A Member of Pat McKeough’s Inner Circle recently asked for his advice on a company that specializes in architectural metal work – ADF Group.
Pat likes the company’s healthy backlog, margin expansion, low debt, and diversified capabilities. However, he notes that the company’s client list is highly concentrated – this poses a higher level of risk for all but more aggressive investors.
ADF Group (Symbol DRX on Toronto; www.adfgroup.com), designs and engineers architectural metal work, including connections, heavy steel built-ups, and miscellaneous products. It provides these services from a 630,000-square-foot fabrication plant in Quebec and a 100,000-square-foot fabrication plant in Montana.
The company’s clients include general contractors, project owners, engineering firms and project architects, structural steel erectors, and other steel structure fabricators. Examples of its work include the 440-foot-tall spire at the top of the One World Trade Center tower in New York, and the three-dimensional trusses for the Mercedes-Benz Stadium in Atlanta.
ADF pays a semi-annual dividend of $0.02 a share in May and October. Its $0.04 annual payment yields 0.42%.
On December 11, 2023, the company announced it had signed $234.0 million in new contracts in the U.S. for work over the next couple of years. The largest of these contracts is for the second construction phase of a pharmaceutical company’s facilities in the U.S. Midwest.
Inner Circle: ADF Group’s revenue dips but earnings rocket 51.8% from a concentrated client base
In the quarter ended July 31, 2024, ADF’s revenue decreased by 6.6%, to $74.9 million from $65.0 million a year earlier. The decrease came mostly from construction site preparation delays related to one client. The company’s order backlog at the end of the quarter was $402.3 million. Projects currently in the backlog extend to January 31, 2026.
The company earned $16.0 million, or $0.51 a share, in the quarter. That’s 51.8% higher than $10.5 million, or $0.32, a year earlier.
ADF had $40.2 million in long-term debt as of July 31, 2024; that represents a low 14% of its market cap. It finished the quarter with $76.0 million in cash.
The company has a concentrated client base—three clients account for 82% of its revenue.
That kind of client concentration adds risk, but ADF is adding to its backlog, and the company continues to report rising sales in its competitive markets.
Recommendation in Pat’s Inner Circle: ADF Group is okay to hold, but only for aggressive investors.
Increased government spending on public infrastructure projects should spur demand for construction equipment and related services from Finning International. That should also let it keep raising its dividend.
With a strong balance sheet showing just 26% debt-to-market-cap, $298M in cash, and proven recession resistance, the company continues its 23-year tradition of dividend growth.
The recent 10% dividend hike demonstrates management’s confidence in future cash flows, while the stock trades at 9.8 times the company’s forward earnings forecast. With both strong financials and infrastructure spending tailwinds, this is one to hold for the long term.
FINNING INTERNATIONAL INC. (Toronto symbol FTT; www.finning.com) sells and services Caterpillar-brand heavy equipment in Western Canada but also Chile, Argentina, Bolivia, the U.K. and Ireland. Its main customers are in the oil and gas, mining, forestry products and construction industries.
Finning continues to benefit from rising commodity prices, such as for copper. That reflects increasing demand from mining firms for its products. It’s also benefitting from increasing government spending on new infrastructure projects.
Canada is Finning’s biggest market, with 54% of net revenue. Other markets in order of revenue contribution are South America (33%) and the U.K. & Ireland (13%).
The servicing of equipment provides 56% of revenue, while the sale of new equipment provides 33%; the balance comes from the sale of used equipment, rentals and fuel.
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Value Stocks: Finning International’s cheap shares are boosted by a 23-year dividend growth streak
Finning’s shares took a drop in mid-November 2024. That was mainly due to weaker-than-expected demand for support services at its Canadian, and U.K. and Ireland operations. However, sales of new and used equipment remain strong.
Overall revenue in the three months ended September 30, 2024, gained 4.2%, to $2.54 billion from $2.44 billion a year earlier. Even so, that missed the consensus forecast of $2.56 billion.
Finning continues to make progress with a plan to streamline its operations and reduce the size of its workforce. If you exclude severance costs and other unusual items, earnings in the quarter fell 13.1%, to $0.93 a share from $1.07. That also missed the $1.04 consensus estimate.
