Short-Term Gains vs. Long-Term Risks: Evaluating Chinese Stocks in Your Portfolio

Posted on by The INO.com Team

Over the past half-decade, China has implemented unpredictable and business-unfriendly policies, including the world's longest-lasting COVID-19 lockdown, making it a challenging environment for investment. A poll conducted at a Goldman Sachs conference in Hong Kong in early February indicated that over 40% of attendees considered China ‘uninvestable.’

Major companies like Apple Inc. (AAPL) and Samsung are also shifting their supply chains away from China, and many others are not planning future investments in this previously coveted market.

As the Chinese economy grapples with market weakness, the New York Times reported a shift in the government’s stance towards more business-friendly policies.

Moreover, JPMorgan analysts are optimistic about the continuation of positive China trading trends, predicting this momentum could extend through the summer. While longer-term structural concerns such as deflationary backdrop, excess capacity, real-estate demand-supply imbalances, credit saturation, and global decoupling persist, analysts believe the worst of the housing market weakness is over. And that should keep the rally going.

Last week, Alibaba Group Holding Limited (BABA), JD.com, Inc. (JD), and Baidu, Inc. (BIDU) released their quarterly results, revealing that growth, although modest, continues. Their management teams are effectively delivering on efficiencies and enhancing shareholder value.

BABA shares have gained more than 8% over the past five days, while JD saw marginal gains over the same period. Although down 4% in the past week, BIDU has logged nearly a 7% gain over the past month.

Meanwhile, the iShares MSCI China exchange-traded fund (MCHI) climbed 17% over the past month, outpacing the S&P 500, which rose nearly 7%.

Despite these gains, the question still lingers: is the rally short-lived? Let’s dig deeper.

Alibaba Group Holding Limited (BABA)

The Chinese e-commerce giant Alibaba Group Holding Limited (BABA) faced tough regulatory, macroeconomic, and competitive headwinds in the past. For the fourth quarter that ended March 31, 2024, BABA’s revenue increased by a modest 7% year-over-year to $30.73 billion. However, the company’s income from operations declined 3% from the prior-year quarter to $2.05 billion.

Alibaba has been navigating a period of cautious consumer spending in China, yet there have been signs of a slight recovery in its core e-commerce business. Revenue from the Taobao and Tmall Group rose 4% year-over-year to $12.91 billion.

Also, customer management revenue (including marketing services for merchants on Taobao and Tmall) increased 5% after being flat in the prior quarter, and revenue from the Alibaba International Digital Commerce Group (AIDC) surged 45% year-over-year to $3.80 billion.

CEO Eddie Wu's commitment to “reignite” growth through further investments showed early results in the March quarter, as he noted the strategies were “working and we are returning to growth.”

However, BABA’s net income plunged by 96% from the prior year’s quarter to $127.18 million, primarily due to a decline in the value of its holdings in other publicly traded companies. The company’s non-GAAP earnings per share fell 5% from the year-ago value to $0.18. Also, its adjusted EBITDA decreased by 5% year-over-year to $3.32 billion.

Analysts expect Alibaba’s revenue for the first quarter (ending June 2024) to increase 5.5% year-over-year to $34.22 billion. However, its EPS for the ongoing quarter is expected to decline by 15.2% year-over-year to $2.04. Further, for the fiscal year 2025, BABA’s revenue is forecasted to reach $140.52 billion (up 8% year-over-year), while the consensus EPS estimate of $8.25 indicates a 4.1% decline from the prior year.

In terms of forward non-GAAP P/E, BABA is trading at 10.74x, 31.9% lower than the industry average of 15.79x. Likewise, its forward EV/EBITDA and Price/Book multiples of 6.93 and 1.47 are 28.9% and 40.5% lower than the industry averages of 9.74 and 2.48, respectively. Attractive, isn’t it? But the question remains: why is this stock so cheap in the first place?

In response to its low valuation, Alibaba's management repurchased $4.8 billion worth of shares in the fourth quarter. Although buybacks can theoretically boost the value of remaining shares by reducing the number outstanding, they fail to tackle the fundamental reasons for Alibaba's low stock price.

Alibaba's diverse investments dilute its focus on core e-commerce and cloud businesses, impacting its efficiency and valuation in the long run. For instance, although the management reported triple-digit growth in AI-related revenue in the fourth quarter, the cloud computing division only expanded by 3% year-over-year to $3.55 billion.

The stock has gained over 28% over the past month and nearly 14% year-to-date. Despite these gains, many investors are wary of the unpredictable and hostile Chinese market, and Alibaba's sprawling conglomeration of disjointed businesses further diminishes its appeal. Plus, the company's AI prospects seem weak compared to U.S. competitors.

Given BABA’s mixed financial performance and uncertain near-term outlook, waiting for a better entry point in this stock seems prudent.

JD.com, Inc. (JD)

Headquartered in Beijing, JD.com, Inc. (JD) offers a wide range of products, including computers, communication devices, consumer electronics, home appliances, and general merchandise. It also provides online marketplace services for third-party merchants, marketing services, omnichannel retail solutions, and online healthcare services.

In the latest quarter, the Chinese online retailer saw accelerated growth in its topline and market share, complemented by a robust bottom line that exhibited healthy gains. As consumers have been gravitating toward low-cost, discount-focused platforms, the company’s strategic price cuts and discount coupons have boosted sales that have been hit by cautious consumer behavior.

