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While 2015 was a flat year for the market overall, as measured by the S&P 500 index, it was actually a very volatile year for a few select sectors.
Energy, materials and retail were among the hardest hit, due to a variety of factors. Within these industries, share prices declined significantly for many stocks. After such a bad year, it’s hard to view any of these beaten-down stocks positively going forward – with a few notable exceptions.
There is no denying that 2015 was a year to forget for Cummins (NYSE: CMI), Caterpillar (NYSE: CAT) and Wal-Mart (NYSE: WMT). But for investors, there are still reasons to be optimistic about 2016 and beyond. All three of these companies are still profitable, and thanks to their stock price declines, their shares are cheaper than they have been in years. They also offer high dividend yields to boot.
In the case of energy and materials, clearly the culprit was the massive decline in commodity prices in 2015. Commodities of all sorts, including oil, gas and precious metals, fell 50% or more from their peak levels seen just two years ago. This caused massive carnage for any company that does business in these industries.
As a global leader in heavy machinery, Caterpillar was hit hard by the commodities downturn. Its problems were exacerbated by the fact that the company caters its earth-moving equipment to the mining industry.
Caterpillar’s projected 2016 revenue is likely to come in $20 billion below where it was in 2012. That is an astonishing drop in just four years, and demonstrates how bad things are in the mining industry. Approximately two-thirds of the decline is attributed to Caterpillar’s mining business, which was its most profitable segment in 2012.
Meanwhile, Cummins is a manufacturer of diesel and natural gas engines. It too has been hit hard by the steep fall in commodities prices. Revenue is expected to decline 2% this year, driven mostly by the economic slowdown in emerging markets such as China and Brazil. International revenue declined 18% just last quarter, compounded by the strengthening U.S. dollar.
When it comes to retail, many companies were expecting to see robust sales due to the fall in gas prices, but that did not play out. Instead, U.S. consumers used their windfall to pay down debt, add to personal savings and spend more on experiences such as travel and leisure.
In the case of Wal-Mart, the company made the decision to invest much more in its employee wages, training and store renovations. Wal-Mart plans to spend $1.2 billion to raise its employee wages, and will invest another $1.1 billion into building its e-commerce and mobile businesses.
Why Better Days Could Lie Ahead
Still, the good thing about Caterpillar and Cummins is that they are cheap stocks with high dividend yields. Caterpillar and Cummins trade for 14 and 9 times earnings, respectively. And, each stock provides a 4.5% dividend yield.
Importantly, even though their profitability has shrunk due to the commodity crash, both companies generate enough earnings to cover their dividends. As a percentage of earnings per share, Caterpillar and Cummins have a dividend payout ratio of 63% and 41%, respectively.
Clearly, both Caterpillar and Cummins will need a recovery in commodity prices for their stocks to recover. If, and when, that happens is anyone’s guess. But it’s important to remember that commodities are cyclical, and the best time to buy these stocks is at the bottom of the cycle, not at the top. In the meantime, those 4.5% dividends pay investors well to be patient.
For Wal-Mart, the good news is that the stock is cheaper than it has been in years, and its dividend yield is near a five-year high. Plus, the company still has some things working in its favor – specifically, its small-store and e-commerce businesses. Wal-Mart’s smaller Neighborhood Markets banner grew comparable sales by 8% last quarter. Its e-commerce business grew revenue by 10% last quarter.
While the picture is certainly ugly right now, Caterpillar, Cummins and Wal-Mart have navigated difficult waters before. They did not grow into the massive, highly profitable companies that they are today without a few bumps in the road.
Only those investors willing to take additional risk should consider investing in these stocks, but for those who do, the long-term rewards may well be worth it.
How to Sleep Easy at Night
Is the economy keeping you up at night? Do you worry there’s another crash just around the corner? If so, you can stop worrying right now. All it takes is a few minutes.