It’s probably been a frustrating year for many investors. Many tech stocks were hammered, megacaps like Metaplatforms (META -1.57%) and Amazon.co.uk to work-from-home growth stock darlings like Focus on video communications and Interactive Platoon. Very few industries have avoided market blows, with retail, real estate and financial services also battered this year. Picking stocks lately hasn’t been easy, to say the least.
But a lesson can be learned from two stocks that beat the market this year by a significant margin – and the two stocks belong to very different sectors from each other. These two actions are none other than the boring and decades old ones Waste Management (WM 0.64%) and McDonald’s (MCD 0.31%). While the S&P500 the index is down about 17% year-to-date, shares of Waste Management are down only 5% and shares of McDonald’s are up 2% at the time of this writing. Both stocks also outperform over time horizons of five and ten years. While there are many reasons for the market’s optimism for the stocks of these two companies, the two have one thing in common: their businesses are unlikely to be derailed or disrupted by weak macroeconomic environments or new competition. .
Predictable companies deserve high valuations
If there’s anything 2022 has taught us, it’s that the market’s appetite for a stock can dwindle quickly if a company’s future becomes less certain. Consider the sharp drop in Meta Platforms, the parent company of Facebook, Instagram and WhatsApp this year. Stocks are likely down as year-to-date earnings per share are down nearly 33% from the same period last year. Meta is struggling with a combination of reduced advertising budgets amid macroeconomic uncertainty and the impact of changes to ad tracking and measurement in Applemobile operating system. Such a drop in earnings has investors reassessing the company’s long-term earnings growth potential and the likelihood of various scenarios unfolding.
It is on this point of predictability that McDonald’s and Waste Management stand out. Not only does it stand to reason that the world’s largest hamburger chain and the nation’s largest waste management service will likely still be serving customers 10, 20, or even 30 years from now, but the two companies also have a long history of steady growth to prove their endurance. McDonald’s was founded in 1955 and Waste Management was founded in 1968. Compare that to the short history of Meta Platforms of less than 20 years. Moreover, Meta didn’t even go public until 2012; that means the company didn’t have to survive the dotcom bubble and didn’t even go public during the Great Recession.
All this to say that the sudden disruption to revenues and profits for some tech darlings in 2022 is a stark reminder that it is paramount for companies to prove to investors that they can grow steadily for years to come if they want their actions to be elevated. market valuations. Waste Management and McDonald’s have been doing this for decades, and they have continued to do so during the COVID-19 shutdowns in 2020 and 2021, and the current inflationary environment. Even in the third quarter of 2022, revenue from McDonald’s and Waste Management exceeded analysts’ expectations.
The strength of both companies, even during difficult times, is also evident in their long history of consistent dividend growth. McDonald’s has increased its dividend for 45 consecutive years, with its most recent 10% increase announced last month. Waste Management’s most recent dividend increase came last December, when it raised its dividend by 13%. This is the 19th consecutive year of dividend increases for the company.
While dividend growth isn’t reason enough for a stock to get a higher valuation, even in tough times, it does suggest that a company is probably doing something right. In the cases of McDonald’s and Waste Management, their many years of dividend growth reflect resilient businesses that grow steadily in all environments. The steady growth of these two companies and market appreciation for their hard-to-disrupt businesses are likely some of the key factors why both stocks have performed significantly better in 2022.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a board member of The Motley Fool. Daniel Sparks has no position in the stocks mentioned. Its clients may hold shares of the companies mentioned. The Motley Fool occupies and recommends Amazon, Apple, Meta Platforms, Inc., Peloton Interactive and Zoom Video Communications. The Motley Fool recommends Waste Management and recommends the following options: $120 long calls in March 2023 on Apple and $130 short calls in March 2023 on Apple. The Motley Fool has a disclosure policy.
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