JD’s CEO, Sandy Xu, highlighted strong performance in categories like general merchandise, electronics, home goods (especially mobile phones), and apparel. He added that improved price competitiveness resonated with users, accelerating growth in lower-tier cities faster than in higher-tier cities.

During the first quarter that ended March 31, 2024, JD’s net revenues increased 7% year-over-year to $36 billion, beating analysts’ estimate of $35.68 billion. Its income from operations grew 19.8% from the prior year’s quarter to $1.10 billion. Furthermore, non-GAAP net income attributable to the company’s ordinary shareholders came in at $1.20 billion and $0.78 per ADS, up 17.2% and 18.7% year-over-year, respectively.

Earlier this month, analysts expressed concerns about the impact of JD.com’s low-cost strategy on margins and profitability. However, CFO Ian Shan dismissed these worries, stating that increasing users and profitability simultaneously is not contradictory.

“We believe by constantly dedicating resources to product, price, and service, this improves user experience, which drives up GMV (gross merchandising volume) and market share,” forming a virtuous cycle of business enhancement and profit growth, Shan explained.

Looking at the balance sheet, JD.com holds more cash than debt, which indicates financial stability and potential for investment in growth opportunities. As of March 31, 2024, its cash and cash equivalents stood at $11.31 billion, and its total current assets were $39.34 billion. Also, JD’s free cash flow increased by 166.3% over the past 12 months, reaching $7.01 billion.

This strong cash position allowed the company to pay an annual dividend (yielding 2.19% at the current price level) for the year ended December 31, 2023, of $0.38 per ordinary share, or $0.76 per ADS, to its shareholders on April 23, 2024. JD's four-year average dividend yield is 1.24%, with a payout ratio of 23.45%.

Despite robust short-term performance, JD.com has been cautious with international expansion compared to its peers. For instance, it opted not to acquire the warehouse and store network of British electrical retailer Currys in March. However, with expectations of slowing domestic growth, the company might need to explore new overseas revenue streams to sustain its momentum.

In terms of forward non-GAAP P/E, JD is trading at 10.66x, 32.5% lower than the industry average of 15.79x. Similarly, its forward EV/Sales multiple of 0.30 is 75% lower than the industry average of 1.22. Also, the stock’s 0.33x forward Price/Sales compares to the 0.89x industry average.

Street expects JD’s revenue and EPS for the second quarter (ending June 2024) to increase 5.6% and 7.2% year-over-year to $41.69 billion and $0.79, respectively. Also, the company has topped the consensus EPS estimates in all four trailing quarters.

For the fiscal year 2024, the Chinese online retailer’s revenue and EPS are anticipated to grow 6.6% and 7.4% year-over-year to $160.66 billion and $3.31, respectively.

Shares of JD have surged more than 43% over the past three months and approximately 20% year-to-date.

Based on the company’s outlook, JD.com is focused on enhancing user experience and solidifying its market position for sustainable growth. This includes developing an ecosystem benefiting both first-party and third-party merchants. Additionally, the company’s shareholder-friendly actions, such as share repurchases and dividends, will likely bolster investor confidence and support the stock’s valuation.

Analyst Saiyi HE maintains a bullish outlook on the stock, with a price target of $51.90.

Considering these factors, along with JD.com's ongoing initiatives and potential for margin expansion, investors should closely monitor the company's performance throughout this year.

Baidu, Inc. (BIDU)

Baidu, Inc. (BIDU) operates as a Chinese-language Internet search provider with its headquarters in Beijing. Its Baidu.com platform enables users to discover online information. The company operates through two segments, Baidu Core and iQIYI.

Often called the "Google of China," Baidu is a prominent AI leader in the world’s second-largest economy. It not only develops AI tools but also supports the technology through its cloud computing infrastructure. Baidu launched the ERNIE bot, China's first public ChatGPT-like tool, and has a growing business in self-driving taxis.

For the first quarter that ended March 31, 2024, BIDU reported a marginal year-over-year increase in its revenues of $4.37 billion, slightly above Wall Street’s estimate of $4.34 billion. Its non-GAAP operating income rose 4% from the year-ago value to $924 million. Its non-GAAP net income came in at $971 million, up 22% year-over-year.

 Baidu’s focus on AI-driven advertisements and cloud services is expected to drive long-term growth despite potential short-term volatility in ad revenue due to the lower monetization of AI-generated search results. Moreover, AI significantly contributed to Baidu’s performance in the latest quarter. The core business, which includes online marketing and AI efforts, reported revenue ahead of analyst expectations, driven by a 6% annual growth in the AI Cloud segment.

“Baidu Core’s online marketing revenue remained stable, while the end-to-end optimization of our AI technology stack continued to propel the growth of our AI Cloud revenue during the quarter,” said Robin Li, Baidu’s CEO, in a statement.

The company’s non-GAAP earnings per ADS amounted to $2.76, a 23.7% increase from the prior year’s quarter. In addition, its adjusted EBITDA increased marginally year-over-year to $1.14 billion.

As of March 31, 2024, the company’s cash and cash equivalents were $4.21 billion, and its total current assets stood at $30.12 billion.

