2019 Dogs of the Dow Hold Slight Lead Over the Market

 

This year we are once again tracking the stocks in the Dogs of the Dow. We have tracked the strategy for the last several years, and the strategy has been a successful one.

The idea behind the Dogs of the Dow strategy is that investors would purchase an equal dollar weighted amount of each of the top 10 yielding stocks in the Dow Jones, and hold those positions for the entire year regardless of individual performance. The reasoning behind the strategy is that the stock’s have yields above the average stock in the Dow Jones because shares are undervalued and should outpace the market as value investors rush in to pick up shares at a discount.

So far this year the overall Dow Jones is up 12.2 percent. The collective group in the Dogs of the Dow are up 12.8 percent (including dividends). If you strip out the dividend payments on the year, the return drops to 11.9 percent, which clearly illustrates how much power dividends can have in boosting a portfolio’s bottom line.

We want to take a closer look at each of the ten stocks in this year’s group, keeping in mind that any appreciation or loss on the year is accounting for dividends that have been paid to investors so far during the year.

Cisco Systems and IBM

The top two stocks in our group after the first quarter are tech giants International Business Machines and Cisco Systems. Both stocks were at the top of the list when we took our last look at the group, but Cicso has pulled slightly ahead of Big Blue after three months of trading. CSCO is up 28.3 percent on the year and IBM has appreciated 26.7 percent.

Cisco Systems (CSCO) ended Q1 up 28.3 percent on the year including one dividend payment. The company reported its first set of quarterly numbers mid-February which topped estimates on the bottom line and revenues basically in-line with the consensus. CSCO was last year’s top performing stock in the Dogs of the Dow and the stock maintains strong momentum headed into the summer months. The stock is reasonably priced with a forward P/E of 16.2 and the company is expected to grow earnings 9.9 percent per annum over the next five years. CSCO gets an overall score of 79 from our Stock Score Report and analysts have an average price of $55.00 on the stock. CSCO currently trades at $54.90.

International Business Machines (IBM) was one of last year’s worst performing stocks, but IBM shares are up sharply after hitting a 52-week low in December. The company posted strong numbers in January and will report its next set of quarterly numbers April 23. Analysts forecast earnings of $2.22, versus $2.45 during the same period last year. The stock has a lot of upward momentum and is currently trading at just 10 times future earnings which are expected to grow a modest 0.9 percent per annum over the next five years. IBM scores a 48 overall score on Stock Score Report and has an average price target of $151.73 versus its current price of $142.57.

Exxon Mobil and Chevron

Our next two best performing stocks are oil and gas giants Exxon Mobil (XOM) and Chevron (CVX). XOM is up 20.7 percent while CVX has risen 16.0 percent year to date with both stocks having made one distribution to date.

Exxon has enjoyed strong gains from its 52-week low set in late December and the stock is currently testing resistance at $82. The company will report its next set of quarterly numbers on May 3, with analysts expecting to see earnings of $0.87 per share, down from $1.09 during the same period last year. XOM is trading at $81.51 with an average price target of $86.25. The stock gets an overall score of 73 on the Stock Score Report. XOM has a forward P/E of 14.6 and analysts forecast average annual earnings growth of 13.3% over the next five years.

Like Exxon, CVX also hit a 52-week low towards the end of December before going on a strong run to the upside. CVX is currently trading just shy of its 52-week high at $125.04 and analysts have an average price target of $138.42 on the stock. Chevron will not report its next set of quarterly numbers until May 3, with the consensus calling for earnings of $1.41 per share versus $1.90 during the same period last year. The company is expected to show earnings growth of 37 percent per annum over the next five years and shares currently trade at 15 times future earnings. CVX gets an overall score of 68 from Stock Score Report.

Procter & Gamble and Merck

Our next two stocks are Procter & Gamble (PG) and Merck (MRK). Our PG position is currently up 13.2 percent year to date, while MRK is up 9.8 percent.

