3 passive income generators down between 29% and 36% to buy on the downside

0

While high-yielding stocks may seem more appealing to investors looking to create passive income, seeking smaller, easily funded dividends is often the most prudent long-term strategy.

While dividend payouts may be smaller initially, these low-yielding stocks often come with lower payout ratios, giving them greater long-term dividend potential if bought and held.

Today, three Motley Fool contributors will explain why the recent price drops for Starbucks (SBUX 1.82%), Lowe’s (DOWN 1.28%)and eBay (EBAY 3.76%) could be a perfect opportunity to generate long-term passive income.

Returning CEO bought stock; should you

Bradley Guichard (Starbucks): You would think that Starbucks is in dire straits by the 33% drop in share price this year. The company has its share of challenges. (Isn’t everyone in 2022?) However, rumors of his demise are greatly exaggerated.

Significant growth for Starbucks has been difficult recently as the US market is heavily saturated. China and other overseas markets offer tremendous, yet challenging, opportunities. Inflation has driven up labor and supply costs, and a union push is worrying some investors. The company needs a strong leader right now, and Howard Schultz’s return as CEO could be the spark the company needs.

Schultz bought Starbucks in 1987 when it had 11 stores. There are over 34,000 locations now, and Schultz’s hand is everywhere. Schultz relinquished the reins in 2017, but returned as interim CEO this year. He recently bought around $15 million worth of Starbucks stock as a sign of confidence.

The fundamentals aren’t bad either. Year-over-year sales for the first two quarters of the current fiscal year are up 17%, while operating profit is up 12%. Diluted earnings per share increased by 18.5% over the same period.

The company has increased the dividend every year since it started paying one in 2010. But here’s the kicker. The dividend yield is almost at its highest level ever, as shown below.

SBUX dividend yield given by Y-Charts

This yield suggests two things. First, investors recognize that Starbucks is in a tough spot. But it could also mean that pessimism has overshot the mark. Timing a market bottom is impractical, so remember that risk mitigation strategies like averaging are essential.

It’s a great time for long-term passive income investors to take a long look at Starbucks stocks.

Focus on professional contractors pays off

Jeff Santoro (Lowe’s): Home improvement retailer Lowe’s has been an investment that outperforms the market over the long term. Including dividends, Lowe’s beat the yield of the S&P500 46% over the past three years and 90% over the past five years. However, since the start of the year, Lowe’s is down 29% and trails the market by 9.4%.

When Lowe’s released its first quarter 2022 results in April, results were mixed, but Pro category growth was strong. Compared to the prior year quarter, revenue decreased 3% and same store sales decreased 4%. This was in line with the company’s expectations, but management noted that an unusually cold start to spring also had a negative effect on results.

Even with this year-over-year decline, Pro category growth remained strong, increasing 20%, on top of the 36% in the prior year quarter. A new loyalty program, which saw adoption rates above expectations during the quarter, helped drive this growth. The company is also expanding its fulfillment capabilities for items Pros need in greater quantities for their specific type of work.

There were a few other positives in the Q1 report. Earnings per share (EPS) increased 9% to $3.51, and gross margin and operating margin improved 74 basis points and 67 basis points, respectively. Management attributes these results to its continuous efforts to improve productivity, which are clearly paying off.

Lowe’s has long been profitable and cash flow positive and has used its excess capital to reward shareholders. Over the past five years, Lowe’s has reduced its outstanding shares by 24% and increased its dividend by 156%. The dividend yield is currently 1.8%, slightly above the market average of 1.7%.

With a price-to-sales (P/S) ratio of 1.3, Lowe’s is trading slightly above its average valuation, and at a discount to where it was at the start of the year. For investors looking for passive income, Lowe’s is a compelling choice given the friendly shareholder moves the company makes and its position as one of the top two players in the home improvement space.

eBay’s returns on capital are its x-factor for investors

Josh Kohn-Lindquist (eBay): While e-commerce juggernaut eBay doesn’t seem like quite as compelling an investment as its faster-growing peers, its unique niche and 18 million “enthusiastic” buyers give it an unconventional moat.

fall between Amazonmore commonplace goods and EtsyeBay’s handcrafted items, eBay’s focus on collectibles, parts (for cars or computers, for example), and certified refurbished items give it a distinctive niche in online sales.

An example of this specialization is the company’s plan to roll out its Vault business, allowing card collectors to buy, sell, and even hold collectible cards in eBay’s vault. Likewise, the company’s collectible sneaker sales are attracting many niche customers, resulting in an orderly ripple effect on some of its most common items.

After increasing sales by 42% year-over-year in the first quarter of 2021, eBay saw its revenues fall by 6% in the first quarter of 2022 as it tried to overcome these incredibly difficult comps. But, more importantly, its earnings per share fell just 2% over the same period, underscoring the power of its robust share buyback program.

Chart showing the decline in eBay shares outstanding since 2018.

EBAY shares outstanding given by Y-Charts

In the past five years alone, eBay has cut its total shares outstanding by nearly half, contributing to EPS growth of 153% over the same period.

To underscore just how powerful this stock cut has been, consider that despite increasing its dividend by more than 50% since 2019, eBay paid out the same amount of dividends in 2019 as it did in the year. last – thanks to this lower number of shares.

On top of these buybacks, eBay is paying a 1.9% dividend which is paired with a meager 19% payout ratio, leaving plenty of room for future increases.

Trading at just 11 times earnings, the company’s price-to-earnings ratio is 33% below its five-year average.

This cheap valuation and 36% drop in share price since the start of the year should put eBay on the radar of passive income investors, especially given its 26% free cash flow margin. and its incredible returns on capital for shareholders.

Share.

Comments are closed.