Rong Luo, Baidu’s Chief Financial Officer, stated, “In the coming quarters, we will execute on what is needed to optimize our operational efficiency in support of our AI enabled businesses and high-quality growth, and maintain a healthy non-GAAP operating margin.”

In terms of forward non-GAAP P/E, BIDU is currently trading at 9.87x, 28.7% lower than the industry average of 13.86x. Also, its forward EV/EBIT multiple of 8.61 is 42% lower than the industry average of 14.85x.

Analysts expect BIDU’s revenue for the second quarter (ending June 2024) to increase 3.1% year-over-year to $4.81 billion. However, its EPS for the current quarter is expected to decrease by 12.2% year-over-year to $2.71. Over the past month, the stock has gained more than 17% to close the last trading session at $108.87.

While the firm’s short-term gains are apparent, demonstrated by robust financial performance and stock price increases, there are looming risks, primarily due to potential fluctuations in ad revenue and the complexities of integrating generative AI capabilities.

Given this backdrop, investors should monitor BIDU's progress closely, especially its advancements in AI and cloud services, to evaluate the sustainability of its growth.

Why Nvidia's Stock Surge Could Translate to Higher Dividends

Posted on by The INO.com Team

With a $2.35 trillion market cap, NVIDIA Corporation (NVDA) has had an exceptional year so far. Following a stellar 2023, NVDA’s stock has already surged nearly 92% since January. Moreover, the stock has gained over 200% in the past year.

This surge in NVIDIA has been fueled by its explosive growth in the AI and data center markets, making it one of the most talked-about and desirable stocks. With a high of just under $955 in yesterday’s session, expectations are mounting for the stock to hit four digits soon.

Ahead of Nvidia’s earnings, Stifel analyst Ruben Roy increased his price target on the stock from $910 to $1,085, citing that he expects Nvidia to again surpass expectations on the top and bottom lines and raise its guidance for the next quarter.

The company’s results have been bolstered by solid demand for its chips from hyperscalers, including Amazon (AMZN), Alphabet Inc. (GOOGL), Meta Platforms, Inc. (META), Microsoft Corporation (MSFT), and others. As a result, the first-quarter earnings report will serve as a crucial gauge of the industry’s appetite for further AI investment.

Also, Bank of America analyst Vivek Arya raised his price target on NVDA stock from $925 to $1100 while maintaining a “Buy” rating.

Let’s analyze how Nvidia’s stock price appreciation could lead to higher dividend payouts.

Dominance in AI and Data Center Markets

The U.S., led by NVIDIA, dominates the generative AI (GenAI) tech market. With the launch of ChatGPT in November 2022, the rise of GenAI gained substantial momentum.

From consumer-facing applications, foundational technology such as large language models (LLMs), cloud infrastructure, and semiconductors crucial for operations, U.S. companies hold a market share ranging from 70% to an impressive 90% across several segments of the generative AI landscape.

According to Statista, the global generative AI market is expected to reach $36.06 billion in 2024. Further, the market is projected to grow at a CAGR of 46.5%, resulting in a market volume of $356.10 billion by 2030. In global comparison, the U.S. is estimated to have the largest market share, totaling $11.66 billion this year.

Moreover, NVDA, a leading tech player, commands a market share of around 92% in the data center GPU market for GenAI applications.

Nvidia’s success extends beyond its cutting-edge semiconductor performance, owing to its software capabilities. The widely adopted CUDA development platform, introduced in 2006, has become a fundamental tool for AI development, amassing a user base of more than 4 million developers.

The company’s chips are essential in powering technology like Google’s Gemini and OpenAI’s ChatGPT. Also, META has placed a sizable order of 350,000 H100 GPU graphics cards from Nvidia. In line, MSFT has spent billions of dollars buying chips from the chipmaker.

Unveiled New Generation AI Graphics Processors

In March 2024, NVDA announced its next-generation chip architecture named Blackwell and related products, including its latest AI chip, B200. The latest GPUs are expected to dramatically boost developers’ ability to build advanced AI models.

The new GPU platform succeeds the company’s Hopper architecture, which was launched two years earlier and helped send NVDA’s business and stock surging.

Blackwell GPUs, containing 208 billion transistors, can enable AI models to scale up to 10 trillion parameters. It will be incorporated in Nvidia’s GB200 Grace Blackwell Superchip, which connects two B200 Blackwell GPUs to a Grace CPU.

The new AI chips are expected to ship later this year.

“Generative AI is the defining technology of our time,” said Nvidia CEO Jensen Huang during a keynote address at the company’s developers conference in San Jose, California. “Blackwell GPUs are the engine to power this new industrial revolution. Working with the most dynamic companies in the world, we will realize the promise of AI for every industry.”

With Blackwell’s superior performance, the chipmaker aims to solidify its dominance in the data center GPU market.

Outstanding Fourth-Quarter Financials

For the fourth quarter that ended January 28, 2024, NVDA’s revenue increased 265.3% year-over-year to $22.10 billion. That exceeded analysts’ expectations of $20.55 billion. It reported a record revenue from the Data Center segment of $18.40 billion, up 409% from the prior year’s period.

“Accelerated computing and generative AI have hit the tipping point. Demand is surging worldwide across companies, industries and nations,” said Jensen Huang.

