Traditional dividend havens such as utilities and real estate investment trusts are expected to continue that role, with yields in the 3% range this year. Those looking for more robust dividend growth should consider sectors such as health care and technology.
The health and tech sectors in the S&P 500 index (.SPX) are expected to notch the best dividend growth this year on a per share basis, 10% for health care and 9% for tech, according to consensus estimates. Those two sectors are expected to increase their earnings this year by roughly 10%, compared with mid-single digits for utilities and REITs.
IHS Markit, a financial-data firm, expects U.S. dividends paid out to total a record $663 billion this year, up 7.2% from 2019’s levels—but below the 7.9% gain the previous year. That 2020 estimate, which excludes special dividends, covers the entire U.S. stock market, including the S&P 500.
And Lowe’s is taking steps to improve pricing and promotional tools in order to recoup lost margins in the new year. Moreover, lower interest rates, stability in the housing sector and advertising efficiencies from the continued shift to digital marketing should give the stock
a boost.
All three stocks are rated buy at UBS, with Hasbro upgraded on Nov. 25. Amazon has a $2,100 price target, Hasbro has a $117 price target and Lowe’s price target is $140.
Home improvement retailer Lowe’s is also a “top global idea” at RBC Capital Markets, where it’s rated outperform with a $134 price target.
“While we have long believed that part of Lowe’s relative underperformance versus Home Depot relates to their respective store bases, as Lowe’s stores tend to be located further out from major metro areas, we have also underestimated how difficult Lowe’s had made it for Pros customers to do business with the company, and improvements on this front should enable it to gain incremental market share,” analyst Scot Ciccarelli wrote in a note.
Young consumers are increasingly concerned about climate change which makes environmental sustainability a top issue for the retail sector.
“We believe brands that promote sustainability will gain wallet share of younger consumers and become more relevant,” wrote Cowen analysts in their “Future of Retail” report. “In our view, there is a strong momentum toward eliminating waste among retailers.”
Cyber Monday mobile transactions in 2019 totaled $3.1 billion, according to Adobe Analytics data. Total Cyber Monday online sales were $9.4 billion, a record.
“The smartphone continues to radically alter the end-to-end customer experience as customers increasingly rely on smartphones to research, transact and engage with brands,” Cowen analysts say.
The rise of smartphone shopping is due to social media platforms and the influencers, brand ambassadors, and communities that have popped up on them. Cowen data shows that more than 63% of millennials ages 18 to 34 spend at least four hours per day on their mobile phones.
“We also believe that the channel has major implications for both in-store traffic and conversion as consumers use devices to inform purchases before or during shopping trips, including the use of smart labels, virtual reality and augmented reality,” Cowen said.
Even as shoppers use mobile devices and other e-commerce platforms to make a purchase, customers are increasingly opting to make the last-mile trek for their
items themselves.
“We expect more shoppers to adopt and appreciate curbside pickup, which we view as an ideal manifestation of combining physical and digital retail,” Cowen said.
Cowen data shows that 21% of the U.S. population has tried curbside pickup or buy-online-pickup-in-store for their groceries.
Walmart Inc. (WMT) and Target Corp. (TGT) are the leaders in curbside pickup, Cowen says. Both are able to leverage their large store fleets to offer the service.
“Given that the same-day options rely on our store assets, team and inventory they are much more profitable than traditional e-commerce fulfillment,” said Target’s Chief Executive Brian Cornell on the third-quarter earnings call.
E-commerce on various devices and convenient fulfillment methods are also erasing the shopping calendar.
“Black Friday will change dramatically in 2020,” said Graham Cooke, chief executive of Qubit, a personalization software provider. “There’s no need to wake up at the crack of dawn just to fight over sale items when shoppers can find great deals from their couch.”
Moody’s analysts think global trade policy disputes, will continue to be a risk factor in 2020, as well as a weight on consumer confidence. President Trump’s U.S. - China trade war has disrupted global manufacturing and retailing supply lines and the import tariffs have raised some prices.
“Although we do not expect a recession in 2020, recession risks are high amid a backdrop of trade policy uncertainty, [and] an unpredictable political and geopolitical environment,” Moody’s says.
“Increased trade friction could trigger spikes of volatility in financial markets and further disrupt trade flows. Many companies have so far been able to lessen the effect of tariffs through a combination of cost reductions, buildup of pre-tariff inventory and price increases within the industry supply chain. But these offsets may not last if these
tensions persist.”
Moody’s forecasts slight operating income growth to a 3% or 4% increase in 2020 for the retails sector, though analysts don’t expect “much improvement” in operating margins as retailers use promotions to increase market share.
Dollar stores like Dollar General Inc. (DG), off-price retailers like TJX Cos. (TJX), and supermarkets like Kroger Co. (KR) are expected to outperform. Department stores like Macy’s Inc. (M) and J.C. Penney Co. Inc. (JCP), and drug stores like Walgreens Boots Alliance Inc. (WBA) are forecast to underperform.
The Amplify Online Retail ETF (IBUY) is up 30% for the past year, the SPDR S&P Retail ETF (XRT) has gained 13.4% for the period, and the Dow Jones Industrial Average (.DJI), and S&P 500 index (.SPX) are up 24.2% and 30.3% respectively.
Secondhand retailers are also in a position to benefit from concern about sustainability. Cowen thinks RealReal Inc. (REAL) and ThredUp, which forecasts that the secondhand market will be valued at $51 billion by 2023, have an advantage.
