Monetary tightening is here. On Wednesday, the Federal Reserve confirmed intentions to begin raising interest rates in March. Fed Chair Jerome Powell hinted to expect the unexpected, stating that the Fed would take a flexible approach to raise rates and respond to inflation as needed.
Although it's a reasonable position to take, and could be the best course of action long term, the U.S. stock market tends to hate short-term uncertainty. Unsurprisingly, the Nasdaq Composite went from up over 3% on Wednesday to giving up most of those gains by the end of the day.
The Nasdaq is now down 14% so far in 2022, but 3M (MMM 0.86%), Procter & Gamble (PG 0.54%), and Emerson Electric (EMR -0.67%) are all down less than 5% year to date. All three companies are Dividend Kings, which are S&P 500 components that have raised their dividends for at least 50 consecutive years. Here's what makes each dividend stock a great buy now.
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The stock is a good value, but it's time for 3M to start demonstrating improvement
Lee Samaha (3M): It's fair to say that 3M had a disappointing 2021. The stock only rose 1.6% over the year as the company failed to fully offset cost increases (caused by soaring raw material prices and elevated supply chain costs) with price hikes.
While 3M is not alone in this, and many company managements have referred to an unprecedented set of trading conditions and pricing pressures, investors are entitled to expect a bit more from 3M. After all, CEO Mike Roman has been restructuring the company since he took over in 2018. However, after changing the company's operating structure, making acquisitions and divestitures, and streamlining actions, there doesn't appear to be any improvement in underlying profit margins. It's something 3M needs to demonstrate to investors.
That said, value investors buy stocks because they are a good value! 3M still has a collection of highly regarded businesses, and its auto-related businesses in particular could see a nice bounce in 2022 as vehicle production picks up. Meanwhile, 3M continues to generate bundles of cash and trades at a significant discount to its industrial sector peers, such as Illinois Tool Works.
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In addition, its 12-month trailing free cash flow (FCF) of $6.5 billion easily covers its cash dividend payout of $3.4 billion (current yield 3.3%). Meanwhile, for those worried about 3M's potential PFAS liability, it's worth noting that if 3M traded on Illinois Tool Works' price-to-FCF multiple, its valuation would be $118 billion higher. So even factoring in a (deserved) discount to its peer, it seems there's a hefty margin of safety priced into the stock now.
All told, 3M is far from perfect; it needs to deliver in 2022, but its dividend is easily sustainable, and management has the financial firepower to turn things around. On that basis, the stock is a useful addition to an income-seeking portfolio.
A deservingly premium price for a safe stock
Daniel Foelber (Procter & Gamble): Time and time again, consumer staple behemoth Procter & Gamble proves its resilience in the face of a challenging broader economy. It has navigated clogged supply chains, higher costs, inflation, and rising interest rates with relative ease. So it's no wonder P&G stock is only down 3% year to date.
P&G reported Q2 fiscal year 2022 (FY22) earnings on Jan. 19. The company raised its organic sales growth guidance for the fiscal year to between 4% and 5% above FY21, confirmed its full-year core earnings per share guidance of $5.66, increased its expected FY22 share buybacks to $9 billion to $10 billion, and expects to return over $8 billion to shareholders through dividends.
P&G's forward price-to-earnings ratio of 28.4 isn't cheap by any means. P&G's stock price has outpaced its earnings growth, a sign that investors are willing to pay a premium price for P&G's stable and reliable business. Throughout the COVID-19 pandemic, and now heading into 2022's period of rising interest rates, P&G could be viewed as a safe haven stock to park a portion of your portfolio in.
During periods of uncertainty and high equity valuations (the U.S. stock market doubled between 2019 and the end of 2021), stocks like P&G provide a low-stress and likely less volatile way to stay invested in the market and generate passive income. P&G has raised its dividend for 65 consecutive years. The stock currently yields 2.1%.
This dividend darling has powered through the volatile early weeks of the new year
Scott Levine (Emerson Electric): Donning its Dividend King crown for 15 years, Emerson Electric is one of the longest-standing Dividend Kings around -- in fact, only two other companies have paid dividends for longer. The company first started dishing dividends to shareholders in 1956, and it achieved Dividend King status in 2006. While the company fared well in 2021, the early weeks of 2022 have seen its share price dip more than 2%. But this reversal of trajectory pales in comparison to the Nasdaq, which has plunged during the same period.
What's buoyed the bulls' enthusiasm over the past few weeks? For one, Wall Street has espoused a favorable outlook on the stock. On Jan. 4, RBC Capital upgraded Emerson Electric's stock to outperform from sector perform and raised the price target to $116 from $104. The higher price target surely stood out to investors as it represented 26% upside from where the stock had closed on Jan. 3. While Barclays and Bernstein assigned less auspicious price targets of $99 and $100, respectively, the overall sentiment regarding the stock seemed favorable.
Besides the analysts' perspectives, investors were likely motivated to click the buy button in response to the company's apparent interest in green hydrogen -- an area that has generated considerable global interest over the past couple of years. On Jan. 11, Emerson Electric reported that it's helping to bring the world's first offshore green hydrogen production project on an operating gas platform to fruition. The news pairs nicely with the company's December announcement that it had acquired Mita-Teknik, a specialist in wind power automation solutions.
As nations strive to reduce their carbon footprints, renewable energy stocks are gaining considerable attention. And while Emerson Electric isn't among the usual clean energy suspects, investors may be encouraged by management's interest in the sector.