He added, “Our Data Center platform is powered by increasingly diverse drivers — demand for data processing, training and inference from large cloud-service providers and GPU-specialized ones, as well as from enterprise software and consumer internet companies. Vertical industries — led by auto, financial services and healthcare — are now at a multibillion-dollar level.

The chipmaker’s gross profit was $16.79 billion, an increase of 338.1% year-over-year. Its non-GAAP operating income rose 563.2% year-over-year to $14.75 billion. Its non-GAAP net income grew 490.6% from the previous year’s quarter to $12.84 billion.

Also, Nvidia posted non-GAAP earnings per share of $5.16, compared to the analysts’ estimate of $4.63, and up 486% year-over-year.

NVDA’s non-GAAP free cash flow was $11.22 billion, up 546.1% from the previous year’s period. The company’s total current assets were $44.35 billion as of January 28, 2024, compared to $23.07 billion as of January 29, 2023.

“Fundamentally, the conditions are excellent for continued growth” in 2025 and beyond, Huang told analysts. He noted that the robust demand for the company’s GPUs is expected to persist, fueled by the adoption of generative AI and an industry-wide shift from central processors to Nvidia’s accelerators.

Further, NVIDIA predicts revenue of $24 billion for the first quarter of fiscal 2025. The company’s non-GAAP gross margin is anticipated to be 77%.

Potential for Increased Dividend Payouts

As Nvidia's revenue and profits soar significantly, the company will likely consider increasing its dividend payouts, benefiting long-term investors. NVIDIA paid its quarterly cash dividend of $0.04 per share on March 27 to shareholders of record on March 6. The company’s annual dividend of $0.16 translates to a yield of 0.02% at the current share price.

Currently, Nvidia's dividend yield is modest compared to its tech peers, but its substantial cash flow and strong balance sheet provide ample room for growth. By increasing dividends, the company can attract a broader base of income-focused investors, further supporting its stock price.

Bottom Line

NVDA’s remarkable rise so far this year can be attributed to its dominance in the AI and data center markets, fueled by the growing demand for its chips from tech giants such as Amazon, Google, Meta, Microsoft, and more.

Moreover, Nvidia’s recent announcement of its next-generation chip architecture, Blackwell, and related products demonstrates its commitment to innovation and maintaining its competitive edge. With Blackwell's superior performance, Nvidia aims to consolidate its dominance in the data center GPU market.

Analysts are highly optimistic about the chipmaker’s prospects. Analysts expect NVDA’s revenue and EPS for the fiscal 2025 first quarter (ended April 2024) to increase 242% and 411.9%year-over-year to $24.59 billion and $5.58, respectively. Also, the company topped consensus revenue and EPS estimates in all four trailing quarters, which is impressive.

As NVDA continues to expand its market share and generate higher revenue and profit, the company naturally accumulates more cash reserves. With ample cash in hand, it can increase its dividend payouts without compromising its ability to fund ongoing operations or invest in future growth opportunities.

Increased dividends will be a positive signal to the market, reflecting Nvidia’s confidence in its long-term prospects and its commitment to returning value to shareholders. This move can also enhance investor sentiment, particularly among those looking for stable income streams in addition to capital appreciation.

In conclusion, NVDA stands at the forefront of the tech industry, driving innovation and shaping the future of AI. Given its outstanding financial performance, technological leadership, and potential for dividend growth, Nvidia is an attractive investment opportunity for long-term investors.

Whale Watching: Impact of Large-Scale Transactions on SHIB's Price Volatility

Posted on by The INO.com Team

Shiba Inu (SHIBUSD) is an Ethereum-based altcoin. In contrast to Bitcoin, which is designed to be scarce, SHIB is intentionally abundant, with a total supply of one quadrillion. This allows users to hold billions or even trillions of SHIB tokens.

Originally created as a meme currency, Shiba Inu has evolved into a decentralized ecosystem. Upon its initial launch, 50% of the SHIB supply was placed in Vitalik Buterin's Ethereum wallet. Since then, SHIB's price surged from an all-time low of $0.000000000056 to an all-time high of $0.000084, marking a 150,000-fold increase. Subsequently, Vitalik donated 10% of his SHIB holdings, worth about $1 billion at the time, to a COVID-19 relief effort in India, and the remaining 40% was burnt.

Currently trading at approximately $0.000024 and valued at $14.11 billion by market cap, Shiba Inu has demonstrated remarkable performance, gaining more than 180% over the past year and over 200% over the past six months. The outstanding performance underscores Shiba Inu’s enduring popularity and speculative allure among cryptocurrency traders.

A major influencer shaping Shiba Inu’s price movements is the activity of large-scale holders, known as whales, who engage in significant transactions that can trigger notable price swings.

For instance, a recent event involved the transfer of a staggering 3 trillion SHIB tokens (valued at approximately $75.9 million) from an undisclosed wallet to the Robinhood platform. Such transactions signal the potential for substantial shifts in the market, acting as cues for other investors and impacting overall market sentiment, thereby contributing to price volatility.

Another key driver of Shiba Inu’s recent price momentum is the surge in token-burning activity. Token burning involves the permanent removal of tokens from circulation, effectively reducing the available supply of SHIB tokens.

The recent surge in Shiba Inu burn activity, which saw a remarkable 4000% increase in its burn rate in May, has tightened the supply-demand dynamics, instilling optimism regarding its potential path to a $0.001 SHIB price.

