With a solid economy and a Fed still likely to cut interest rates this year, we believe the dividend yield of 2.6% and forward P/E ratio of 14 on our portfolio holdings are attractive, especially as we think the outlook for corporate profits is favorable, observes John Buckingham, value investing expert and editor of The Prudent Speculator.
Yes, bouts of downside market volatility, troubling events on college campuses and rising geopolitical tensions are disconcerting, but equities over time have always managed to prove Warren Buffett right: “If a business does well, the stock will eventually follow.”
Bristol-Myers Squibb (BMY)
Bristol-Myers Squibb is a global pharma company focused on drugs for cardiovascular, virology, oncology, affective disorders, immunology, metabolic and other indications. BMY has been expanding its neuroscience portfolio, announcing the acquisition of Karuna Therapeutics, which is developing a schizophrenia treatment.
BMY lost $4.40 per share in Q1, but the $11.87 billion revenue figure was 4% better than the analyst consensus. The big loss was due to one-time accounting handling of acquired in-process R&D, with $12.1 billion coming from the Karuna transaction and $800 million from Systlmmune. The company will cut 2,200 from its workforce and expects to see $1.5 billion of cost savings by the end of next year.
BMY now trades for 6.5 times next 12-month adjusted EPS projections, which we think is too low for a high-quality drug maker, especially as we believe the firm’s newer and upcoming drug launches are not being adequately appreciated by fickle investors.
Caterpillar (CAT)
Construction and mining equipment giant Caterpillar has maintained its edge through the incorporation of technology and software into its products to improve both performance and total cost of customer ownership. Despite another solid quarter, CAT has retreated 13% from its early-April highs.
In Q1, the company posted revenue of $14.96 billion, which lagged the consensus estimate of $15.3 billion, but adjusted EPS of $5.60 came in nicely above the average analyst forecast of $5.12.
We think CAT’s dominance in the U.S. continues, and runways for growth still exist in emerging economies, with the Street projecting EPS at $24.50 in 2026. The recent pullback leaves the stock trading for just 15 times earnings, well below the historical norm.
Exxon Mobil (XOM)
One of the world’s largest integrated oil and gas companies, XOM’s countercyclical expansion strategy leading into the pandemic continues to pay off, aided by global oil prices remaining elevated as conflicts in the Middle East and Ukraine cause concern about supply.
Recent news points to the FTC being prepared to clear XOM’s Pioneer acquisition, which we see adding scale advantages, as well as further deepening the presence in the Permian Basin. Shares have sputtered recently after Q1 financial results saw EPS of $2.06 come in 6% below the consensus analyst estimate, even as revenue of $83.08 billion exceeded forecasts.
While the oil biz is strong, natural gas is mired in a glut of supply, and XOM continues to make progress on structural cost reductions, with $400 million in Q1 adding to the $10.1 billion total, which is strong progress toward the goal of $15 billion by 2027.
In the intermediate term, we think the world will continue to deal with a supply and demand imbalance (with a lack of investment over the past few years). The dividend yield is 3.2% and we like the forward P/E ratio near 11.