The company also continues to enjoy strong demand for new equipment. Its backlog as of September 30, 2024, was $2.3 billion, up from $2.0 billion at the end of 2023. After the end of the quarter, it received an order worth $250 million from a mining company in South America, and $90 million of new orders from mining firms in Canada.
Meanwhile, the company’s balance sheet is still sound. It ended the latest quarter with cash of $298 million, and its long-term debt of $1.38 billion is a moderate 26% of its market cap. Finning’s strong balance sheet cuts its cyclical risk.
Finning will probably earn $3.91 a share for all of 2025, and the stock trades at just 9.8 times that forecast.
With the June 2024 payment, Finning raised your quarterly dividend by 10.0% to $0.275 from $0.25 a share. The new annual rate of $1.10 a share yields 2.9%. Finning has now raised the annual dividend rate each year for the past 23 years.
Wajax Corp. – an industrial equipment leader offers compelling value through its diversified customer base and recent strategic expansion into hydraulic services.
Management’s recent 6.1% dividend hike helped push the yield to its current attractive level, demonstrating confidence in the firm’s prospects despite a temporary revenue dip from a cycled-off mining contract.
Even with a defensive business model combining equipment sales and maintenance services, plus strong growth prospects in infrastructure and resources, the stock still trades at just 8.7 times the company’s forward earnings forecast.
WAJAX CORP. (Toronto symbol WJX; www.wajax.ca) sells and services cranes, forklifts and other heavy equipment. Wajax also provides related parts and systems such as ball bearings, hoses, diesel engines and transmissions. The company’s customers are spread across the resources, construction, manufacturing and transportation industries.
Last year, Wajax acquired Sault Ste. Marie, Ontario-based Beta Fluid Power Ltd. and Beta Industrial Ltd. The purchase price has not yet been disclosed.
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Beta Fluid is a leading regional supplier of hydraulic and pneumatic equipment for use in the industrial, mining and construction sectors. It also offers hydraulic and pneumatic maintenance, repair and replacement services, including mobile services. Beta Industrial provides a wide range of on-site facility repair and maintenance services.
Dividend Stocks: High payout is secure despite a revenue dip at Wajax
In the quarter ended September 30, 2024, overall revenue fell 5.6%, to $481.0 million from $509.7 million a year earlier. Equipment sales declined in part as a result of the delivery of a large mining shovel in the third quarter of 2023, which did not recur this year. Excluding one-time items, Wajax earned $9.6 million, or $0.44. That was down 53.6% from $20.7 million, or $0.96.
The company raised its quarterly dividend by 6.1% with the April 2024 payment, to $0.35 a share from $0.33. The stock now yields a high 6.0%.
We continue to recommend investors diversify their Finance sector holdings with non-bank stocks. Here’s one that dominates its niche market, which helps cut your risk. What’s more, it’s incorporating artificial intelligence (AI) technology to improve its product and services performance. That should spur growth for years to come.
That’s because this investment management leader offers a compelling combination of current income and growth potential from strong demographic tailwinds from retiring baby boomers.
With a 10.3% five-year dividend growth rate and expanding international presence, the stock trades at 13.2 times the company’s forward earnings forecast.
T. ROWE PRICE GROUP INC. (Nasdaq symbol TROW; www.troweprice.com) has its fee income rise and fall with the value of the mutual funds and other securities it manages.
The company’s fee income rises with the value of the mutual funds and other securities it manages. Thanks to the strong stock market, T. Rowe Price had $1.63 trillion in assets under management as of September 30, 2024, up 12.4% from $1.45 billion at the start of the year. Investors outside the U.S. account for roughly 9% of the company’s assets under management.
Thanks to the strong stock market and rising assets under management, the company’s revenue in the third quarter ended September 30, 2024, rose 6.9%, to $1.79 billion from $1.67 billion a year earlier.
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Despite higher costs—for payroll, advertising, and new technology—earnings before unusual items rose 17.4%, to $586.5 million from $499.5 million. Due to fewer shares outstanding, earnings per share rose 18.4%, to $2.57 from $2.17.
Dividend Stocks: T. Rowe Price’s 38-year dividend growth streak at good valuation
The company’s long-term prospects remain bright, particularly as more baby boomers retire over the next few years. A new plan to cut 2% of its workforce and consolidate office space should also improve profitability.