This deflationary mechanism has created scarcity, which is helping enhance the token's perceived value. Thus, investor confidence is bolstered, and positive sentiment towards SHIB is cultivated.

Earlier this month, Shiba Inu experienced a dramatic surge in its burn rate, escalating by over 5500% compared to previous levels. This surge led to the removal of 25.93 million SHIB tokens from its total supply within a 24-hour period. Such a significant reduction injected renewed optimism into the market outlook for the meme coin.

On top of this, Shiba Inu's fundamentals have received a boost as the meme coin secures a listing on the cryptocurrency payment platform CoinGate. This listing is anticipated to broaden Shiba Inu's utility, enabling users to utilize the meme coin for various commercial transactions like purchasing sports gear, gift cards, and more.

Among these transactions, users can now use Shiba Inu to pay for Airbnb accommodations and make purchases from select brands such as Nike and Zalando.

In light of meme coin flashing green signals on the charts, analysts have grown bullish, offering forecasts that span moderate gains of 20% to potential surges as high as 350% in the near future.

Although whale activity, token burns, and investor sentiment all exert significant influence, Shiba Inu’s price trajectory remains dynamic and prone to rapid fluctuations. As market participants navigate this evolving landscape, staying abreast of these key factors becomes imperative for making well-informed investment decisions and seizing potential opportunities within the SHIB ecosystem.

Pipeline Powerhouses: Oneok (OKE) vs. Williams Companies (WMB) as Dividend Plays

Posted on by The INO.com Team

Energy demand continues to rise worldwide, driven by the growing population, rapid urbanization, and economic development. Increased energy consumption across residential, commercial, and industrial activities necessitates the expansion and modernization of energy infrastructure to ensure a consistent supply of energy.

The energy infrastructure sector operates assets that offer services crucial for expanding the global economy and ensuring energy security. The industry is supported by stable cash flows, high barriers to entry, long-lived real assets, and inelastic demand, which collectively contributed to double-digit returns in 2023.

Energy infrastructure companies are well-poised to provide essential services for decades to come. In 2024, the sector’s total return is projected to be between 10% and 14%, driven by a dividend yield between 6%-7%, expected dividend growth of 3%-5%, and stock buybacks of 1%-2%.

Notably, as represented by the Alerian Midstream Energy Index, the energy infrastructure sector delivered an impressive 25% annualized return compared to the S&P 500’s 10% from December 31, 2020, to December 31, 2023.

Moreover, the growth in the U.S. natural gas and oil production volumes is expected to set new records, reinforcing the U.S. position as the world’s largest energy exporter.

According to the Energy Information Administration’s (EIA) Short-Term Energy Outlook (STEO), the U.S. natural gas trade will continue to expand with the startup of new LNG export projects. Also, EIA expects increased natural gas exports by pipeline, primarily to Mexico.

In its STEO forecast, net exports of U.S. natural gas will rise 6% year-over-year to 13.6 billion cubic feet per day (Bcf/d) in 2024. In 2025, net exports are expected to grow another 20% to 16.4 Bcf/d. U.S. LNG exports are projected to grow by 2% in 2024 to an average of 12.2 Bcf/d and an additional 18% (2.1 Bcf/d).

As per a Research and Markets report, the oil and gas midstream market is expected to reach $43.41 billion by 2030, growing at a CAGR of 5.9% during the forecast period (2024-2030).

As the energy infrastructure sector has been a hotspot for dividend-seeking investors, ONEOK, Inc. (OKE) and The Williams Companies, Inc. (WMB) stand out as prominent players offering attractive yields and stable returns.

On April 18, OKE’s Board of Directors declared a quarterly dividend of 99 cents ($0.99) per share, paid on May 15 to shareholders of record at the close of business on May 1. Its annual dividend of $3.96 translates to a yield of 4.79% at the prevailing share price. Its four-year average dividend yield is 7.08%.

Further, the company’s dividend payments have increased at a CAGR of 2.7% over the past five years.

Meanwhile, on January 30, WMB’s Board of Directors approved a dividend of $0.475 per share, paid on March 25, to shareholders of record at the close of business on March 8. This represents a 6.1% increase from the company’s fourth-quarter 2023 dividend, paid in December 2023. Its annual dividend of $1.90 translates to a yield of 4.6% at the current share price.

Moreover, the company’s dividend payouts have grown at a CAGR of 5.4% over the past five years. Its four-year average dividend yield is 5.95%. Additionally, WMB has raised its dividend for six consecutive years.

Let’s examine OKE and WMB’s recent financial performance, strategic initiatives, valuation, and growth outlook more thoroughly to determine whether these stocks are worth buying or holding.

ONEOK, Inc. (OKE)

With a $48.23 billion market cap, ONEOK, Inc. (OKE) engages in the gathering, processing, fractionation, storage, transportation, and marketing of natural gas and natural gas liquids (NGL). It operates through four segments: Natural Gas Gathering and Processing; Natural Gas Liquids; Natural Gas Pipelines; and Refined Products and Crude. 

On May 13, OKE announced an agreement to acquire a system of natural gas liquids (NGL) pipelines from Easton Energy, a Houston-based midstream company, for around $280 million. The transaction encompasses nearly 450 miles of NGL pipelines in the strategic Gulf Coast market centers for NGLs, refined products, and crude oil.

