper now 3M is specializing in producing security tools, like N95 masks, for first responders. Nonetheless, its enterprise is extraordinarily diversified, with 36% of gross sales from its security and industrial section, 27% from transportation and electronics, 26% from healthcare, and the rest from client merchandise. That is only a high-level view, however it offers a way of the breadth of choices this industrial big supplies the world. It has been going through headwinds, from falling gross sales to rising prices, throughout most of its enterprise because the world offers with COVID-19.
Third-quarter earnings, for instance, fell practically 6% 12 months over 12 months. That is not horrible, but when a COVID-19 vaccine will help to get international development again on monitor, 3M would possible see earnings flip greater. That is not a surprising assertion, given the cyclical nature of the economic sector. Keep in mind, the US, together with many different nations, fell right into a recession because of the coronavirus. That is unhealthy for cyclicals like 3M.
However when a vaccine does get developed, accredited, and distributed, just about all of 3M’s companies are prone to profit from a world that can be wanting to get again to regular. Positive, demand for some merchandise (like N95 masks) would possibly fall off, however the energy from the remainder of its industrial portfolio ought to energy forward. In the meantime, when you act now, you possibly can gather 3M’s traditionally excessive 3.4% yield whilst you watch because the medical trade efficiently develops new vaccines.
Returning to development and margin enlargement
Daniel Foelber (Honeywell Worldwide): Honeywell is recovering together with the economic system, however its numbers are nonetheless down from final 12 months. Aerospace, its largest section, serves the aviation trade via new unique tools gross sales in addition to air transport aftermarket gross sales — each of which have been down 47% within the third quarter. And though protection and house have been up 12%, Honeywell reported a 25% total decline in third-quarter aerospace gross sales.
Administration does not anticipate a fast restoration in aerospace however did say that low rates of interest, fiscal stimulus, and a vaccine in early 2021 would possible assist Honeywell return to development and margin enlargement. One other good thing about a vaccine is that it might possible result in elevated demand for fuels utilized in transportation and industrial processes, which may assist Honeywell UOP. Surging crude oil costs would naturally profit UOP, which serves the oil and gasoline trade and is a part of the corporate’s efficiency supplies and applied sciences section.
Honeywell could be a giant winner from a coronavirus vaccine, however it additionally has the monetary energy to climate a protracted financial slowdown or a slower-than-expected vaccine rollout. The corporate has little or no debt and loads of cash to pay bills, make investments, and canopy its dividend, which yields 1.8%. Honeywell is a horny funding in that its enterprise would enhance from a vaccine, however it’s diversified sufficient to generate sizable cash circulate and earnings even with out one.