The company should earn $9.42 a share in 2025. It trades at a reasonable 13.2 times that earnings forecast.
T. Rowe Price last raised your quarterly dividend by 1.6% with the March 2024 payment, to $1.24 a share from $1.22. The annual rate of $4.96 yields a high 4.0%. T. Rowe Price has now increased its annual dividend payment for 38 consecutive years.
Over the past five years, that dividend rose by an average 10.3% annually. The company’s TSI Dividend Sustainability Rating is Above Average.
Recommendation in Dividend Advisor: T. Rowe Price Group Inc. is a buy.
This industrial transformation story offers compelling value as the company completes its pivot from pipeline coatings to higher-margin plastics and electrical products. With $265M in recent divestitures strengthening its balance sheet, Mattr is well-positioned to execute its growth strategy.
A $150m modernization plan includes two new operational U.S. facilities expected to add $100m to annual revenue while expanding profit margins from 16.9% to over 20% by 2030.
Combined with aggressive share buybacks and projected EPS growth from $0.93 to $1.44 next year, the stock trades reasonably at 8.9 times the company’s forward earnings forecast.
MATTR CORP.(Toronto symbol MATR; www.mattr.com) was formerly called Shawcor Ltd. (old symbol SCL), the company recently sold most of its pipeline coating business to Tenaris S.A. (New York symbol TS) for $241.2 million.
The remaining firm makes plastic tanks and industrial products such as electrical cables and sheaths.
The company recently sold its remaining pipeline coating business, Thermotite, which operates a plant in Serra, Brazil.
Mattr will receive $17.5 million U.S. (about $24 million Canadian) when it completes the sale in the next few months.
The cash will help fund Mattr’s plan to spend $150 million to modernize its facilities. These improvements will likely lift its projected earnings from $0.93 a share in 2024 to $1.44 in 2025. The stock trades at a low 8.9 times that 2025 forecast.
Meanwhile, Mattr has now completed building two new composite (plastic) production facilities in Texas and South Carolina as part of that plan. They should reach normalized production levels in 2026, which would add $100 million to the company’s annual revenue of $911 million.
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Mattr is also modernizing two plants that make wires, cables and related products. It expects to complete this project in mid-2025.
The company also recently agreed to acquire AmerCable Inc. Based in Arkansas, this firm makes a variety of power cables and wires for industrial customers.
The company will pay $280 million U.S. (or $390 million Canadian) when it completes the purchase by the end of 2024. The new operations should add $75 million to Mattr’s annual EBITDA (earnings before interest, taxes, depreciation and amortization charges).
Growth Stocks: Modernized plants will boost sales and profits at Mattr
The stock is down from its recent peak of $18 in July 2024 mainly due to concerns over its plan to spend $150 million to modernize its facilities. A potential economic slowdown has also weighed on the stock.
Overall, the plan should increase Mattr’s annual sales by over 10% a year through 2030 and lift its gross profit margins from 17% to more than 20% by 2030.
Mattr’s revenue in the three months ended September 30, 2024, rose 2.0%, to $226.2 million from $221.9 million a year earlier. Strong sales of wire and cable products offset lower shipments of plastic pipes due to the timing of certain orders. The latest revenue figure also missed the consensus forecast of $239.7 million.
If you exclude unusual items, Mattr earned $0.23 a share (or a total of $15.39 million) in the latest quarter, down 79.3% from $1.11 a share (or $77.05 million). That’s due to higher sales of less-profitable products, as well as the costs related to building new facilities. Even so, the latest earnings still topped the $0.21-a-share consensus estimate.
Mattr suspended its quarterly dividend of $0.15 a share in 2020 in response to the COVID-19 disruptions.
However, the company continues to reward investors with share buybacks. Stock repurchases reduce the number of shares outstanding. That boosts earnings per share since profit is divided among fewer shares. The higher per-share earnings then help spur market interest in the stock and so lift share prices.
Under its recent buyback program, Mattr bought 3.4 million shares for a total of $52.2 million.
The company has now received approval for its new plan to buy back up to 4.98 million of its shares (7.5% of the total outstanding) over the next year.
