Investing

Merrill Lynch Says Buy These 5 Dow Jones Industrial Average Laggards

Lee Jackson

Published: July 26, 2018 8:20 am

Last Updated: January 11, 2020 8:23 pm

The venerable Dow Jones industrial average index is home to some of the biggest and best companies in the United States, and it continues to fairly represent the overall economy with just 30 stocks. Up just over 2% so far this year, the index has some members that have struggled and, given their size and liquidity, may be great buys for growth stock investors going forward.

We screened the index for potential underperforming companies against the Merrill Lynch research universe database, looking for stocks that were rated Buy and paid a dividend. We found five that look like great picks for the rest of 2018 and beyond.

DowDupont

This result of a blockbuster merger in 2017 has emerged bigger and stronger, and the stock is on the Merrill Lynch US 1 list. DowDupont Inc. (NYSE: DWDP) is a diversified chemical company with $79 billion in sales in 2017, and it was formed as a result of the merger of Dow and DuPont.

The company is organized in three principal divisions: Agriculture (20% of EBITDA), Material Science (55%) and Specialty Products (25%). It intends to separate these into three public entities by 2020.

The stock has underperformed this year, and the concerns over the trade issues with China are continuing to keep shares under pressure. The stock is down over 15% from highs that were printed in January.

DowDupont shareholders are paid a 2.31% dividend. The Merrill Lynch price objective for the shares is $84, and the Wall Street consensus target was last seen at $81.79. The stock closed Wednesday’s trading at $67.53 a share.

Exxon Mobil

This remains a top Wall Street energy pick and is on the US 1 list at Merrill Lynch. Exxon Mobil Corp. (NYSE: XOM) is the world’s largest international integrated oil and gas company. It explores for and produces crude oil and natural gas in the United States, Canada, South America, Europe, Africa and elsewhere.

The company also manufactures and markets commodity petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics, and specialty products, and it transports and sells crude oil, natural gas and petroleum products.

Exxon posted first-quarter 2018 earnings of $4.7 billion, compared with $4.0 billion a year earlier. Cash flow from operations and asset sales was $10 billion, including proceeds associated with asset sales of $1.4 billion. The second quarter results are due on July 27.

With Americans hitting the road in record numbers this summer, you can bet that plenty of gasoline will be sold to get everybody to their destination, regardless of the somewhat higher prices this summer.

The dividend recently was raised by a nickel per share to $0.82, which now translates to a yield of 3.92%. Merrill Lynch has a $100 price objective on the stock, while the posted consensus target price is $89.58. The stock closed most recently at $83.59 per share.

3M

This top industrial could really jump with a continued economic pickup. 3M Co. (NYSE: MMM) is a diversified, global manufacturer. Its businesses are technology-driven and organized under five segments: Consumer, Safety and Graphics, Electronics and Energy, Healthcare, and Industrial. Its popular brands include Scotch, Post-It, 3M and Thinsulate. The company also holds over 500 U.S. patents.

Last year the company entered into a definitive agreement with Johnson Controls to acquire the latter’s operating unit Scott Safety. The deal, which was worth $2.0 billion, likely will boost 3M’s technology, manufacturing, global capabilities and brand. In addition, it will enable the company to expand its recent portfolio actions within the Safety and Graphics business to help position for long-term success.

3M shareholders are paid a 2.71% dividend. The $255 Merrill Lynch price target compares with the $211.69 consensus target. The stock closed most recently at $204.38.

IBM

This blue chip leader still may be offering investors the best entry point in years. International Business Machines Corp. (NYSE: IBM) is a leading provider of enterprise solutions, offering a broad portfolio of information technology (IT) hardware, business and IT services, and a full suite of software solutions. The company integrates its hardware products with its software and services offerings in order to provide high-value solutions.

IBM’s five major segments are: 1) Cognitive Solutions, 2) Global Business Services, 3) Technology Services & Cloud Platforms, 4) Systems and 5) Global Financing. Analysts cite the company’s potential in the public cloud as a reason for their positive outlook going forward.

For the second quarter, IBM beat analyst expectations on both revenue and earnings per share, despite some currency headwinds. At current trading levels the stock is a bargain, especially if the company can continue to grow its cloud business.

IBM shareholders receive a large 4.28% dividend. The Merrill Lynch price target is $200. The posted consensus target is $170.75, and shares closed at $146.62 on Wednesday.

Cisco

This top mega-cap technology company recently reported an outstanding quarter. Cisco Systems Inc. (NASDAQ: CSCO) designs, manufactures and sells internet protocol (IP) based networking products and services related to the communications and information technology industry worldwide.

It provides switching products, including fixed-configuration and modular switches, and storage products that provide connectivity to end users, workstations, IP phones, wireless access points and servers, as well as next-generation network routing products that interconnect public and private wireline and mobile networks for mobile, data, voice and video applications.

Toss in a massive $25 billion share buyback plan and investors should be well rewarded going forward.

Investors in Cisco receive a solid 3.06% dividend. Merrill Lynch has set its target price at $53. The consensus target was last seen at $49.56, and shares traded most recently at $43.16 apiece.

These five top Dow stocks have lagged this year, or at best, traded sideways. However, they all offer good growth potential and don’t come with massive valuations like some of the FANG stocks. They are also safer picks in a very pricey market.