Sorting stocks by dividend yield often reveals higher-yielding options that come with their own set of challenges. This is especially evident when considering three prominent companies within the Dow 30 index: Walgreens, Verizon, and 3M. Their enticing dividend yields of 8.6%, 7.9%, and 5.9% respectively may pique the interest of investors. However, it’s crucial to delve deeper into their individual situations before making any investment decisions.
- Walgreens’ Transition: Walgreens, a pharmacy giant, has been undergoing significant business transformations. Initially, the company attempted to venture into pharmacy benefits management (PBM), but this endeavor faced difficulties and was eventually sold off to Amerisourcebergen. In an effort to fund its new direction of owning emergency clinics, Walgreens has been divesting its sizable stake in Amerisourcebergen. While the concept of combining a doctor’s office with a pharmacy is intriguing, the absence of a permanent CEO raises concerns about the leadership necessary to execute this costly transition. The abrupt departure of the CEO implies board dissatisfaction, and the stock’s significant decline adds to investor apprehension. Prudent investors may choose to wait until a new CEO is in place before considering an investment in Walgreens.
- Verizon’s High Costs: Verizon, a major cellular provider in the United States, operates in a less complex industry compared to Walgreens. The increasing demand for cellular bandwidth, driven by mobile video streaming and the proliferation of Internet of Things devices, suggests continued robust growth. However, maintaining customer loyalty in this competitive space necessitates ongoing investments in network infrastructure. Verizon faces the additional challenge of having higher leverage than its competitors, which places it at a spending disadvantage. Among the three companies, Verizon may be the most appealing due to its extensive customer base and consistent revenue stream. Nevertheless, investors must be aware of substantial risks related to its balance sheet and network upgrades.
- 3M’s Legal Challenges: Industrial conglomerate 3M is grappling with several ongoing lawsuits, despite its efforts to resolve them. Recent settlements, including a $10.3 billion agreement over forever chemicals and a $6 billion settlement regarding military earplugs, have imposed significant financial burdens. These costs are expected to continue affecting earnings in the coming years. To mitigate legal risks, 3M has made strategic decisions such as discontinuing its forever chemicals business and spinning off its healthcare division. However, this latter move raises concerns about the company’s long-term growth, as healthcare was previously its fastest-growing segment. While progress is being made, uncertainty still surrounds 3M’s future, making it advisable for cautious investors to wait for more clarity.
In conclusion, these three companies currently face challenges that have driven up their dividend yields. For conservative investors, the associated risks may make them less attractive options. Other investment avenues, such as midstream companies and real estate investment trusts (REITs), offer similar yields without the negative business shifts these companies are experiencing. However, more adventurous investors may be enticed by the high yields but should carefully evaluate the risk-reward tradeoffs before making investment decisions. It’s essential to consider the long-term prospects and management stability of these companies before committing capital.
