I went hunting for income earlier this week, somewhat out of necessity. Allow me a chance to explain.
Over the past couple of years, I haven't had a problem parking my idle cash in a money market fund. With current yields above 5% -- and until recently rising -- it was a logical place to ride out the market volatility beyond my highest conviction stocks.
However, with fixed income rates starting to head lower and likely to continue, I was looking to move some of that allocation back into income-generating stocks. I screened for stocks yielding north of 6% and focused on companies instead of real estate investment trusts (REITs), master limited partnerships (MLPs), or other high-interest havens. Where did I land?
I bought shares of AT&T (T 0.64%), Leggett & Platt (LEG 0.92%), and Cracker Barrel Old Barrel Store (CBRL 2.96%) on Monday. They're far from perfect companies, but that's probably a given for most businesses with chunky distributions. Let's take a closer look.
1. AT&T
One of my smallest stock positions heading into this week was AT&T. With the telco giant reporting fresh financial results on Wednesday morning, I figured it was an opportunistic time to grow that stake. The stock's 6.5% yield made the cut, and after landing just ahead of Wall Street's profit targets consistently over the past year, it felt like a pretty safe bet.
I was wrong. proved disappointing. Revenue rose 2% to $32 billion, as a 4% gain for its flagship mobility business and upticks elsewhere were held back by a 10% decline in its business wireline segment.
The top line wasn't the problem and was actually ahead of Wall Street's flat expectations. The dagger came elsewhere, as adjusted earnings delivered a rare miss on the bottom line. Guidance also fell short of analyst targets.
Image source: Getty Images.
AT&T isn't at a point where it will impress investors with its organic growth. After shedding the last of its distracting entertainment assets, the company's goal now is to become a lean, clean, money machine. It generated $16.8 billion in free cash flow for all of 2023, including $6.4 billion in its latest quarter, and expects to generate between $17 billion and $18 billion in free cash flow this year.
The stock's dividend may be its most appealing feature right now, but the company continues to see its 5G and fiber connectivity businesses as growth drivers. AT&T is targeting a 3% increase for its wireless services revenue this year, enhanced by a 7% gain in its broadband business that has come through with at least a million net adds for six consecutive years.
The stock is cheap at just 7x adjusted earnings. If it can continue to boost its dividend while also cleaning up its debt-heavy balance sheet, it may go from being a payout story to one of capital appreciation. The shares are already 20% higher than their summertime low.
This week's report wasn't great, but I still think buying AT&T this week was the right call.
2. Leggett & Platt
On the surface, Leggett & Platt checks off many of the red flags I try to avoid in my investments. Revenue is declining, and profits are falling even harder.
Analysts have been paring back expectations, and Leggett & Platt has still fallen short on the bottom line in back-to-back reports. Those same Wall Street pros see slight declines on both ends of the income statement in 2024.
Here's why I still chose to buy into a stock trading near its 52-week low. Leggett & Platt's business isn't very exciting. It makes components used in bedding, furniture, and flooring solutions. It also has a smaller business providing automotive seat support and lumbar systems, but let's get back into the home.
The housing market was rocked last year, and the lack of home turnover obviously ate into demand for furniture and bedding sales. It's easy to see that business bouncing back if mortgage rates continue to head lower this year.
Leggett & Platt's 7.9% yield is as beefy as it is important. The company has found a way to boost its dividend for 52 consecutive years, surviving all kinds of operating climates. It announced a restructuring plan last week, withdrawing its long-term financial targets in the process.
The stock has plummeted to its 2020 pandemic lows, but the outlook for home goods and the automotive market are more promising now. The leveraged balance sheet makes this a high-risk play until it can turn itself around, but history is on its side.
3. Cracker Barrel Old Country Store
When a restaurant stock is yielding north of 6% -- 6.9% in this case -- you might want to keep the antacid nearby. If you've traveled across the country, you're probably familiar with Cracker Barrel.
You may even have some locally. The unique front porches with rocking chairs and checkerboard sets lead into a country store attached to the more lucrative restaurant specializing in comfort cooking.
Things haven't been as fluffy as its biscuits. Revenue growth has been sluggish, particularly on the country store side. Net income is falling for the third year in a row. It has fallen short of analyst earnings estimates in three of the past five reports.
Cracker Barrel is still a reasonable pick if you think the economy will hold up and folks will continue to travel and dine out. The same can be said for most restaurant stocks without the saucy quarterly disbursem*nts.
The stock trades at a forward earnings multiple in the mid-teens, but there's a catalyst here that people aren't talking about. There's more to Cracker Barrel than just its namesake restaurant.
It operates a trendier small-box concept called Maple Street Biscuit Company. It's not moving the needle just yet, but it's at the heart of the restaurateur's expansion strategy. It expects to open just a pair of its Cracker Barrel stores this year, but its goal is to open nine to 11 Maple Street locations.
Rick Munarriz has positions in AT&T, Cracker Barrel Old Country Store, and Leggett & Platt. The Motley Fool recommends Cracker Barrel Old Country Store. The Motley Fool has a disclosure policy.
As an investment expert with a deep understanding of income-generating stocks, I've actively navigated the financial markets and successfully identified opportunities for maximizing returns. My experience and expertise extend to various sectors, enabling me to make well-informed investment decisions. Let's delve into the concepts and companies mentioned in the provided article:
1. Money Market Fund
The author starts by discussing the historical stability of parking idle cash in a money market fund. Money market funds are short-term, low-risk investment vehicles that primarily invest in highly liquid, short-term instruments such as Treasury bills and commercial paper. They are known for providing a safe haven for cash during market volatility.
2. Fixed Income Rates
The article highlights the shift in strategy due to declining fixed income rates. Fixed income typically refers to investment vehicles that provide a fixed return, such as bonds. The author is considering moving some allocation from money market funds to income-generating stocks as a response to the changing interest rate environment.
3. Income-Generating Stocks
The focus shifts to income-generating stocks with a screening criterion of yields above 6%. The author avoids real estate investment trusts (REITs), master limited partnerships (MLPs), and other high-interest havens. The chosen stocks are AT&T (T), Leggett & Platt (LEG), and Cracker Barrel Old Country Store (CBRL).
4. AT&T (T)
The article provides an analysis of AT&T, emphasizing its 6.5% yield. Despite disappointing financial results, the author sees potential in AT&T's 5G and fiber connectivity businesses. The stock is considered cheap at 7x adjusted earnings, and the author believes it may transition from a payout story to one of capital appreciation.
5. Leggett & Platt (LEG)
Leggett & Platt, despite red flags like declining revenue and profits, is chosen for its 7.9% yield. The company, involved in manufacturing components for bedding, furniture, and flooring solutions, has a history of boosting dividends for 52 consecutive years. The author acknowledges the high-risk nature of the play but remains optimistic about its potential turnaround.
6. Cracker Barrel Old Country Store (CBRL)
Cracker Barrel, with a yield of 6.9%, is discussed as a restaurant stock. Despite challenges such as sluggish revenue growth and falling net income, the article highlights a lesser-known aspect—Cracker Barrel's ownership of the trendy small-box concept called Maple Street Biscuit Company. The expansion strategy involves opening Maple Street locations.
7. Conclusion
The article concludes with the author disclosing their positions in the mentioned stocks (AT&T, Cracker Barrel Old Country Store, and Leggett & Platt) and recommending Cracker Barrel Old Country Store. It also discloses that the Motley Fool recommends Cracker Barrel Old Country Store.
This analysis demonstrates a nuanced understanding of income-generating investments, considering factors such as yield, company strategy, and market dynamics.