Nearly half of the total sustainable merchandise is for women, 25% for children, and 24% for men, according to the StyleSage Sustainability Report.
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Online lifts holiday shopping sales
Seema Shah of Creditntell.com says the holiday shopping season got a lift from
e-commerce sales, but overall results could have been more robust.
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Sustainability will continue to be top of mind for young consumers
Retail gets increasingly mobile
Recession fears and international trade disputes will continue to impact the
retail sector
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The slower dividend growth “is mainly attributed to a slowdown in earnings growth when compared with 2018 earnings growth, which was boosted by tax cuts,” IHS Markit says in its 2020 forecast.
Still, there should be plenty of dividend growth this year across various sectors, starting with health care. Dividends usually grow in line with earnings, and the health-care sector, from large pharmaceutical firms to a major prescription-drug distributor, offers plenty of strength. “The amount of money spent on prescription drugs has nearly doubled over the past three decades as pharmaceuticals sales and profit margins have ballooned,” the forecast says.
The consensus earnings estimate for the Health Care Select Sector SPDR (XLV), a good proxy for larger health-care companies, is $6.31 a share, up 8% from $5.82 in 2019.
In its recent assessment of dividend trends, IHS Markit noted that the health-care sector “has shown a very aggressive capital deployment stance in [fiscal-year 2019] with mergers and acquisitions being the top priority followed by rising cash dividends.”
IHS Markit expects the sector to boost its dividends by 9.3%, helped by sustainable free cash flow and lower debt levels.
Goldman Sachs shares IHS Markit’s optimistic outlook for health-care dividend stocks. For analytical purposes, Goldman divides the broad market into various baskets of stocks, one of which focuses on dividend growth. That particular basket, Goldman Sachs wrote in a note dated Jan. 3, “offers longer-term investors a premium yield while positioning for a value rotation.”
Growth stocks have outperformed value names for many years, though value stocks did better in the last four months of 2019. Goldman Sachs observed in the research note that “the outlook for growth and value remains muddy” as stand-alone investments, and that “we recommend strategies that combine growth and value.”
Goldman’s dividend-growth basket of stocks was recently yielding 3.6%, compared with 2.1% for the S&P 500, and it traded at a substantial discount to the broader market. These stocks offer 10% dividend growth through next year, compared with 5% for the broader market, Goldman Sachs says.
The health-care stocks in the basket are AbbVie (ABBV), which recently yielded 5.3%; Gilead Sciences (GILD), 3.9%; Pfizer (PFE), 3.9%; Cardinal Health (CAH), 3.9%; Amgen (AMGN), 2.7%; Bristol-Myers Squibb (BMY), 2.8%; and Eli Lilly (LLY), 2.2%.
Meanwhile, the tech companies in the S&P 500 are expected to increase their dividends by an average of 9% on a per-share basis, based on consensus estimates.
IHS Markit notes that “many of the leading tech payers have relatively large cash balances and low debt profiles, reinforcing the sector’s status as top payer.” That includes Microsoft (MSFT), which has regularly increased its dividend at a double-digit pace, and Apple (AAPL), whose net cash at the end of September totaled $98 billion. Microsoft was recently yielding 1.3%, and Apple was at 1%—both well below the S&P 500’s average of about 2%.
The yields of Microsoft and Apple are also punier than the tech stocks in the Goldman Sachs dividend-growth basket. But in terms of total dividend payouts expected this year, Microsoft and Apple are expected to rank in the top five of U.S. companies, according to IHS Markit.
The tech names in Goldman’s dividend-growth basket include Texas Instruments (TXN), which recently yielded 2.8%; IBM (IBM), 4.8%; Broadcom (AVGO), 4.2%; Cisco Systems (CSCO), 3%; and NetApp (NTAP), 3.1%.
Of course, health care and tech aren’t the only sectors that offer dividend growth. Based on consensus estimates, consumer-discretionary and energy companies in the S&P 500 are expected to boost their dividends this year by 8% on average.
Consider, though, that the Consumer Discretionary Select SPDR exchange-traded fund (XLY), a proxy for companies in that sector, yields about 1.3%—not all that enticing. And energy stocks have lagged behind the broader market, their attractive yields notwithstanding. The Energy Select Sector SPDR ETF (XLE) was recently yielding about 3.7%.
Utilities in the S&P 500 are expected to boost their dividends on a per share basis by an average of 7%, a respectable gain if it occurs. However, many of these stocks have been bid up, as investors seek yield in a low-rate environment, essentially treating them as a bond proxy.
The Utilities Select Sector SPDR ETF (XLU), for example, trades at about 19.7 forward earnings estimates, some 15% above its five-year average of 17.2 times, according to FactSet.
Income investors could also turn to the financial, materials, and industrial sectors of the S&P 500 for yield growth. Such stocks are expected to boost their dividends by 6% this year on a per share basis, according to consensus estimates.
Take financials, for instance. They are expected to yield 2.2% on average, and many individual banks sport even higher yields. JPMorgan Chase’s (JPM) was recently at 2.6%, the same as Citigroup’s (C). Wells Fargo (WFC) was at 3.8%, compared with a 2.1% yield for Bank of America (BAC).
Although dividend growth should slow this year, there should still be plenty of yield available in various sectors. But it’s important to understand the fundamentals of a company, even if its yield is alluring.