A Member of Pat McKeough’s Inner Circle recently asked for his advice on Duolingo – a company that’s one of the leading language learning apps with over 800 million downloads.
Pat likes the firm’s strong brand recognition and steady growth in active users, revenues and earnings. The firm is also being innovative with new product offerings. However, Pat cautions that the shares are priced at a very high valuation relative to earnings and could be very volatile, especially with plenty of competition in the field.
Duolingo Inc. (Symbol DUOL on Nasdaq; www.duolingo.com), is the top-grossing education app on Google Play and the Apple App Store. It has more than 800 million downloads.
Founded in 2011, the company offers courses on over 40 distinct languages—from the world’s most spoken, such as Spanish and French, to endangered languages like Hawaiian, Navajo and Scottish Gaelic. It also offers fictional languages from TV shows like Star Trek and Game of Thrones.
The company has a “freemium” business model: the app and the website are accessible free of charge, although Duolingo also offers a premium service, Super Duolingo (formerly called Duolingo Plus), for a subscription fee. Duolingo has locations in the U.S., China and Germany.
Notably, the company believes that there are more people in the U.S. learning languages on Duolingo than there are foreign language learners in all U.S. high schools combined. In addition, there are more people learning certain languages on Duolingo, such as Irish and Hawaiian, than there are native speakers of those languages worldwide.
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Duolingo went public on July 27, 2021, selling shares through its IPO for $102 each. The company started out as a hot new issue. It initially set its proposed IPO price at $85 to $95 but was able to raise that on anticipated demand for its shares. It doubled in price within little more than a month.
Revenue rose 47.3%, from $250.8 million in 2021 (the business’s first year as a public company) to $369.5 million in 2022. In 2023, revenue rose 43.7%, to $531.1 million. Duolingo lost $60.1 million, or $1.52 a share, in 2021. In 2022, it lost $59.6 million, or $1.51 a share. In 2023, the company made $16.1 million, or $0.39 a share.
Inner Circle: Duolingo’s business and share price strengthens with innovation a key contributor
For the quarter ended September 30, 2024, revenue was $192.6 million, up 39.9% from $137.6 million a year earlier. More specifically, subscription revenue grew by 48.9%, to $17.6 million, and now accounts for 82% of overall revenue.
Daily active users (DAUs) rose 53.7%, to 37.2 million from 24.2 million while monthly active users (MAU) grew 36.1%, to 113.1 million from 83.1 million.
Duolingo had 8.6 million paid subscribers at the end of the latest quarter, 48.3% higher than 5.8 million a year ago. The company’s paid subscribers as a percentage of MAUs was 7.6% of the total.
Duolingo generated a profit in the latest quarter of $23.4 million, or $0.53 a share, up sharply from $2.8 million, or $0.07 a share.
The stock shot up to around $198 shortly after the IPO. It then fell to as low as $60 in 2022. However, the shares are up 55.2% over the last year and are now well above the IPO price.
Its business prospered during the pandemic, and the company now appears to be building on that rapid growth. It remains the leader in language instruction, but to keep growing, it must keep successfully expanding in its highly competitive market.
One way it’s doing that is through developing new products. For instance, it recently announced the launch of Duolingo Max, a higher tier subscription that harnesses the power of generative AI. Duolingo Max aims to give subscribers an even more engaging way to learn by chatting with Duolingo characters and receiving personalized explanations of the learner’s mistakes.
The company has also announced a strategic shift to a multi-subject product, with the addition of math and music courses to the mobile app. Moreover, management has announced a new curriculum designed for English learners at more advanced levels of language proficiency.
Recommendation in Pat’s Inner Circle: Duolingo Inc. is a hold.
As investors seek sustainable income in an evolving market landscape, TSI’s own Scott Clayton has identified compelling opportunities in spinoffs for 2025. This analysis applies our comprehensive dividend sustainability framework to companies planning those strategic splits for next year.
While spinoffs often capture headlines for their short-term market impact, our research goes deeper as we examine the fundamental factors that support dividend reliability and growth potential. As a TSI subscriber, you know this already and that’s why you’re reaping the benefits of TSI’s Dividend Sustainability Ratings.
Excerpt from theglobeandmail.com, November 21, 2024.
