Industrial, materials and consumer discretionary companies with exposure to China stand to benefit from stimulus.
China just released a stimulus package to help the country reach its 5% economic growth target for 2024 and jolt its struggling housing and equity markets. The announcement came after the U.S. Federal Reserve unveiled a 50-basis-point (0.5%) rate cut to counter rising unemployment and help consumers who have been hit hard by inflation and soaring housing costs.
The stimulus package led to a surge in Chinese stock prices and U.S.-based companies exposed to China. Here’s why Caterpillar (CAT 0.01%), Albemarle (ALB -1.40%), and Estee Lauder (EL -0.18%) surged between 5% and 16% from Sept. 24 to Sept. 26, and whether these dividend stocks are worth buying now.
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A global bellwether across energy and industrials
Caterpillar hit a new intraday all-time high on Sept. 26 and is now up more than 40% year to date. The stock has been roaring higher in response to U.S. rate cuts and, now, the China stimulus package.
Caterpillar is known for its construction machinery business. But in 2023, its energy and transportation segment produced more revenue than construction. The segment includes oil and gas, power generation, industrial applications, and transportation. Resource industries, which are mainly focused on mining, earned nearly half as much revenue as construction.
Caterpillar is also highly diversified geographically. Fifty-four percent of 2023 sales came from outside the U.S. The Asia-Pacific region (led by China) contributed $11.73 billion in 2023 sales — or 17.5% of total sales. Caterpillar’s mining business, in particular, is enormous in China.
China’s stimulus is excellent news for Caterpillar, which has seen weakness across its Asia/Pacific business. If Caterpillar can sustain its momentum, the stock could remain a good value. In the following chart, you can see that Caterpillar’s stock price has been soaring in lockstep with earnings growth.
CAT data by YCharts
However, analyst average estimates had called for just $22.12 in 2024 earnings per share (EPS) and $22.87 in 2025, implying slowing growth.
Since Caterpillar is a cyclical company, its price-to-earnings (P/E) ratio tends to be low during expansion periods and high during downturns. So while its 17.8 P/E doesn’t look too pricey at first glance, it is buoyed by abnormally high trailing earnings. The valuation could begin to look much more expensive if growth slows.
Buying Caterpillar now is a bet that the U.S. and China’s interest rate cuts will spur economic growth and help both countries avoid recessions. Even if Caterpillar sells off, investors can take solace in its dividend, which which at 1.4% isn’t stellar, but the company has increased it for 30 consecutive years.
Albemarle could be finally turning the corner
Albemarle is one of the most prominent lithium miners in the world. The stock has been on a roller-coaster ride during the past decade, surging in 2016 and 2017, falling in 2018 and 2019, booming from 2020 through part of 2022, and tumbling the past couple of years.
Albemarle reached a four-year low in August but has surged more than 25% since mid-August.
There’s been a flurry of good news, including a pullback in lithium production from a major Chinese mine, Federal Reserve interest rate cuts, and the recent stimulus package news out of China.
Lithium miners like Albemarle ramped up production in anticipation of higher demand for electric vehicle (EV) batteries. But slower-than-expected EV demand has weighed on the industry, as have higher interest rates, which increased the cost of capital.
Albemarle isn’t out of the woods yet, but these are signs that the downturn could be bottoming — at least for now. Still, the company remains highly sensitive to lithium spot prices and consumer demand for EVs. Buying Albemarle is a bet that global EV sales will rebound, which will boost lithium demand and help justify the supply that has come online during the past few years.
Despite the cyclicality of the industry, Albemarle continues to steadily increase its dividend — with a modest raise in the recent quarter for an annualized yield of 1.7%. All told, Albemarle could be a good investment for folks who are confident in the long-term tailwinds of the lithium industry and are willing to ride out the highly volatile nature of the industry.
Estee Lauder still has work to do to restore investor confidence
Estee Lauder has leading brands in the skin care, makeup, fragrance, and hair care categories. The company had done a phenomenal job capturing growth from international markets through partnerships with retailers, boutique outlets, and airport stores. However, the travel retail business has gone from a competitive advantage to a weakness for Estee Lauder as consumers tighten spending.
In Estee Lauder’s fiscal 2024 (ended June 30), the company reported $15.61 billion in net sales, down 12% from fiscal 2022. During that two-year period, sales from its largest region — Europe, the Middle East, and Africa — declined 20%, Asia-Pacific fell 10%, and the Americas segment was down slightly. In fiscal 2024, less than 30% of Estee Lauder’s sales came from the Americas — so it truly is an international business.
China has been a major drag on the company’s results. China was the main contributor to a 6% decline in Asia-Pacific sales last fiscal year. To quote the company’s fiscal 2024 annual report: “We have experienced challenges within our business, including in our Asia travel retail business, and we expect volatility to continue. We have experienced, and are expecting to continue to experience, ongoing declines in overall prestige beauty due to current consumer sentiment in mainland China, which is also expected to impact Asia travel retail.”
Estee Lauder’s stock price surged almost 17% from Sept. 24 to Sept. 26 — along with big gains for other luxury retailers and cosmetics companies with exposure to China. However, the stock is still down big from its all-time high and down year to date.
CAT data by YCharts
Estee Lauder and its 2.6% dividend yield could be a good investment for folks who believe in the power of its portfolio of brands and its ability to pivot its marketing strategy to be less dependent on travel.