Tuesday, September 21, 2021

October 2021 Dividend Stock Watch List

As I'm writing this blog post, the start date of fall is just one week away. Even more importantly, October is a couple weeks away.

Why is October so significant?

Because I will be receiving three paychecks during the month as opposed to the usual two, so I will have even more funds than normal to invest. Let's take a look at three dividend stocks not already in my portfolio that I am keeping my eyes on for October.

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Dividend Stock #1: Omnicom (OMC)

The first stock on my watch list for October is the large-cap advertising and marketing conglomerate, Omnicom.

Omnicom's diluted EPS declined nearly 28% from $6.06 in 2019 to $4.37 last year.

While Omnicom was predictably hit somewhat hard in 2020 with COVID-19 emerging as a pandemic and the resulting drag on the economy, the company is set to rebound this year and beyond.

Omnicom's diluted EPS is set to advance slightly higher than 2019's figure of $6.06 to $6.09 this year as the economy picks back up and advertising spending recovers based on the average analyst estimate. Better yet, analysts expect that Omnicom will resume mid-single-digit earnings growth, when diluted EPS is anticipated to increase 4.4% from $6.09 this year to $6.36 next year.

Through the first six months of this year, Omnicom also maintained an interest coverage ratio just under 8 ($1.05 billion in earnings before interest and taxes/$134 million in interest costs). This implies that the balance sheet is relatively healthy and that interest expenses can easily be covered by EBIT.

Despite this news, Omnicom is trading at less than 12 times this year's forecasted diluted EPS. This is moderately lower than the company's historical P/E ratio around 15 to 16, which makes Omnicom a good value play.

With $2.75 in dividends per share scheduled to be paid out this year, Omnicom's diluted EPS payout ratio will be in the mid-40% range. I believe that this makes Omnicom's current 3.91% dividend yield (based on the current share price of $71.67 as of September 12, 2021) safe.

Dividend Stock #2: McDonald's (MCD)

The second dividend stock on my watch list for October is the massive fast-food chain McDonald's.

Similar to Omnicom, McDonald's was adversely impacted by the onset of COVID-19 last year. This resulted in McDonald's adjusted diluted EPS declining 22.8% from $7.84 in 2019 to $6.05 in 2020.

However, McDonald's is on track to fully recover and then some this year, with analysts expecting adjusted diluted EPS to surge 50.1% from $6.05 last year to $9.08 this year.

McDonald's also was able to generate an interest coverage ratio of slightly over 8 through the first half of this year ($4.93 billion in EBIT/$597 million in interest expense), which like Omnicom, indicates that McDonald's can handily service its debt.

While McDonald's isn't a bargain at 26 times this year's earnings and 24 times next year's earnings, it also isn't too expensive considering the quality of the business. I have wanted to own McDonald's for years and have never purchased it because I was always waiting for the perfect price, but I've come to learn over the years that a fair price is good enough for a world-class business. McDonald's can do the rest in the wealth creating process.

McDonald's will likely pay out $5.25 in dividends per share (assuming a 7% increase in the quarterly dividend in September to $1.38) against $9.08 in EPS this year, which would be a dividend payout ratio in the high-50% range.

McDonald's 2.16% yield at $239.18 a share (and soon to be around 2.3% yield with the upcoming dividend increase) appears to be safe based on a quick analysis of the balance sheet and dividend obligation, which are two of the main reasons I want to own the stock.

Dividend Stock #3: Raytheon Technologies (RTX)

The final stock that is on my watch list for October is the behemoth aerospace and defense contractor Raytheon Technologies.

RTX was hit hard by the COVID-19 pandemic due to the decreased revenues in its Collins Aerospace segment and aerospace engine segment known as Pratt & Whitney, which is what led its adjusted diluted EPS to plummet 44.8% from $4.95 in 2019 to $2.73 in 2020.

With commercial aviation recovering amid increasing global vaccination rates, analysts expect RTX's adjusted diluted EPS to rebound to $4.07 this year and to return to growth next year with adjusted diluted EPS of $5.04.

With an interest coverage ratio of just under 4 through the first half of this year, it may appear as though RTX's balance sheet is weak. However, this is negatively skewed only because the company's earnings power hasn't yet fully recovered to pre-pandemic levels.

When that recovery occurs next year, RTX's interest coverage ratio will be much healthier.

RTX's dividend also appears fairly secure considering that even with adjusted diluted EPS estimates of $4.07 for this year (still well below pre-pandemic levels), RTX's payout ratio will be a tad under 50%. Next year, RTX's payout ratio should be well below 50%. This is what leads me to believe that the current 2.46% yield is safe (based on the current share price of $83.00).

At 20 times this year's expected earnings and a price of $83.00 a share, RTX may not seem cheap. But again, that's only because the company is still recovering from COVID. RTX is trading at just 16 times next year's earnings, which makes it a good recovery play.

Concluding Thoughts:

My net annual forward dividends will end this month at around $2,025, which is another all-time high for my portfolio. And since I'm expecting around $2,500 available to invest for October between my capital contributions and dividends, October will be one of my heaviest months of capital deployment for this year.

I'm very much looking forward to seeing if I can reach the $2,100 mark or so for the month with my capital deployment and the dividend increases that I'm expecting for October.


Are any of OMC, MCD, or RTX on your watch list for October 2021?

If not, what stocks do you have your eye on for next month?

I appreciate your readership and look forward to your comments in the comment section below!

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