These pipelines transport various liquid products through a portion of OKE’s capacity to current customers. The company intends to connect the pipelines to its NGL infrastructure in Mont Belvieu, Texas, and its refined products and crude oil infrastructure in Houston, thereby accelerating commercial synergies.

“We expect that this acquisition will accelerate the ability to capture commercial synergies related to our recent Magellan acquisition and future earnings growth,” said Pierce H. Norton II, OKE’s President and CEO.

Also, in March, ONEOK increased its stake in the Saddlehorn Pipeline Company by acquiring an additional 10% interest, bringing its total ownership to 40% as of March 31, 2024.

OKE’s trailing-12-month EBIT margin and net income margin of 21.17% and 12.54% are 11% and 9.7% higher than the industry averages of 19.07% and 11.43%, respectively. However, the stock’s trailing-12-month gross profit margin of 36% is 19.4% lower than the 44.68% industry average.

In terms of forward non-GAAP P/E, OKE is trading at 16.62x, 45.8% higher than the industry average of 11.40x. Its forward EV/EBITDA of 11.34x is 95.6% higher than the industry average of 5.80x. Also, its forward Price/Sales of 1.07x is 38.7% higher than the industry average of 1.49x.

For the first quarter that ended March 31, 2024, OKE reported a 12% year-over-year rise in Rocky Mountain region NGL raw feed throughput volumes. It posted a 4% increase in natural gas volumes processed and a 9% growth in Rocky Mountain region natural gas volumes processed.

ONEOK’s adjusted EBITDA from the natural gas gathering and processing segment and the natural gas pipelines segments were $306 million and $165 million, up 7.4% and 4.4% year-over-year, respectively.

However, the company’s total revenues declined 5.8% from the prior year’s quarter to $4.78 billion. Its operating income was $1.06 billion, a decline of 29.9% year-over-year. Also, net income available to common shareholders and EPS came in at $639 million and $1.09, down 39.1% and 53.4% from the previous year’s period, respectively.

“The strength of our business, underscored by accelerating volumes and a positive synergy outlook, resulted in an increase to our 2024 financial guidance and provides significant momentum into 2025,” said Pierce H. Norton II.

ONEOK increased 2024 net income guidance by $70 million to a midpoint of $2.88 billion. The company raised its EPS to a midpoint of $4.92. Also, its adjusted EBITDA guidance increased by $75 million to a midpoint of $6.175 billion.

Furthermore, its 2024 capital expenditure guidance remains unchanged at $1.75 billion to $1.95 billion. The company also expects that additional annual synergies will meet or surpass $125 million in 2025.

Looking ahead, analysts expect OKE’s revenue for the fiscal year (ending December 2024) to increase by 32% year-over-year to $23.34 billion. However, the consensus EPS estimate of $4.97 for the current year indicates a decline of 9.3% year-over-year. Moreover, ONEOK has missed consensus revenue estimates in all four trailing quarters and consensus EPS estimates in three of the trailing four quarters.

For the fiscal year 2025, the company’s revenue and EPS are estimated to grow 6.4% and 10.4% year-over-year to $24.83 billion and $5.49, respectively.

Shares of OKE have surged nearly 23% over the past six months and more than 44% over the past year.

The Williams Companies, Inc. (WMB)

With a market cap of $50.30 billion, The Williams Companies, Inc. (WMB) operates as an energy infrastructure company. Its four business divisions include Transmission & Gulf of Mexico; Northeast G&P; West; and Gas & NGL Marketing Services. 

During the quarter of 2024, WMB placed Transco’s Carolina market link into service. This development contributed to additional fee-based revenues.

 The midstream company finished 2023 with a deal to acquire a portfolio of natural gas storage assets from an affiliate of Hartree Partners LP for $1.95 billion.

The transaction includes six underground natural gas storage facilities in Louisiana and Mississippi with a total capacity of 115 Bcf, 230 miles of gas transmission pipeline and 30 pipeline interconnects to LNG markets, and connections to Transco, the nation’s largest natural gas transmission pipeline.

These Gulf Coast natural gas storage assets are strategically located to take advantage of solid LNG and power demand fundamentals, boosting the company’s earnings growth.

WMB’s trailing-12-month gross profit margin of 60.70% is 35.9% higher than the 44.68% industry average. Its trailing-12-month EBITDA margin of 28.40% is 148.4% higher than the 11.43% industry average. However, the stock’s trailing-12-month ROTC and ROTA of 6% and 5.47% are lower than the industry averages of 7.75% and 5.74%, respectively.

In terms of forward non-GAAP P/E, WMB is trading at 22.65x, 98.6% higher than the industry average of 11.40x. Also, its forward EV/EBITDA and Price/Sales of 11.27x and 4.86x are unfavorably compared to respective industry averages of 5.80x and 1.49x.

In the first quarter that ended March 31, 2024, WMB’s service revenues increased 12.5% year-over-year to $1.91 billion, but its total revenues came in at $2.77 billion, down 10.1% from the year-ago value. Its adjusted EBITDA grew 7.7% year-over-year to $1.93 billion.

