3 Worst Performing Dow Jones Stocks in 2019

            The stock market has done well for most investors this year. The Dow Jones Industrial Average (DJI) is up ~22% year-to-date (as of December 21, 2019). The tech heavy S&P 500 (SPX) is up ~28.5% as of the same date. These are excellent returns and 2019 is seemingly shaping up to be the best year for the Dow Jones since 2017. For the S&P 500, this will likely be the best return since 2013. Despite the good composite returns there are always a few stocks that perform poorly in any index for the year. The Dow Jones and S&P 500 are no exception in 2019.

            In this article, I discuss the three worst performing stocks in the Dow Jones to date in 2019. These are the only three stocks with a negative YTD return in a very good year for stocks. Walgreens Boots Alliance (WBA) is down (14.55%), Pfizer (PFE) is down (10.13%), and 3M Company (MMM) is down (7.96%). All three stocks are also dividend growth stocks with decent yields making them of interest for most of my readers. These stocks are performing poorly for different reasons. I summarize each one individually as the basis for further research.

Walgreens Boots Alliance Retail Pharmacies are Struggling

            Walgreens Boots retail pharmacies are struggling to generate sales growth. The company is facing reimbursement pressures in the U.S. and Europe. In addition, there is also the negative news regarding opioid lawsuits on distributors and potential settlement in the U.S. This has pressured top line growth in U.S. pharmacies. In the U.K., the Boots pharmacies are generating negative sales growth mostly due to a declining market.

The current forward dividend is $1.83 per share and Walgreens Boots offers an ~3.1% yield that is well covered by earnings. The current payout ratio is only ~30.8% based on an annual forward dividend of $1.83 and consensus forward earnings per share of $5.93. Walgreens Boots has raised the dividend for 44 straight years making it a Dividend Aristocrat and Dividend Champion. The low payout ratio provides some confidence that the dividend will continue to be raised in the foreseeable future.

From a valuation perspective, Walgreens Boots is trading below its historical valuation and that of the broader market. Based on consensus 2019 EPS, the forward price-to-earnings ratio is ~9.8. The trialing 10-year earnings multiple is roughly 15.0 But with current retail and e-commerce competition for pharmacies a lower multiple is probably justified.

There is some risk here that Walgreens Boots continues to muddle along. But the company is making efforts to increase operational efficiencies and changing retail offerings. Some dividend growth investors may want to further research Walgreens Boots.

Pfizer a Year of Dramatic Change

            Pfizer is a company in transition. The company has a new CEO who has made rapid and dramatic changes to the company’s operating structure and businesses. Furthermore, one of Pfizer’s blockbuster drugs, Lyrica, has come off patent. I believe that the uncertainties regarding these changes combined with the loss of Lyrica’s patent has pressured the stock price.

            Pfizer has formed two joint ventures that effectively divested the generics business and the consumer health business. The generics business, which was known as Upjohn, is now part of a joint venture with Mylan called Viatris. Mylan will own 43 % of shares, and Pfizer will control 57 % of shares. Pfizer also divested its consumer healthcare unit to form a joint venture with GlaxoSmithKline. Pfizer will own 32% of the company and GlaxoSmithKline will own the remainder.

            After these divestures, Pfizer is now a smaller company focused on R&D based drug innovation. There is more risk here to the top and bottom lines. But Pfizer has had success in the past in bringing new therapies to market. The company was also not shy in making large acquisitions. Along these lines, Pfizer has recently acquired Array BioPharma and Therachon, and is entering into smaller partnerships and licensing agreements. But with that said, the jury is still out whether Pfizer’s transformation will succeed or not.

            In the meantime, one is paid to wait. Pfizer offers an approximately 3.9% yield. The payout ratio is ~51% based on a forward dividend of $1.52 and consensus 2019 EPS of $2.97. So, the dividend is reasonably well-covered by earnings. However, the joint ventures will reduce earnings some as the company only gets some of the earning from generics and consumer health now. The Array BioPharma acquisition will cause a near-term hit to earnings. So, a rise in the payout ratio is expected.

            All this activity has also increased the net debt, which now stands at ~$44.8B at end of Q3 2019. This seems high but the company still has interest coverage over 10X, and the net debt-to-EBITDA ratio is only ~2.1X. Pfizer should receive about $12B from the Mylan joint venture in mid-2020. If that cash us used to reduce debt, then Pfizer will be in a much better position from the perspective of debt.

            From the valuation perspective, Pfizer is trading at a forward valuation multiple of 13X. This is much lower than the broader market and also the historical multiple of roughly about 18.0. But with the current changes and uncertainties the market is awarding Pfizer a lower multiple.

            Pfizer has more risk now since future revenue is based on R&D and regulatory approval of new drugs. Investors may want to research Pfizer further.

3M Company Faces Global Manufacturing Headwinds

            3M Company is facing headwinds from tariffs, trade friction, a contracting global manufacturing, costs from litigation. 3M has large exposure to China and Chinese manufacturing has been contracting for some time. U.S. manufacturing has also been contracting for a good part of 2019. In addition, 3M has exposure to liabilities from several lawsuits although some have been settled.

The net result is that 3M had to reduce top line and bottom line guidance for 2019. As a supplier to other manufacturers, 3M has exposure to cyclical manufacturing and industrial companies. In addition, the consumer and healthcare segments performed so-so in 2019. Going from expected revenue and profit growth in 2019 to a decline combined with guidance revisions punished the stock price.

            But with that said, 3M’s dividend yield is now ~3.3% and is reasonably well-covered by earnings. The payout ratio is ~63.7% based on consensus 2019 earnings per share of $9.04 and a forward dividend of $5.76. this ratio is OK but at the upper end of my threshold of 65%. Still, if global manufacturing recovers in 2020 then 3M should do well, and earnings will rise, and the payout ratio should decline.

            3M is not a bargain despite the decline in stock price since earnings also fell. The stock currently trades at a forward earnings multiple of ~19.4. This is below the broader market average but above the trailing 10-year multiple of about 17.2. 3M is a solid company and a Dividend King but the stock may be pressured further if global manufacturing does not recover in 2020.

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