With the market trading near all-time highs, it's hard to find high-yield stocks that appear to be relatively cheap. It can be done, of course, but it requires looking at companies that may be dealing with some headwinds. That's not to suggest you look at truly down and out names, which could lead to owning some really risky stocks; instead, you might consider industry giants with long histories of success behind them, like integrated energy company ExxonMobil (NYSE: XOM) and food icon General Mills (NYSE: GIS). Here's a quick look at what you need to know about these two companies, and why now is a good time to jump aboard.
Turning a giant ship takes time
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With an over-$320 billion market cap, Exxon is easily one of the largest energy companies on the planet. Its business spans the entire spectrum of the oil and natural gas industry, including the wells that produce them, the pipelines that carry the fuels, the processing plants that turn them into usable products, and the gas stations at which you fill your tank.
This broad reach is by design, because it allows Exxon to balance the ups and downs of the industry. For example, when oil prices are weak and crimping upstream (exploration) earnings, its downstream (refining and chemicals) divisions often benefit from reduced costs for key inputs. In addition, Exxon has long taken a conservative approach to its balance sheet (long-term debt only makes up around 10% of the capital structure) so that it can use long-term debt during downturns to support capital spending and its dividend payments. The company has an incredible streak of 36 consecutive annual dividend increases, which no other oil major can match.
The problem Exxon is dealing with right now is relatively weak oil production. The company's oil production fell from roughly 4.097 million barrels of oil per day in 2015 to an average of just 3.833 million barrels of oil per day in 2018. That's the wrong direction, especially at a time when many competitors have been expanding production. However, an important inflection point was hit in the middle of last year, with production picking up in the second half as Exxon's U.S. onshore drilling activity started to bear fruit. Average production in the first quarter was roughly 4 million barrels per day.
In other words, things are starting to look better. And it's worth noting that onshore U.S. drilling is just one of the growth projects the company has in the works today. Exxon's stock, meanwhile, is yielding over 4%, which is near the highest levels it's seen since the late 1990s. The company is still a financially strong industry leader, and income investors should take a look at Exxon today before Wall Street starts to recognize that this giant ship has finally started to turn a corner.
A leveraged bet on a big trend
General Mills owns some of the best known brands in the food industry, including Cheerios and Yoplait, among many others. It has navigated shifting consumer tastes in the industry for over 100 years. Changing buying habits are again buffeting the stock today, though, as customers have shifted toward foods considered fresh and healthy. That's not exactly what packaged food makers like General Mills are known for.
However, General Mills has been adjusting with the times. It has sold brands like Green Giant and bought on-target brands like Annie's and Larabar. It's also been revamping older products, like its cereals and yogurts, so they resonate better with customers. These things are par for the course. Based on the company's long history of success in the industry, it's highly likely that it will manage to adjust to current trends... it will just take a little time.
What's a little bit out of the norm is General Mills' debt-funded acquisition of Blue Buffalo. This marked the company's entrance into pet food, a new market, and increased its long-term debt by 75% in a single quarter. Worse, some industry watchers believe it overpaid for Blue Buffalo, despite the fact that it is the industry-leading name in the niche it occupies. Even if that's not the case, General Mills has materially increased its leverage with this deal, and that has investors worried. Which is a big part of the reason why the 3.8% yield is near levels not seen since... the late 1990s.
The thing is, General Mills is well aware of the debt overhang, and has already reduced debt by over $1 billion. Long-term debt is roughly 62% of the capital structure. That's high, but not outlandishly so. Trailing interest coverage, meanwhile, was roughly 4.5 times in the most recent quarter. While that's down materially from previous levels, it shows that General Mills isn't having any trouble paying for the extra debt. Equally important, the addition of Blue Buffalo has helped to get the company's top line growing again, which was the intended purpose of the deal.
The company has more work to do, but so far it looks like General Mills is handling itself reasonably well. As it reduces debt and continues to shift its portfolio along with its customers' desires, it is likely to prove, again, why it's an industry icon that's managed to survive for more than a century despite the routinely intense competition it faces. If you are willing to stick it out as General Mills works through its latest transition, you can collect a historically generous yield.
Worth the risks
There are clearly risks involved with Exxon and General Mills today. The yields wouldn't be as high as they are if that weren't the case. However, both have proven over time that they have what it takes to survive difficult times. Both are taking actions today to adjust to the current headwinds, and both are starting to show signs of success. If you can stomach a little uncertainty, Exxon and General Mills are two dividend stocks that you should be looking at today while they are still trading with yields at the high end of their historical ranges.
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