Stocks with high dividend yields are always attractive to long-term investors, and even more so in an environment marked by economic uncertainties. Along with providing a regular source of quarterly income, dividend-paying companies are generally perceived as more stable, with an established track record of earnings and operational strength.
That said, a high dividend yield doesn't always correlate with an impressive share price performance, which can add a layer of complexity to the search for value.
With this in mind, here's a comparison of two Dow Jones Industrial Average ($DOWI) components offering healthy dividend yields that have underperformed the market in 2023 - industrial conglomerate 3M (MMM) and pharmaceutical company Merck (MRK) - to determine which stock offers the best upside potential for investors at current levels.
Business Profiles
Founded way back in 1891, Merck is a true pharmaceutical giant, with a market cap of $267.14 billion. The New-Jersey headquartered company has operations in 66 countries across the world, and was ranked 71st in last year's Fortune 500 list. Merck's primary operations are concentrated in the healthcare, life sciences, and electronics sectors.
Meanwhile, 3M is a conglomerate focused on the industrial safety, healthcare, and consumer goods sectors. Currently, the company commands a market cap of $61.03 billion and has operations in more than 70 countries worldwide. The company was founded in 1902, and has been granted more than 100,000 patents for its innovations over the years.
Financials
In its second-quarter report on Tuesday, Merck reported a 3% yearly rise in sales to $15 billion, which comfortably outpaced the consensus estimate of $14.45 billion. The company did swing to a steep net loss of $2.06 per share as Merck absorbed a $10.2 billion charge related to the acquisition of autoimmune treatment specialist Prometheus Biosciences, but analysts were expecting a wider loss of $2.17 per share. This continues a positive trend for MRK, which has consistently exceeded analysts' quarterly earnings estimates in recent years.
3M reported softer results for the second quarter when compared to the previous year. In the April-June period, 3M reported net sales of $8.3 billion, down 4.3% from the previous year, while EPS arrived at $2.17, down 47.6% from the prior year. Despite these year-over-year declines, both top- and bottom-line results surpassed consensus estimates. In fact, 3M's EPS has beaten analysts' expectations in 4 out of the past 5 quarters.
Share Price Performance
As mentioned earlier, both MRK and MMM have had a disappointing run in 2023 so far, considering the performance of the broader stock market. While it's not exactly on pace with breakout gains for the tech sector over the same time frame, the Dow Jones Industrial Average is up about 7% year-to-date; meanwhile, both MMM and MRK are negative on the year.
However, 3M has performed worse than Merck. MMM is down 9.2% so far in 2023, and is down 28.6% from its 52-week high of $152.30.
Meanwhile, MRK is down just 2.8% YTD, and only about 11% away from its 52-week high of $119.65.
Valuation
In terms of relative valuation, MMM trumps MRK when it comes down to some key metrics.
In terms of price to earnings (p/e), price to sales (p/s) and price to cash flow (p/cf) ratios, MMM is trading at a more attractive valuation than Merck. MMM has a p/e, p/s, and p/cf of 12.24, 1.80, and 8.17, respectively - all lower than Merck's comparable p/e, p/s, and p/cf of 15.82, 4.56, and 11.77.
The only notable ratio that appears to value Merck more favorably is the price to book (p/b). Merck is currently trading at a p/b ratio of 5.76, which is lower than 3M's p/b ratio of 7.86.
Analyst Estimates
However, analysts are more upbeat about Merck stock than 3M.
Analysts maintain an overall rating of “Strong Buy” on MRK, with a mean target price of $124.44 - indicating upside potential of about 15.4% from current levels. Out of 16 analysts covering the stock, 13 have a “Strong Buy” rating, and only 3 have a “Hold” rating. Notably, the stock has no “Sell” ratings.
Meanwhile, analysts have assigned a consensus “Hold” rating on MMM, with a mean target price of $114.54 - which implies expected upside of less than 6% from current levels. Out of 14 analysts covering the stock, 1 has a “Strong Buy” rating, 10 have a “Hold” rating, and 3 have a “Strong Sell” rating on the stock.
Dividend Yield
Finally, how do the two companies compare in terms of their dividend yields?
3M has a higher dividend yield of 5.36% when compared to Merck's dividend yield of just 2.75%.
In terms of forward dividend yield, 3M is also ahead at 5.38%, compared to Merck's 2.74%.
Final Takeaway
Both 3M and Merck have the potential to be valuable additions to investors' portfolios, given that both have displayed solid fundamentals and have a lengthy track record of dividend payouts.
Value-minded investors may be drawn to MMM right now, thanks to its higher dividend yield and lower relative valuations as compared to Merck. However, given its comparatively stronger price action and more favorable analyst ratings - along with competitive dividend payouts and fair valuations - MRK seems to have the edge at current levels in this Dow dividend stock face-off.
On the date of publication, Pathikrit Bose did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