The adjusted EBITDA growth was driven by the continued outperformance of its transmission, storage, and gathering businesses, which delivered 13% higher adjusted EBITDA compared to the same period in 2023. Also, contracted transmission capacity achieved another record of 33.9 Bcf/d in the first quarter, up 4.3% year-over-year.

In addition, the company’s adjusted net income and earnings per share were $719 million and $0.59, up 5.1% and 5.4% from the prior year’s period, respectively. Its available funds from operations increased 4.3% year-over-year to $1.51 billion.

“Crisp execution by our teams in both integrating newly acquired assets and building large-scale organic projects has us on track to be in the top half of our original 2024 guidance range,” commented Alan Armstrong, president and CEO of WMB.

He added, “Our track record of generating predictable, growing earnings in all market cycles underscores the value of Williams as a resilient, long-term investment with a strong dividend.”

Williams projects adjusted EBITDA at the top half of its 2024 guidance range of $6.8 billion and $7.1 billion. It continues to expect 2024 growth capex of $1.45-$1.75 billion and maintenance capex of $1.1-$1.3 billion, which includes capital of $350 million for emissions reduction and modernization initiatives.

For 2025, WMB expects adjusted EBITDA between $7.2 billion and $7.6 billion, with growth capex between $1.65 billion and $1.95 billion and maintenance capex between $750 million and $850 million, which includes capital of $100 million based on a midpoint for emissions reduction and modernization initiatives. Also, it continues to anticipate a leverage ratio midpoint for 2024 of 3.85x.

Street expects WMB’s revenue and EPS for the fiscal year (ending December 2024) to decrease 5.2% and 4.58% year-over-year to $10.34 billion and $1.82, respectively. For the fiscal year 2025, the company’s revenue and EPS are expected to increase 11.4% and 12.3% from the prior year to $11.52 billion and $2.05, respectively.

WMB’s stock has gained more than 15% over the past six months and approximately 42% over the past year.

Bottom Line

The energy infrastructure sector is well-poised for robust growth and expansion, driven by rising global energy demand amid a growing population, urbanization, and economic development. The industry’s stable cash flows, high barriers to entry, and inelastic demand contributed to impressive double-digit returns in 2023.

Further, the sector is projected to deliver a total return of 10% to 14% in 2024, supported by attractive dividend yields, dividend growth, and stock buybacks. OKE and WMB are critical players within the sector, each with strategic initiatives and strong dividend profiles.

ONEOK’s raised financial 2024 guidance reflects favorable industry fundamentals across its system and continued confidence in synergy expectations. However, the company’s recent first-quarter 2024 results indicate mixed performance, with revenue year-over-year declines and pressure on profit margins.

Despite these challenges, OKE’s dividend yield remains attractive, and its long-term growth outlook is supported by surging energy demand and infrastructure expansion.

Similarly, Williams has demonstrated solid financial health with strategic investments and integration of newly acquired natural gas storage assets. While the company reported year-over-year growth in service revenues and adjusted EBITDA in the first quarter, overall revenues have declined.

WMB’s strong dividend track record and future growth projections underscore its potential as a resilient, long-term investment. The company leverages its existing infrastructure and project development capabilities to serve growing domestic and global security needs while creating sustainable value for its shareholders.

Given the mixed fundamentals, it seems prudent for investors to hold OKE and WMB stocks and wait for better entry points. Both companies offer attractive dividends and long-term growth prospects, but market conditions and stock valuations should be carefully considered to maximize investment returns.

3M's Dividend Cut Signals Shift in Investor Strategy: What Does It Mean for Shareholders?

Posted on by The INO.com Team

With a $56.02 billion market cap, 3M Company (MMM) offers diversified technology services, focusing on consumer goods, safety and industrial, healthcare, and transportation sectors. On May 14, MMM declared a dividend on the company’s common stock of $0.70 per share for the second quarter of 2024, payable on June 12. 

The company has paid dividends to its shareholders without interruption for more than 100 years. However, the newly declared dividend is down from the previous quarter’s dividend of $1.51, and this dividend cut will end a 64-year streak of increases.

Let's delve into the implications of 3M’s significant dividend reduction for investors, examining the reasons behind this decision and its effects on shareholder value.

3M Spun-Off Its Healthcare Business

In April, MMM successfully completed the planned spin-off of its healthcare division, which formally launched Solventum Corporation as an independent company. Solventum is now publicly traded on the New York Stock Exchange under the ticker symbol SOLV.

“This is an important day for 3M and Solventum, and I extend my sincere congratulations to members of both teams who have made this possible,” said Mike Roman, 3M chairman and CEO. “Both companies are positioned to pursue their respective growth and tailored capital allocation plans, and I am excited to see both companies succeed as they innovate new solutions and create value for their respective stakeholders.”

Given the spin-off of its healthcare business, 3M’s recent dividend cut was not surprising. The launch of Solventum as an independent entity impacted MMM’s financial landscape, as the healthcare segment accounted for nearly 30% of the company’s free cash flow.

Now, the consumer and industrial products company is aiming for a dividend payout ratio of approximately 40% of adjusted free cash flow compared to about 60% before the Solventum spin-off.

MMM’s annual dividend of $2.80 translates to a yield of 5.05% at the prevailing share price. Its four-year average dividend yield is 3.75%.

