2 Fundamentally sound, undercover stocks with great long-term potential

Introduction

I am a firm believer, like many others, that stocks offer better long-term returns. The less time you hold a stock, the riskier an investment becomes. And the more you own it, the less the risk it presents. However, if fundamentals change or there is a better deal elsewhere, selling after holding for a short time can also prove to be advantageous.

In the current market that seems overvalued, many stocks do not look very attractive at the moment. But in this article I list two that I believe offer investors big returns over the long term: Casey’s General Stores ( CASY ) and The Interpublic Group of Companies ( IPG ). And I discuss why these two stocks could be great additions to your dividend portfolio.

Stock #1: IPG

Interpublic Group Of Companies is a stock that offers long-term dividend investors the potential for stellar returns. The stock is also one that appears to be undercover despite their long history of operation. IPG was founded in 1930 and has been public since 1971.

IPG is a company that provides marketing and advertising solutions for businesses. They operate in three segments: Media, data and engagement solutions, integrated advertising and creative solutions and specialized communication and experience solutions.

In addition to the US, IPG operates internationally in Latin America, Canada, Europe and Asia. The company announced its second-quarter earnings in July, with a $0.03 beat on the bottom line. EPS was $0.57, significantly higher than Q1’s $0.29.

But year-to-date EPS fell 16.17% from $0.68. Revenue of $2.7 billion was flat year over year. Although, organic net income rose 1.3% in the US and 2.6% in their international markets. One thing to note is that IPG’s first and second quarter revenues are highly seasonal and usually increase in the second half of the year.

But what makes the Interpublic Group of Companies attractive are their strong fundamentals that place them in a favorable position for growth. On August 29, the company announced plans to expand with Mediabrands Health, aimed at providing media and advertising services for healthcare companies.

This, along with their balance sheet, sets IPG up for long-term success. At the end of the second quarter they had just $2.9 billion in long-term debt, down from $3.2 billion in the first quarter. Additionally, their liquidity was strong with $1.55 billion in cash and cash equivalents, giving them flexibility for continued expansion and acquisitions in the future.

They also have an investment grade credit rating and no debt coming due in the next four years. Their leverage ratio was also 1.63x. Peers Omnicom Group ( OMC ) and WPP plc ( WPP ) had leverage ratios of 1.6x and 1.5x, respectively.

However, the former were in a better position as a result of their well-staggered maturities, with no maturity until 2028. Both OMC and WPP have debt maturing this year through 2027.

Total Redemptions and Returns

Interpublic Group is also a great long-term holding due to frequent share buybacks and total returns compared to the S&P. During the second quarter, the company repurchased 2.2 million shares and 4.1 million through the first half of 2024. In February, they announced an additional repurchase program for $320 million, along with a 6% increase in dividends.

Year-over-year, IPG exited 9 million shares, down from 387.7 million to 378.7 million according to the 10-Q. This puts management in a comfortable position to continue raising the dividend, as less free cash flow is needed to cover it.

In addition, their yield of over 4%, low payout ratio below 50% and dividend growth rate also make them very attractive. And I expect the company to continue its solid dividend growth for the foreseeable future.

Below you can see that IPG’s total return profile is also attractive. Over the past 5 years, the company has outperformed the S&P in total returns by 98.17% compared to 93.01% for the index.

And over the past decade, their total returns have been respectable, with a return of 141.04% compared to 181.33% for the S&P. So, if you are a long-term dividend investor looking for a stock that offers attractive total returns relative to the market, a strong balance sheet and is fundamentally sound, then IPG may be a stock to consider.

Stock #2: CASY

The second stock on the list is Casey’s General Stores, another dividend hedge stock that is a hidden gem in my opinion. CASY deserves more accolades and recognition as a result of solid foundations and solid execution over the years. They are also the third largest convenience store chain and the fifth largest pizza chain in the US

I see them as a smaller, lesser-known Costco (COST) because of their strong customer loyalty. The exception is that they prefer to operate in smaller markets, with 72% of their revenue coming from cities with a population of 20,000 or less. However, this is good because it usually translates into strong brand loyalty among the customer base.

This was evident with a 23% year-over-year growth rate in their member rewards program. This was 8 million in their last quarter and is likely to continue for the foreseeable future.

One reason is that the company has recently expanded in the South, especially in Texas. In an all-cash deal, CASY acquired 198 stores in Texas, Alabama, Mississippi and Florida. This increased their total number of stores by 7% to 2,900. And management plans to add another 350 stores over the next two years.

In the last quarter, the convenience store operator also managed to beat its profit by $0.64. This brought their total EPS to $13.43 for the fiscal year, a growth rate of 12.8% year over year. And with recent acquisitions, I anticipate solid earnings growth going forward.

Total revenue for the year fell slightly from $15.1 billion to $14.9 billion. Like The Interpublic Group, the latter also had a strong investment-grade balance sheet with well-staggered debt maturities.

In Q4, CASY’s liquidity was also strong, with $1.1 billion and only $1.6 billion in long-term debt. Their leverage ratio was 1.5x, slightly higher than peer Kroger (KR), whose leverage was 1.25x. Additionally, Casey’s had no significant debt until June of next year, with $150 million due at that time. After that, they have no more debt until 2028.

Total Redemptions and Returns

Casey’s General Stores is also famous for frequently doing share buybacks. In their most recent quarter, the company repurchased $15 million worth of stock, bringing it to $105 million for the fiscal year. They also have nearly $300 million left in their current buyback program.

Their total number of shares was about 37.370 million, down from 37.510 million in fiscal 2023, according to the 10-K. They also announced a 16% dividend increase last June. And like IPG, I expect their dividend growth to continue as the company is likely to do share buybacks in the near future.

While their yield is not as attractive as Interpublic Group’s, the significantly lower payout ratio and longer history of dividend growth likely ensures that the company will offer higher dividend increases in the future.

Below is the total return of Casey’s General Stores compared to the long-term S&P. Unlike IPG, which has outperformed the index in total returns over 5 years but has lagged behind over the past decade, CASY has significantly outperformed the index over 5 and 10 years, rising 124% over the past 5 years in compared to 90% for the S&P.

In the chart below you can see that the gap widens significantly over a 10-year period, with the CASY doubling the S&P with a return of 453% to 181%. And given their low payout ratio, continued expansion and share buybacks, I expect this to continue over the long term.

risks

With interest rates likely to be cut this month, the Fed may be looking at data that indicates a recession could be coming. And while we probably won’t know until we’re in one, a recession could cause a slowdown in both companies’ operations, putting their dividends at risk.

While I don’t foresee either company cutting their dividends and expect both companies to successfully navigate a slowdown, it’s still something investors should be aware of when considering these two stocks.

Investor Takeaway

Both The Interpublic Group and Casey’s General Stores are two undercover stocks that offer investors attractive options for their portfolios. Additionally, both companies have strong fundamentals that include investment-grade balance sheets, low payout ratios and strong total return potential.

Moreover, as both continue to expand, I expect their share prices to reflect this, offering solid growth and total return potential over the years. If you’re a long-term dividend investor who enjoys solid fundamentals with sold total returns, you should consider adding these two stocks to your portfolio.