What are we looking for?
Sustainable dividends from stocks with upcoming spinoffs for 2025.
The screen
Comcast Corp. shares moved up recently on news the U.S. conglomerate will go ahead with the $7-billion spinoff of its NBCUniversal cable TV network business.
Canadian investors reacted similarly when TC Energy Corp. last year announced plans for the now-completed spinoff of its oil pipeline operations, South Bow Corp.
While spinoffs may or may not lead to short term gains, those organizational splits – where companies set up profitable subsidiaries as independent firms and hand out shares to their investors – often outperform comparable stocks in the long term.
What’s more, our TSI analyst team notes spinoff firms frequently have above-average takeover appeal. That’s thanks to their smaller market caps and “pure play” focus. Meanwhile, their former parents also benefit from more-focused operations.
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From a list of U.S. and Canadian firms with spinoffs planned for 2025, we singled out those dividend payers with growth potential as well as takeover appeal. We then applied our TSI Dividend Sustainability Rating System; it awards points to companies based on these key factors:
One point for five years of continuous dividend payments – two points for more than five;
Two points if it has raised the payment in the past five years;
One point for management’s commitment to dividends;
One point for operating in non-cyclical industries;
One point for limited exposure to foreign currency rates and freedom from political interference;
Two points for a strong balance sheet, including manageable debt and adequate cash;
Two points for a long-term record of positive earnings and cash flow to cover dividends;
One point if the company’s an industry leader.
Companies with 10 to 12 points have the most-secure dividends, or the highest sustainability. Those with seven to nine points have above-average sustainability; average sustainability, four to six points; and below average sustainability, one to three points.
Five dividend-paying giants announce 2025 spinoffs
What we found
Our TSI Dividend Sustainability Rating System generated five spinoff stocks primed for growth:
Comcast Corp. (with a 2.9% yield), based in Philadelphia, plans to spin off its NBCUniversal cable TV networks into a separate company. The media and telecommunications giant’s entertainment and news channels include MSNBC, CNBC, USA, Oxygen, E!, Syfy and Golf Channel.
Honeywell International Inc. (2.0%), based in North Carolina, already spun off two subsidiaries to shareholders in 2018 (Resideo Technologies Inc. and Garrett Motion Inc.). Now, it’s spinning off its Advanced Materials business. That division makes products ranging from body armour and pharmaceutical packaging to air-conditioning refrigerants and packaging films.
DuPont de Nemours Inc. (1.9%), headquartered in Wilmington, Delaware, is a global manufacturer of specialty materials, chemicals, agricultural products and more. Earlier this year, and almost five years since its last spinoff, DuPont announced plans to separate into three independent, publicly traded companies. Under the plan, it would spin off its Electronics and Water businesses. The remaining firm will keep the DuPont name and “DD” trading symbol, as well as most of its Industrial Solutions, Safety Solutions and Shelter Solutions businesses.
Unilever plc (3.2%), based in London, is one of the world’s largest makers and sellers of branded and packaged consumer goods. The company is now spinning off its Ice Cream business, which has five of the top 10 selling global ice cream brands including Wall’s, Magnum, and Ben & Jerry’s.
Spectrum Brands Holdings Inc. (2.1%), headquartered in Madison, Wisconsin, is focused on three segments: home/personal care, pet care, and home and garden. The company plans to narrow that focus and spin off its home/personal care (HPC) division.
Scott Clayton, MBA, is senior analyst for TSI Network and associate editor of TSI Dividend Advisor.
Aggressive investors looking at high-risk, aggressive stocks to invest in should only allocate a small part of their portfolios to those investments, including a ChatGPT-like stock
There are always investment-related worries to occupy the minds of investors looking for good Canadian stocks—but focusing on high-risk, aggressive stocks to invest in just makes it worse. That applies even to “hot” investments similar to a ChatGPT stock.
It’s only natural to worry about your investments, even good Canadian stocks, whether that’s during the kind of bull market we saw in 2021, or the COVID downturn of 2020 or the current volatile market. But being able to overcome that worry is one of the most important traits a successful investor can have. It’s especially important when investors are looking for high-risk stocks to invest in.
