With the markets in a volatile mood — a common occurrence in a rate-tightening cycle — it makes sense to hunker down and focus on buying stocks with strong long-term growth prospects. There are three in particular I’d highlight in this context:
- Northwest Natural Holdings‘ (NWN 1.63%) 66-year history of increasing its dividend makes the utility worth a look.
- Honeywell International‘s (HON -0.10%) hidden growth potential makes it a compelling option for patient investors.
- UPS’ (UPS -0.65%) potential to grow revenue and earnings in the age of e-commerce is real.
Here’s a closer look at all three.
Northwest Natural Holdings
Gas and water utility Northwest Natural Holdings isn’t the most exciting stock on the market, but that might be what investors are looking for right now. The company has a 66-year history of hiking dividends, and management’s plans to increase earnings by 4% to 6% a year for the next five years imply more growth. If the dividend of $1.93 grows at a 5% rate per annum for the next five years, it will be $2.46, representing a dividend yield of 4.8% based on Friday’s closing price (the dividend currently yields 3.8%).
Northwest plans to get through growing its core gas distribution business (focused in Oregon and southwest Washington) by converting customers to gas and generating new customers via new housing and commercial construction. Northwest also owns a collection of small water and wastewater utilities in the Pacific Northwest, Texas, and Arizona. In addition, it’s investing in renewable natural gas ($50 million in production facilities in Ohio to convert landfill gas to RNG) and has agreements in place to develop RNG on behalf of utility customers.
It all adds up to a solid growing business that can reward shareholders over the long term.
Many mature industrial companies are characterized by mid-single-digit growth prospects (as discussed above for Northwest). If that were the case with Honeywell, there would be no reason to buy it while it’s trading for 21 times analysts’ 2022 earnings estimates.
However, Honeywell isn’t your average mature industrial conglomerate. The company is actively investing in high-growth industries like quantum computing (through a majority stake in Quantinuum) and sustainable technologies (renewable fuels, carbon capture, advanced plastics recycling, and renewable energy storage). These are not feasibility concepts; they are real businesses. Management believes the sustainable technologies businesses will generate $700 million in sales in 2024 (from $200 million in 2021). Meanwhile, management forecasts Quantinuum will generate $2 billion in revenue in 2026 from a negligible amount in 2022.
Honeywell has fast-growth businesses, and it has existing businesses with solid growth prospects. For example, its aerospace business will participate in the multiyear recovery in commercial flight departures. Honeywell Building Technologies is a leading player in the movement toward digitally connected smart buildings, and Honeywell Intelligrated is a fast-growing e-commerce warehouse automation business perfectly positioned for the post-pandemic economy. Honeywell also owns process automation, Internet of Things advanced sensors, and productivity devices that are well placed for the digital economy (scanners and readers that capture data for retail and logistics companies).
As a reflection of this combination of growth businesses, management recently updated its long-term organic growth rate target to 4%-7% from 3%-5% previously. Moreover, the shift to higher-margin software also implies higher profit margins. It all adds up to a company with strong long-term earnings prospects.
UPS CEO Carol Tome is doing exactly what investors want from the company. There’s long been a healthy debate on whether the package delivery companies could expand margin and revenue simultaneously as burgeoning e-commerce deliveries put a strain on their networks. The solution to the problem — raise prices, be more selective over deliveries, and focus on targeted end-markets (for example, healthcare and small and medium-sized businesses, or SMB) — may seem simple enough. Still, it needs to be done.
The good news is there is every indication UPS is on track with these aims. A good example comes from the recent first-quarter earnings report, where package delivery volumes fell in the U.S. and internationally, but price increases led to 6.4% revenue growth. In addition, UPS continues to make progress in expanding its healthcare and SMB-focused sales. Ultimately, UPS is a year ahead of the 2023 targets laid out in June last year.