As Warren Buffett says, buying quality merchandise at a discount price is never a bad thing. And this is absolutely the case when it comes to income shares.
With the travel sector under pressure, I think there are some strong businesses with falling share prices. And there’s a pharmaceutical giant with a 5.5% dividend yield that looks good to me.
InterContinental Hotels Group
With a 1.6% dividend yield, InterContinental Hotels Group (LSE:IHG) doesn’t look like much of an income stock at first sight. But dividends aren’t the company’s only shareholder distribution.
The firm also distributes cash to investors through share repurchases. And it intends to return around £790m this year through a combination of dividends and buybacks.
With a market cap of £12.36bn, that’s a return of around 6.39%. I think that’s something income investors should take a serious look at.
The reason the company’s able to do this is because its capital requirements are so low. The business only uses 10% of the cash it generates, leaving 90% available for distributing to shareholders.
That makes InterContinental a quality business. But the stock’s fallen almost 10% over the last month, mostly due to news of weak travel demand for this year.
A drop in profits is a serious risk for a stock trading at a price-to-earnings (P/E) ratio of 21. Nonetheless, this is the kind of stock I’d consider to take advantage of a cyclical downturn.
Pfizer
Pfizer‘s (NYSE:PFE) shares have fallen around 14% over the last 12 months. And while there’s some justification for that with Covid-19 vaccine demand evaporating, I think it’s an overreaction.
At today’s prices, the stock comes with a dividend yield of just under 5.5%. Furthermore, there are reasons for thinking the company’s going to be able to return cash to shareholders for some time.
Pharmaceutical companies like Pfizer are always a bit of a risk. Which new drugs will get regulatory approval and develop into lucrative opportunities is hard to predict, even for industry experts.
The company’s been doing well recently though. And one of the most eye-catching developments is the progress of its once-a-day weight-loss drug, which is showing encouraging signs.
Pfizer’s relatively late to the anti-obesity scene. But as the firm showed with its ability to develop a Covid-19 vaccine, it has the scale and the resources to innovate at speed when it sees an opportunity.
With management explicitly stating its intention to grow the dividend over time, this could be a great stock for income investors. So I think there’s an opportunity to consider right now with the stock on sale.
Opportunities
Getting a discount on quality merchandise is always a nice thing. And the key to this is knowing where the sales are. Different stocks come in and out of favour at different times. But the market can overreact to bad news, giving investors buying opportunities.
Sometimes it’s an industry – such as travel – suffering from a weak demand outlook. Other times, it’s a specific company going through a cyclical downturn.
Either way, dividend investors who are prepared to be opportunistic can usually find stocks to buy for good returns. And I certainly think this is true at the moment.
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Stephen Wright has positions in Pfizer. The Motley Fool UK has recommended InterContinental Hotels Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
