The Dow Jones Industrial Average delivered a bounce-back year in 2023. The iconic stock market benchmark rallied roughly 14% (recovering from a nearly 11% slide in 2022).
However, not all Dow Jones stocks were in rally mode in 2023. Several lagged the index last year, led by Walgreens Boots Alliance (WBA 1.05%), Chevron (CVX 0.34%), and Johnson & Johnson (JNJ 0.41%). Those declines pushed the dividend yields of those "Dogs of the Dow" higher. Here's why dividend investors will want to scoop up shares in 2024.
Getting back to health
Shares of Walgreens slumped nearly 29% in 2023, the biggest drop among Dow stocks. That sell-off pushed the healthcare, pharmacy, and retail company's dividend yield up to 7.2%. The company has an excellent track record of paying dividends. It has paid them for 364 straight quarters (91 years) while growing its payout for the last 47 consecutive years.
While dividend growth has been anemic in recent years (Walgreens only gave investors a 0.5% raise in 2023), it could reaccelerate in the future. The company is in the midst of a major transformation as it aligns its core business, builds its next growth engine with consumer-centric healthcare solutions, and optimizes its portfolio. It has been selling several noncore assets, including its sizable stake in Cencora, to invest in building out its growth engine. The company has also floated the idea of launching an IPO of its U.K.-based pharmacy chain Boots.
These actions have weighed on its earnings growth and balance sheet. However, along with transformational cost cuts, these moves should eventually reinvigorate the company's growth rate. That growing cash flow will give Walgreens more money to invest in growing its core businesses, repaying debt, and paying dividends. It would also help lift some of the weight on its stock price.
A needle-moving deal on the horizon
Chevron's stock price slumped about 15% in 2023, the second-worst performance in the Dow. Lower oil prices were the primary catalyst driving the sell-off.
There's not much Chevron can do about oil prices. However, what it can do is reduce costs and increase its ability to generate more cash at lower oil prices. That's what it has been doing over the past year. The company has been growing its scale by acquiring oil companies to reduce costs and boost its cash flow and growth potential.
Chevron bought PDC Energy in 2023 for $7.6 billion. The company expects to capture over $100 million in cost savings. That helps drive its view that the deal will boost its free cash flow by over $1 billion (assuming oil averages $70 a barrel, which is right around the recent price).
Meanwhile, Chevron signed an even bigger deal in October, agreeing to buy Hess for nearly $60 billion. The company expects to capture $1 billion in annual cost savings from the acquisition. It also anticipates that the transaction will enhance its free cash flow growth profile while extending its outlook into the 2030s.
That improved free cash flow growth drives Chevron's view that it will increase its 4%-yielding dividend by another 8% in 2024. That would be its 37th straight year of dividend growth.
Slimmed down to grow faster
declined by about 11% in 2023, the third-worst performance in the Dow. That slump pushed its dividend yield up to 3%. The company increased its payout by 5.3% in 2023, its 61st straight year of dividend growth.
One of the factors that weighed on the stock was the overhang from the separation of its former consumer healthcare business, Kenvue. Johnson & Johnson completed an IPO of that business and then spun off most of the remaining shares to its investors. It holds a minority stake that it eventually expects to monetize.
The healthcare behemoth's sales and cash flow declined following the spinoff. However, the company expects growth to reaccelerate in 2024 as it focuses on its faster-growing pharmaceutical and MedTech divisions. It sees its operational sales growing by 5% to 6% next year, with adjusted earnings-per-share growth of 7.3% at the midpoint. Meanwhile, the company forecasts 5%-7% operational sales growth and similar earnings-per-share growth in the 2025-2030 time frame, with free cash flow improving back to its pre-Kenvue level by 2026.
Acquisitions could drive even faster growth in the coming years. Johnson & Johnson has one of the strongest balance sheets in the world. It has AAA-rated credit and ended the third quarter with $24 billion in cash against $30 billion of debt. It also owns 9.5% of Kenvue's stock, worth around $4 billion.
That gives it tremendous financial flexibility to make deals. It most recently agreed to pay $400 million to buy Laminar to bolster its MedTech offerings.
These "dogs" could fetch a higher return in 2024
Walgreens, Chevron, and Johnson & Johnson were the worst-performing Dow Jones stocks of 2023. Those slumping stock prices helped push up their dividend yields. That makes them look like attractive income stocks to buy in 2024.
In addition to that income, they offer meaningful upside potential when their share prices eventually bounce back. Because of that, they could produce strong total returns in 2024, making them great Dow stocks to buy right now.
Matthew DiLallo has positions in Chevron, Johnson & Johnson, and Kenvue. The Motley Fool has positions in and recommends Kenvue. The Motley Fool recommends Chevron and Johnson & Johnson. The Motley Fool has a disclosure policy.