Lost Dividend Aristocrat Status

The recent dividend reduction will cause 3M to lose its status as a Dividend Aristocrat, a company that has increased its dividend payouts for at least 25 consecutive years. Once 3M is removed, the S&P 500 Dividend Aristocrat Index will consist of 66 components.

S&P Global reviews the index qualification once per year in January, suggesting that 3M stock might remain in the index until early 2025.

The removal from the index is not expected to impact the stock significantly. Former 3M CEO Mike Roman had already informed investors about resetting the company’s dividend post the April 1 spinoff.

3M’s stock soared toward a 16-month high on Wednesday after the company cut its quarterly dividend but by less than what was anticipated.

J.P. Morgan analyst Stephen Tusa expressed “relief” that the dividend wasn’t slashed even more. With 553.36 million shares outstanding as of March 31, the new annual dividend rate of $2.80 per share translates to a total annual payout of approximately $1.55 billion. Tusa noted that this payout is higher than the expected $1.4 billion.

While the dividend cut may initially impact investor sentiment and income, the broader market’s reaction suggests that it has anticipated and priced this adjustment due to 3M’s spin-off of its massive healthcare business, Solventum.

Investors should monitor the company’s financial reports, strategic moves, and efforts to address underlying challenges, which could ultimately shape the trajectory of shareholder value in the upcoming quarters.

First-Quarter Results and Updated Full-Year 2024 Guidance Reflecting Completion of Solventum Spin

For the first quarter that ended March 31, 2024, MMM’s revenue of $8 billion surpassed analysts’ estimate of $7.66 billion. Its organic sales grew 0.8% year-over-year, marking the first positive growth in the past five quarters. Its adjusted operating income margin was 21.9%, up four percentage points year-over-year.

The company posted adjusted earnings per share of $2.39, compared to the consensus estimate of $2.11, and up 21% year-over-year. During the quarter, 3M’s adjusted free cash flow was $0.8 billion. Moreover, the company returned $835 million to shareholders via dividends.

Furthermore, as of March 31, 2024, the materials company’s cash and cash equivalents stood at $10.91 billion, compared to $5.93 billion as of December 31, 2023. The company’s total current assets were $21.61 billion versus $16.38 billion as of December 31, 2023.

Starting in the second quarter of 2024, Solventum’s historical earnings results will be reported within 3M’s financial statements as discontinued operations.

According to the full-year 2024 outlook, the company projects adjusted organic sales growth to be flat-2%. Also, its adjusted earnings per share is expected to be between $6.80 to $7.30.

Strategic Initiatives and Legal Settlements

On May 3, 3M announced a 90,000-square-foot expansion at its facility in Valley, Nebraska, boosting the plant’s manufacturing capacity and adding around 40 new jobs. The $67 million investment includes new production lines, equipment, and a warehouse, enabling 3M to meet customer demand for its personal safety products more efficiently.

In addition, MMM is making changes in its leadership structure. On March 12, the company announced the appointment of William M. “Bill” Brown as chief executive officer, effective May 1, 2024. He succeeded Michael Roman, who was appointed to the role of Executive Chairman of the 3M Board of Directors, also effective May 1.

“Bill's strong track record as a CEO for a global technology company makes him the right leader for 3M,” said Michael Roman. “He brings a wealth of experience in strategic leadership, innovation, and operational excellence to 3M. I look forward to working with him to build on our momentum in my new role as executive chairman.”

Further, 3M has faced substantial lawsuits, but they are beginning to resolve these issues. On April 1, 3M’s previously announced settlement with U.S.-based public water suppliers (PWS) to address PFAS in drinking water received final court approval.

This marks another significant development for 3M as it remains committed to its objectives. The final approval of this settlement and the company’s ongoing progress to cease all PFAS manufacturing by the end of 2025 will further its efforts to minimize risk and uncertainty in the future.

The company also settled the Combat Arms Earplug litigation. More than 99% of claimants have signed on at the last registration date, marking a significant stride in resolving this long-running dispute.

Bottom Line

MMM delivered better-than-expected first-quarter 2024 results as it returned to organic sales growth and achieved doubt-digit growth in adjusted earnings. The company enhanced performance in its businesses through effective operation management, successfully executed the Solventum spin-off, and finalized two major legal settlements.

The significant progress 3M has made in executing its strategic priorities set the stage for long-term value creation for shareholders, particularly as Bill Brown assumes the role of the CEO.

The recent dividend cut by 3M, following the spin-off of its healthcare division Solventum, was largely anticipated by investors and analysts as part of its broader strategic realignment. While the cut ended a streak of 64 straight years of increases, it was less than feared; 3 M’s stock is trading higher.

Moreover, the stock has surged nearly 3% over the past five days and more than 8% over the past month.

Analysts at J.P. Morgan upgraded 3M to Overweight from Neutral and raised its price target on the stock from $110 to $111.

The upgrade reflects “a combination of an attractive valuation, an increasingly cleaned up balance sheet, with the dividend cut catalyst behind them now, and a turn in earnings momentum on a bottom in electronics, with better visibility on remainco fundamentals,” Stephen Tusa said in a note to clients.

Moving forward, investors should closely monitor 3M's financial performance, execution of strategic plans, and ability to capitalize on growth opportunities. The company’s trajectory in addressing underlying challenges and creating long-term shareholder value will be the key factors influencing investor sentiment and decision-making in the upcoming quarters.