Anxiety recedes with investment quality, diversification and balance
You’ll find that many of your worries centre on things that are unlikely to happen; that are already largely discounted in current stock prices; and that probably won’t matter as much as you feared they would. That also applies when you’re looking for the best high-risk, aggressive stocks to invest in, like something similar to a ChatGPT-like stock or other AI star.
You get a much better return on time spent if you devote less of it to worrying about high-risk, aggressive stocks to invest in, and more of it on forming an investing strategy that focuses on good Canadian stocks, for example. Create a strategy that is built upon analyzing the quality and diversification of your investments, and the structure and balance of your portfolio.
There’s another advantage as well. A calm investor is much less likely to react in haste and make sudden decisions that could prove to be damaging in the long run such as devoting a large portion of your portfolio to a ChatGPT-like stock or another darling of momentum investors instead of focusing on good Canadian stocks.
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Pink sheet stocks are the Wild West of U.S.-based stocks—and only for investors looking for high-risk stocks to invest in … with money they can afford to lose
Companies that trade on the U.S. over-the-counter market are said to trade as “pink sheet stocks,” a holdover from the days when the quotes for these stocks were printed on pink paper.
Today, OTC Markets Group (formerly Pink OTC Markets Inc.), a private company, is the main provider of pricing and financial information for the over-the-counter (OTC) securities markets.
OTC Markets Group operates a centralized information network that includes services for market makers, issuers, brokers and OTC investors. This information aims to make OTC trading more efficient and improve access to capital for OTC issuers.
Unlike good Canadian stocks, many companies that trade “pink sheets stocks” usually don’t have sufficient market caps, or enough shareholders, to meet most stock exchanges’ minimum criteria. That includes several penny stocks that purport to be the next ChatGPT stock.
Over-the-counter shares are often sporadically or inactively traded. That can make buying penny stocks and pink sheet stocks (and selling them) more difficult and expensive than shares of larger stock exchanges.
As well, over-the-counter stocks trade through “market makers,” or traders who maintain an orderly market in a particular stock by standing ready to buy or sell shares. The market maker’s job is to maintain a firm bid and ask price for their assigned securities. If a broker wants to buy a stock, but there are no offers to sell it, the market maker fills the order by selling shares from their own firm’s account. If a broker wants to sell, but no one wants to buy, the market maker buys the shares.
Over-the-counter stocks may at times seem to offer extraordinary opportunities, but this can be an expensive illusion. Most legitimate companies with substantial growth potential will want to leave the over-the-counter market as quickly as possible, and move to the major markets. This tilts the odds against you.
That’s why we’ve always stayed out of the over-the-counter market, and are likely to continue to stay out as we focus on good Canadian stocks and good U.S. stocks. There are just too many attractive buying opportunities in major markets where risk is lower and your chances of making money are much better.
Patience, consistency and skepticism are at the heart of a successful portfolio investing approach
If you ask investors who have a few decades of successful investing behind them, few if any will credit their portfolio investing success to one big idea, like a stock similar to a ChatGPT stock. That’s especially true if the technique involves predicting the future, or trying to speculate on the price movements of volatile commodities like oil. Instead, most will talk about everyday qualities like patience, consistency and a healthy sense of skepticism—the kind of qualities that bring success in all aspects of life, not just investing.
These qualities help you apply our three-part formula for portfolio investing success: mainly invest in well-established, high-quality companies; spread your money out across most if not all of the five main economic sectors; and downplay or stay out of companies that are in the broker/media limelight. These are our guiding principles when we manage the portfolios of Successful Investor Wealth Management clients.
Investing tip for high-risk stocks to invest in: Spread your money out
No matter what kind of stocks you invest in, you should take care to spread your money out across the five main economic sectors: Finance, Utilities, Consumer, Resources & Commodities, and Manufacturing & Industry.
By diversifying across most if not all of the five sectors, you avoid overloading yourself with stocks that are about to slump simply because of industry conditions or investor fashion.
Bonus tip: Avoid high-risk Canadian cannabis “pot of gold” stocks
Even with its continuing challenges, the marijuana industry now has a number of established producers, including Canopy Growth, but investors still need to look out for high-risk “pot-of-gold” penny stocks. These typically arise in new industries. Those stocks never become the good Canadian stocks we focus on.
