After a strong first half where both the S&P 500 Index ($SPX) and the Nasdaq Composite Index ($NASX) delivered double-digit returns with quite low volatility, fear is back on Wall Street - and quite literally so. The Cboe Volatility Index ($VIX), which is known as the market's “fear gauge,” and measures expected SPX volatility over the next 30 days, rose to its highest level since March 2020 on Monday.
The S&P 500 had its worst day since 2022, and the Nasdaq Composite’s YTD gains are now down to just about 9%, as the tech rally has come to a screeching halt. While aggressive and growth investors will see the crash as a buying opportunity, and might have their shopping lists ready, such volatility is bound to spook more conservative investors.
Dividend stocks are one asset class within the broader equity markets that can help beat the volatility blues, to some extent. I believe that Pfizer (PFE) and Starbucks (SBUX) are two dividend stocks that conservative investors can buy in August. Shares of both have underperformed over the last couple of years, and along with their fat dividend yields, they also bring prospects of decent capital appreciation for investors.
Pfizer Has a Dividend Yield of Over 5.5%
Pharma companies like Pfizer can be a good defensive bet amid volatile markets. PFE has a dividend yield of 5.5%, which looks quite attractive - and importantly, growing the dividend is the company’s top capital allocation priority, followed by reinvesting in the business, deleveraging, and share buybacks.
To be sure, the company is currently undergoing a transition as it tries to pivot its revenues away from its COVID-19 portfolio, whose sales have fallen sharply from the peak. Along with working on new drugs, Pfizer is also looking at inorganic growth. Last year, the company completed the acquisition of Seagen, and during the Q2 earnings call, it said that “Seagen products are contributing meaningfully to our revenue.” Management expects Seagen to add $10 billion in “risk-adjusted” sales by the end of this decade.
Pfizer’s Q2 earnings were better than expected, and the company raised its 2024 revenue guidance by $1 billion to a range between $59.5 billion and $62.5 billion. The company also raised its adjusted earnings per share (EPS) guidance to $2.45 to $2.65, which is 30 cents higher than the previous guidance.
PFE Stock Looks Quite Cheap Here
PFE stock trades at a next 12 months (NTM) price-to-earnings (PE) multiple of just over 11x, which looks quite cheap. While the company faces several headwinds, including slow progress on the new pipeline of drugs – especially the weight-loss pill – I find the risk-reward quite attractive, with the nearly 6% dividend yield a cherry on the top.
Starbucks Stock Trades Near 52-Week Lows
Starbucks stock has also been a long-term underperformer, like Pfizer, and has lost almost a quarter of its market cap over the last five years. It's not a recession-proof business, as sales at Starbucks outlets are vulnerable to declines in case of a severe economic downturn.
Starbucks faces several headwinds, and has reached near-saturation in North America, while China - which was expected to spur its growth - has slowed down structurally. The trouble that American brands have been facing in the world’s second-largest economy is not helping matters, either. Starbucks has also faced boycott calls over what it says are “misperceptions” over its stance on the Israel-Hamas conflict.
Some of Starbucks’ woes are not much different from Nike (NKE), which is also battling competition from newer brands, and - like Starbucks - recently cut its forecast. Starbucks has had three CEOs in as many years, and even brought back old-hand Howard Schultz to revive the company. The coffee chain is currently led by former Reckitt and PepsiCo (PEP) executive Laxman Narasimhan.
Elliott Management Takes a Stake in SBUX
Starbucks presents a fertile ground for activist investors, given the turmoil. Elliott Management has taken a stake in the company, and is engaging with the management - which Narasimhan described as "constructive" during the company’s fiscal Q3 2024 earnings call. However, Schulz – who is Starbucks' sixth largest shareholder - is reportedly opposed to the settlement offered by Elliott Management.
Starbucks has a dividend yield of 3.1%, which is over twice that of the S&P 500 Index. The management has an intense focus on its dividend, and targets a payout ratio of 50%.
The stock trades at an NTM PE of around 19x, which doesn't look demanding, even after considering the headwinds that the company faces. Overall, I find SBUX a good buy for conservative investors, and if Elliott Management can help revive the iconic brand, it will help in decent capital appreciation prospects over the next couple of years.
On the date of publication, Mohit Oberoi had a position in: NKE , PFE . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