Consumer goods maker Procter & Gamble has enjoyed steady gains over the last twelve months and is currently trading just shy of its all-time high at $103.30. Analysts have placed an average price target of $99.08 on the stock. The company has shown flat earnings growth over the last five years of 0.8% per annum, but looking ahead analysts see profits rising at an annual pace of 6.2% over the next five years. The stock is priced reasonably with a forward P/E of 21.7, so there is not much room for error with its upcoming quarterly reports. PG will report its next set of quarterly numbers on April 23, with the consensus for earnings of $1.04 per share, up slightly from $1.00 during the same period last year. PG gets an overall score of 71 on the Stock Score Report.

Pharmaceutical giant Merck has also steadily risen over the last twelve months and is currently trading just pennies below its 52-week high. Investors remain upbeat on the stock, which remains favorably priced with a forward P/E of just 15.8. Earnings are expected to rise 9.8 percent per annum over the next five years which should keep strength under the stock as long as the company is able to hit its estimates moving forward. MRK gets an overall score of 85 from Stock Score Report and analysts have an average price target of $83.39 on the the stock. MRK will report its next set of quarterly numbers at May 3, and shares are currently trading at $83.32.

JP Morgan Chase and Verizon

JP Morgan Chase (JPM) and Verizon (VZ) are both in positive territory for the year, but each are lagging the overall market. JPM is up 7.9 percent, while VZ has risen 7.1 percent year to date.

JPM took a hit in December with the overall market, and while the stock did rebound in January when strength returned to the market, shares have been stuck in sideways pattern for the last two months as investors show uncertainty over the stock’s future. The company posted disappointing quarterly numbers mid-January and will next report earnings on April 12. A strong report would allow shares to break out to the upside, but recent updates from the Federal Reserve suggesting interest rates will remain unchanged in 2019 will keep investors uneasy on the financial sector. The stock has a very attractive valuation with a forward P/E of just 9.8, and earnings are forecast to rise 9.6 percent per annum over the next five years. However, with interest rates not expected to rise as much as previously thought the company may struggle to keep pace with the growth estimates and prevent the stock from moving too much to the upside. JPM trades at $103.71 with an average price target of $119.17 and the stock gets an overall score of 48 from Stock Score Report.

Telecom giant Verizon is currently in a strong upward trend after trading sideways for the first two months of the year and the stock is currently approaching a new all-time high. The company posted mixed numbers in January with a bottom line beat, extending its streak of positive earnings surprises to four quarters. Verizon will report its next set of numbers on April 23 with analysts expecting earnings of $1.17 per share, in-line with the same period last year. The stock is trading with a forward P/E of 12.3 and earnings are expected to rise 9.5 percent per annum over the next five years. VZ is trading at $58.99 with an average price target of $60.25 and the stock gets an overall Stock Score Report score of 66.

Coca-Cola and Pfizer

Coca-Cola (KO) and Pfizer (PFE) are the group’s two worst performers with both stocks slightly in the red. KO shows a loss of 0.2 percent while PFE is down 1.1 percent year to date.

Coca-Cola stock started off the year in strong fashion before getting hammered after the company’s fourth-quarter report in February. Earnings were in-line with the consensus, but the company issued weak 2019 guidance which pulled the stock sharply lower. KO has since started to recover and is close to break-even for the year, but investors are likely to remain cautious until the company’s next quarterly report on April 23. A poor reading, or reaffirmed weak guidance will once again result in a drop in the stock, but if the company changes its outlook there is a lot of upside and the stock will recover a lot of its previous losses. KO trades at $46.85 with an average price target of $50.08 and gets an overall score of 61 on Stock Score Report.

Pfizer posted positive surprises on the top and bottom line for Q4 in January which helped shares rebound from a disappointing January, but the stock has been stuck in a sideways trend since its recent report. The drug maker will report its next set of quarterly numbers on April 30 which will determine whether shares are able to break out of the sideways trend to the upside, or if investors will see the stock trade below its January lows. Its valuation is attractive with a forward P/E of 13.9 and earnings forecast to rise 6 percent annually over the next five years. Analysts see moderate upside in the stock with an average price target of $45.29 versus its current price of $42.81. PFE gets an overall score of 65 on our Stock Score Report.

Michael Fowlkes

Michael Fowlkes

Michael Fowlkes is a financial writer who has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va.

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