The major stock market indexes are hovering around all-time highs, but there are plenty of industries that have had their fair share of struggles so far this year.
Upstream exploration and production (E&Ps) like Devon Energy (DVN 0.29%) and APA (APA 1.15%) are down significantly on the year.
Meanwhile, Target (TGT -0.65%) erased all of its year-to-date gains (and them some) by plunging after reporting its third-quarter earnings.
Here's why all three dividend stocks are worth buying in December.
Image source: Getty Images.
The company's potential to increase its dividend is significant
Lee Samaha (Devon Energy): Down 15.5% year to date (YTD) at the time of this writing, many investors appear to have thrown in the towel on Devon Energy. However, doing so would be a mistake because the company continues to gush cash flow, which is used to retire debt, buy back stock, and pay dividends to investors. At the same time, management has acquired assets this year in the form of its purchases of Grayson Mill Energy (Bakken region) and its investments in its core assets in the Permian region have generated productivity improvements resulting in a hike in full-year production guidance.
I've discussed Devon Energy in more length elsewhere; suffice to note that based on a price of oil of about $70 a barrel (equating to the price at the time of writing) and its current share price, management believes it will generate around 9% of its market cap in free cash flow (FCF) next year. That will give management ample opportunity to pay down more debt or hike its variable dividend. Moreover, even if it elects to use cash flow to buy back stock opportunistically, the reduction in the share count will increase existing shareholders' claim on future cash flows.
As such, the market appears to be too pessimistic about Devon's acquisition of assets in the Bakken (where it can generate cost synergies in concert with its existing Bakken assets) and too dismissive of its potential to increase dividends in the future. If oil prices stay relatively high, investors can expect good returns from buying Devon Energy stock at this level.
APA Corporation can grease the wheels of your passive income machine
Scott Levine (APA Corporation): Plunging 36.8% YTD at the time of this writing, shares of E&P APA Corporation are energizing the bears a lot more than the bulls. But that's not to say that there aren't some compelling reasons to add this oil dividend darling to your buy list. Plus, with shares of APA trading at a discount to their historical valuation, investors have an excellent opportunity to pick up 4.4% forward-yielding dividend APA stock at an attractive price.
Much of the skepticism surrounding APA stock this year stems from concerns regarding the company's operations in the North Sea. In the second-quarter 2024 financial results, management projected lower production from the North Sea as the company focused on maintenance activity. Subsequently, in the third-quarter earnings presentation, management reported that it plans to shutter North Sea production by the end of 2029.
Those who have decided to click the sell button on APA stock because the company's ceasing production in the North Sea are being shortsighted. For one, APA has integrated operations after the acquisition of Callon in April -- an acquisition that resulted in a 40% increase in unconventional acreage in the Permian. The acquisition strengthens the company's position in the Permian, and management expects the integration of Callon to result in $225 million to $250 million in cost synergies.
For those seeking additional indications that the company is well positioned, Standard & Poor's upgraded APA to BBB-, leaving the company with investment grade credit ratings from all three rating agencies. Turning to the company's cash flow, investors will find that APA consistently generates strong cash flows from which it can source its dividend, providing further evidence that the company's dividend is secure.
APA Free Cash Flow Per Share (Annual) data by YCharts.
With shares of APA trading at 1.9 times operating cash flow -- a discount to their five-year average cash flow multiple of 2.7 -- now's a great time to jump in the oil patch with APA stock.
Target is too cheap to ignore
Daniel Foelber (Target): Target stock fell 21.4% in a single session after reporting third-quarter earnings on Nov. 20. It has made up some of those losses since then, but Target is still red on the year compared to big gains for the broader indexes. At the time of this writing, Target is up just 8.6% from its 52-week low and is down 51% from its all-time high. Target is out of favor while its peer, Walmart, is at an all-time high. A big reason is Target's poor forecasting.
When Target reported second-quarter earnings in August, it revised its full-year guidance. Yet in Target's recent earnings report, the company lowered full-year guidance to a range below its forecast from back in May. Wall Street hates uncertainty, and Target is giving investors little reason to trust its projections. Despite this issue, there is reason to believe the sell-off of Target stock has gone too far.
Target's latest guidance calls for $8.30 to $8.90 in 2024 adjusted earnings per share (EPS). At the midpoint of $8.60, that would be a 3.8% decline from 2023 adjusted EPS. But Target is still a highly profitable, cash-cow company. Target pays a $1.12 per share quarterly dividend for a run rate of $4.48 per year. So, even with lower profits, its earnings are still nearly double its dividend payment. With a yield of 3.4%, Target stands out as a viable source of passive income for patient investors. Target is a Dividend King with 53 consecutive years of dividend raises, so investors buying the stock today should see their dividend income grow over time.
Perhaps most importantly, Target is a very inexpensive company, with a price-to-earnings ratio of 13.8. Folks who are pessimistic about the company may say it deserves to be cheap if earnings continue declining. But dig into management's commentary on the quarter, and you'll find that Target acknowledges some of its issues with pricing and inventory management and still believes its long-term strategy will succeed. The Target Circle loyalty program isn't perfect, but it continues to grow. And Target is working toward expanding e-commerce, curbside pickup, and other omnichannel strategies.
All told, the long-term investment thesis is intact, making Target a compelling Dividend King to buy in December.