Stock promotion is a take-the-money-and-run type of business. Most successful entrepreneurs value their reputations, and want to build a profitable, sustainable business that can pay off for investors. So they generally go into some other line of work, and stay out of stock promotion. Right now, cannabis stock investing is a risky area of speculative highly aggressive stocks.
We advise staying out of stock promotions of Canadian marijuana stocks businesses or anything else. They attract the wrong kind of people.
These days, it’s faster and easier than ever to launch a stock promotion, thanks to the Internet. One recent “penny pot” investing stock scam almost seems like an MBA-style case study on how to launch one of these frauds online. To avoid being taken in, it pays to read more, and to think before you invest.
Have you been looking for high-risk, aggressive stocks to invest in rather than what we term good Canadian stocks, for example? Share your experience with us in the comments.
This article was originally published in 2017 and is regularly updated.
We see IBM as a great way for investors to successfully tap the fast-growing artificial intelligence (AI) field. This legacy tech firm was in fact an early pioneer in AI. In 2011: representing an AI milestone, the firm’s Watson supercomputer beat human contestants on the Jeopardy game show.
More recently, rising client demand for AI services has lifted the stock by 45.9% in the past year. Its rising earnings also give it more room for dividend hikes.
The stock trades at 21.1 times the company’s forward earnings forecast, a very reasonable valuation for a diversified business model that’s focused on the fast-growing AI market. This is a very solid pick and relatively low risk path to capitalize on long-term AI benefits.
IBM (New York symbol IBM; www.ibm.com) is one of the world’s largest computer firms, with operations in over 175 countries.
In the past few years, IBM has shifted its focus to its more profitable cloud computing, consulting and mainframe businesses. It now gets 75% of its revenue from its software and consulting businesses.
As part of that strategy, IBM paid $34 billion in July 2019 for Red Hat—the leading developer of cloud-based software.
Despite the Red Hat acquisition, IBM’s revenue fell 4.6%, from $77.15 billion in 2019 to $73.62 billion in 2020. That’s mainly because some businesses deferred investments in new technology due to the COVID-19 pandemic.
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In November 2021, IBM spun off some of its legacy consulting operations as Kyndryl Holdings Inc. (New York symbol KD). As a result, revenue fell 17.8% to $57.35 billion in 2021; on a comparable basis, revenue actually rose 3.9%. In 2022, revenue improved 5.5% to $60.53 billion on stronger demand for its software and hybrid cloud products. Revenue gained a further 2.2% to $61.86 billion in 2023.
Earnings before unusual items fell 32.3%, from $12.81 a share (or a total of $11.44 billion) in 2019 to $8.67 a share (or $7.77 billion) in 2020. Earnings then improved 15.0% to $9.97 a share (or $9.02 billion) in 2021, but they fell 8.4% to $9.13 a share (or $8.33 billion) in 2022 because of the Kyndryl spinoff. Earnings rebounded 5.4% in 2023, to $9.62 a share (or $8.87 billion).
Blue Chip Stocks: Circle: IBM Reports Earnings Growth Alongside Key Strategic Acquisitions
In the three months ended September 30, 2024, IBM’s revenue rose 1.5%, to $14.97 billion from $14.75 billion a year earlier. Revenue rose 9.7% for IBM’s software businesses; that offset 0.5% lower revenue at its consulting unit and 7.0% lower revenue for its mainframe computers and other hardware (that business is at the end of a three-year product cycle, when sales cyclically slump).
Earnings excluding one-time items gained 6.1%, to $2.16 billion from $2.03 billion. Due to more shares outstanding, per-share earnings rose 4.5%, to $2.30 from $2.20. The higher earnings growth is largely due to a plan to improve productivity.
Meantime, IBM often buys other companies to enhance its expertise. It cuts the risk of using acquisitions to expand by targeting smaller firms that are easier to absorb.
For example, IBM recently agreed to buy Accelalpha. Based in Bellevue, Washington, this firm helps businesses implement and manage their applications that run on the cloud platforms of software developer Oracle Corp. (New York symbol ORCL). The purchase price has not yet been disclosed.
This acquisition expands IBM’s Oracle consulting expertise in supply chain and logistics, finance, enterprise performance management and customer transformation.
