Even after Friday's epic rally, all three major indices remain negative for the year, with the Nasdaq Composite still down 12%.
Although the Dow Jones Industrial Average (DJIA) has outperformed the S&P 500 and Nasdaq so far in 2022, some of its components stand out as too cheap to ignore. Sure, Caterpillar (CAT -6.95%) and 3M Company (MMM -0.89%) have cyclical business units where performances can ebb and flow with the broader economy. But, both companies also have multi-decade-long reputations of paying increasingly large dividends each year. Here's what makes each value stock a great buy now.
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Caterpillar is a buy despite lingering issues
Caterpillar reported its Q4 and full-year 2021 earnings last week. Q4 revenue came in at $13.1 billion vs. $12.6 billion expected, and adjusted earnings per share (EPS) came in at $2.69 vs. $2.27 expected. Despite beating expectations, Caterpillar stock fell 5% on Friday. For context, Caterpillar stock was performing well relative to the market heading into earnings. The company also discussed ongoing supply chain issues and slowing construction sales out of Caterpillar's second-largest market (China) as two concerns likely to affect its 2022 performance.
Regardless of the mixed bag, Caterpillar deserves a lot of credit for posting $11.83 in full-year earnings per diluted share, which is the highest in company history. It achieved that milestone despite generating less revenue than in 2019.
Higher capital expenditures weighed on its free cash flow (FCF). But Caterpillar was still able to generate FCF of $4.73 billion, which was more than double the $2.3 billion it paid in dividends and nearly enough to cover both the dividend payment and the $2.7 billion in stock it repurchased during the year.
Caterpillar is showing impressive profitability despite ongoing global economic challenges. High oil and gas prices and demand for raw materials provide a positive outlook for its oil and gas and mining segments. Given its strong FCF, attractive price to earnings (P/E) ratio of just 16.8, and its dividend yield of 2.2%, Caterpillar looks like a great dividend stock to buy now.
3M's record year is going unnoticed
Like Caterpillar, 3M reported earnings last week. Wall Street didn't like what it saw, and share prices of 3M reached a new 52-week low on Friday. 3M remains one of the worst-performing stocks in the DJIA. In fact, 3M stock hasn't participated in the broader market's torrid gain. Its stock price is actually lower than where it was five years ago. The only reason it has produced a positive total return is due to its dividend.
CAT Total Return Level data by YCharts
Yet 3M's underperformance could present a buying opportunity. The company just reported record-high revenue, net income, and earnings per diluted share of $10.12, giving it a P/E ratio of just 16.1. Like Caterpillar, it generated far more FCF than needed to fund its dividend. Management decided not to give detailed full-year guidance, choosing instead to save that information for the company's investor presentation on Feb. 14. However, 3M's business segments should perform well as the economy continues to rebound.
The biggest red flag for 3M, and really the crux of what's held its stock back for years, has been an inability to grow margins in the face of higher cost pressures and single-digit revenue growth. Inflation adds even more strain on margins.
Those concerns certainly matter. But they've already arguably been baked into the stock price. A picture is worth 1,000 words, and this chart really shows why 3M is a good buy now.
MMM Revenue (Annual) data by YCharts
12% revenue growth and 22% net income growth in five years aren't great, even for an industrial stalwart. That is until you realize the stock is down 8% over the last five years. The dividend is also a lot higher now. In fact, 3M has a dividend yield of 3.5%, not to mention it is a Dividend King. A Dividend King is an S&P 500 component that has raised its dividend for at least 50 consecutive years. By contrast, a Dividend Aristocrat like Caterpillar is an S&P 500 component that has raised its dividend for at least 25 consecutive years.
Add it all up, and you have an industry-leading industrial behemoth that is simply too cheap to pass up.
Two value stocks worth considering now
Investors that have been waiting for attractive passive income streams are in luck. The sell-offs in Caterpillar stock and 3M stock present opportunities to open starter positions in two quality businesses. Equal parts of each stock gives an investor an average dividend yield of 2.9%, while exposing their portfolio to several facets of the global industrial sector.
