‘Dogs of the Dow’ Decade Edition...More Pains or Gains Ahead?

Key Points

• Last year, the 'Dogs of the Dow' eked out a 2.2% total return while the DJIA declined 7.0%.
• Three 'Dogs' that have struggled mightily over the past decade might be due to turn it around.
• Walgreens is down -41% over the last 10 years with EPS expected to be down 21% this year and down another 6% in 2024.
• Verizon has slid to a 13-year low with most analysts reluctant to call it a buy despite a Dow-best 8% forward dividend yield.
• IBM has a -26% cumulative 10-year return but is up more than 20% from its 2023 low.

The ‘Dogs of the Dow’ investment strategy became popular in the early 1990’s when author Michael O’Higgins wrote a book titled “Beating the Dow - A High Return, Low-Risk Method for Investing in the Dow Jones Industrial Stocks With as Little as $5,000.” 

The idea was to select the 10 highest yielding Dow components in anticipation of outsized price and dividend gains in the months that followed. It has since evolved to include alternative definitions that involve share price performance, price-to-earnings (P/E) ratios and other common metrics. ‘Small Dogs,’ a sub-litter of the five lowest-priced Dow dogs, has also been born. 

What hasn’t changed is the market’s fascination with the much debated concept. Many books and research papers have been written on the subject, prompting investors to root for the underdogs. How has it panned out?

From 2000 to 2022, the Dogs of the Dow had an average annual return of 8.7% compared to 5.8% for the Dow Jones Industrial Average (DJIA). In 2022, the Dogs eked out a 2.2% total return while the DJIA declined 7.0%. 

But what about performance for longer time periods? If the strategy works well in 12 month spurts, should it also work well over several years?

What if you were to take the worst-performing Dow stocks of the last 10 years and track them for the next 10 years? You’d end up with a list headed by three companies that have struggled mightily over the past decade. Are they bound to turn it around by 2033?

Decade Dog #1: WBA 

While consumer defensive peers Walmart, Procter & Gamble and Coca-Cola have made nice advances, Walgreens Boots Alliance Inc. NASDAQ: WBA is down -41% over the last 10 years. The pharmaceutical retailer has finished lower in seven of the last eight calendar years, the only Dow component to do so. So what goes down must come up?

Don’t count on it. Walgreens operates more than 14,000 stores under its namesake, Duane Reade and Boots banners. Since benefitting from Covid test and vaccine volumes, the footprint has struggled to attract consumers. Inflation and high interest rates are forcing retailers like Walgreens to offer discounts and promotions at the expense of profits. Earnings per share (EPS) are expected to be down 21% this year and down another 6% in 2024. 

Walgreens is looking to offset retail weakness by entering new growth markets like primary care clinics and pharmacy benefit management (PBM) services — but remains heavily dependent on its U.S. retail operations. The business model diversification bodes well for an eventual return to profit growth, but it’ll take a while to get there. The stock currently has only one bull on Wall Street, with the remaining 11 analysts taking a neutral or bearish stance.

Decade Dog #2: VZ 

Verizon Communications Inc. NYSE: VZ has lost 35% of its market value since August 2013. The wireless telecom service provider has been trying to eclipse its $69.50 split-adjusted record high for nearly a quarter of a century. And while most Dow members have run past their pre-pandemic peaks, Verizon has slid to a 13-year low.  

Despite boasting a Dow-best 8% forward dividend yield, most analysts are reluctant to call Verizon a buy. For starters, the U.S. wireless market has become saturated, leaving telco giants scrambling for new growth avenues. Prevailing economic uncertainty is expected to continue to weigh on consumer and business spending on wireless equipment and plans. In its second-quarter report, management reiterated soft 2023 guidance. 

Recovery could be dialed up in 2024, however, when Verizon is expected to return to profit growth. Pending economic developments and promotional activity may moderate, lending to the healthy underlying demand for 5G and broadband. At the same time, corporate spending on 5G projects should dissipate at the benefit of cash flow. Wall Street’s $41 price target combined with the sky-high dividend, points to a potential 34% total return over the next 12 months.

Decade Dog #3: IBM 

International Business Machines Co. NYSE: IBM ranks third on the Dogs of the Dow Decade list with a -26% cumulative 10-year return. The old-school tech company has struggled to gain ground in a modern economy dominated by the likes of Apple, Microsoft and Alphabet. IBM has gone through multiple restructurings and leadership changes to arrive at its current lineup of enterprise hardware, software and services. 

In its latest attempt to stay relevant, the 111-year-old company is focused on cloud computing and technology’s hottest trend, artificial intelligence (AI). The newly launched WatsonX AI and data analytics platform is unproven but could be an attractive tool for enterprises seeking a ‘plug-and-play’ way to accelerate their AI ambitions. 

Over the long term, IBM believes it can deliver mid to single-digit sales growth alongside increasing profit margins. Following better-than-expected second-quarter earnings, IBM is up more than 20% from its 2023 low — but Wall Street remains skeptical. The stock hasn’t been upgraded since January 2023, and the consensus price target implies a 2% downside.

‘Big Blue’ appears headed down a better path. Even with a 4.6% dividend, though, repeated success will be needed to win back investors.