The acquisition builds on IBM’s nearly 40-year collaboration with Oracle.
IBM is also buying HashiCorp Inc. (Nasdaq symbol HCP). That firm makes software to help companies set up and manage their cloud-based computer networks.
Assuming HashiCorp shareholders and regulators approve, IBM will pay $6.4 billion when the deal closes, probably by the end of 2024.
IBM’s shares have gained 45.9% in the past year due to investor enthusiasm for AI. They now trade at 21.1 times the $10.74 a share the company will probably earn in 2025. That’s a particularly attractive multiple, as IBM spends a high 12% of its revenue on research and is adding artificial intelligence features to its software products.
With the June 2024 payment, IBM raised your quarterly dividend by 0.6%, to $1.67 a share from $1.66. The new annual rate of $6.68 yields 3.0%. The company has paid regular dividends since 1916 and has increased the annual rate yearly for the past 29 years.
Campbell Soup Co’s portfolio of well-recognized food brands provides a diversified and resilient revenue base. These household names have demonstrated enduring consumer appeal, offering stability and growth potential even in challenging economic environments.
Meanwhile, ongoing cost optimization efforts include the realization of $950 million in annual savings from a key acquisition and an additional $50 million from an integration. Both should drive meaningful margin expansion.
The stock trades at 14.4 times the company’s forward earnings forecast. That’s an attractive multiple considering the company’s strong brands and market share.
CAMPBELL SOUP CO. (Symbol CPB on Nasdaq; www.campbellsoupcompany.com) plans to change its name to “The Campbell’s Company,” reflecting its broader array of products. It also recently transferred its stock listing from the New York Stock Exchange to Nasdaq (the shares continue to trade under the “CPB” symbol.) The move should lower its administrative costs.
Under its new strategic plan, which began in 2018, Campbell sold most of its international and refrigerated-foods businesses. That let it focus on canned soups, pasta and V8 vegetable juices. Campbell also kept its snack food operations. They were significantly expanded in March 2018 when the company paid $6.1 billion for snack-foods maker Snyder’s-Lance.
In March 2024, the company completed its $2.9 billion acquisition of Sovos Brands Inc. (Nasdaq symbol SOVO), the maker of Rao’s pasta sauces. The new operations will add $1 billion to its annual sales.
As a result of that purchase, Campbell’s sales in its fiscal 2024 fourth quarter ended July 28, 2024, rose 10.9%, to $2.29 billion from $2.07 billion a year earlier. That missed the consensus forecast of $2.31 billion.
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If you exclude businesses that Campbell bought and sold, sales fell 1.2% in the latest quarter. That’s because lower selling prices (down 2%) offset a 1% improvement in volumes.
If you factor out costs related to the Sovos purchase and other unusual items, the company’s earnings rose 26.0%, to $0.63 a share from $0.50 a share. That beat the consensus estimate of $0.62.
Value Stocks: Substantial cost savings bolster the outlook for these iconic brands
Campbell also continues to realize savings in the wake of the Snyder’s-Lance acquisition. So far, it has reduced annual costs for its continuing businesses by $950 million. It expects those yearly savings to reach $1 billion by the end of fiscal 2025.
In addition, Campbell realized $10 million in savings in the latest quarter by combining its operations with those of Sovos. It expects annual costs savings will total $50 million by the end of fiscal 2026.
Campbell’s expect sales in fiscal 2025, excluding the Sovos purchase and the recent sale of its Pop Secret popcorn business, will rise about 1%. It also expects its earnings will rise between 1.0% and 4.0%, to between $3.12 and $3.22 a share. The stock trades at 14.4 times the midpoint of that range. That’s an attractive multiple considering the company’s strong brands and market share.
Longer term, Campbell expects its sales will rise 2% to 3% annually. It also expects earnings per share will improve between 7% and 9% annually through fiscal 2027.
Campbell last raised your quarterly dividend with the February 2021 payment. Investors now receive $0.37 a share, up 5.7% from $0.35. The current annual rate of $1.48 yields a solid 3.2%.
Your dividend has grown an average of 1.1% annually over the last 5 years. Campbell Soup’s TSI Dividend Sustainability Rating is Above Average.
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