We're only five weeks into the 2022 trading year, and already it's been one wild ride. We tend to look at the stock market generally and see big swings in major tech stocks and the broader S&P 500 and Nasdaq Composite. But income investors know there's a different way to invest in the U.S. stock market.
Industry-leading companies that pay dividends offer a different risk/reward profile with an investment anchored in the growing global economy and the prospect of generating passive income streams. United Parcel Service (UPS -1.77%), Stanley Black & Decker (SWK 1.77%), and Caterpillar (CAT 0.42%) are three top dividend stocks that look to be great buys now.
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Big news about Big Brown's dividend
Scott Levine (UPS): While it hasn't attained the noble rank of Dividend Aristocrat, UPS deserves respect for the level of commitment it has demonstrated to shareholders with its dividend. Since 1999, when the company held its initial public offering, UPS has maintained or raised its dividend every year -- a pretty impressive feat. But that's not the only reason UPS should be on the radar for dividend-hungry investors. Earlier this week, the company announced during its fourth-quarter earnings report that it was hiking its quarterly payout to $1.52 per share. Representing a 49% per share increase over the $1.02 in dividends it paid in each quarter of 2021, the company's dividend raise is the highest quarterly increase to its dividend in company history. As a result, UPS now offers a forward dividend yield of 2.7%.
Assume that you'll have to pay a premium to pick up shares? Think again. The stock can actually be found hanging on the discount rack. Currently, UPS is trading at 13.4 times operating cash flow, less expensive than its five-year average cash flow multiple of 15.7. For those who prefer to assess the price tag in terms of earnings, the stock still looks cheap, trading at 15.6 times trailing earnings, a notable discount to its five-year average price-to-earnings (P/E) ratio of 27.4.
Turning in a strong performance in 2021, UPS forecasts continued success in the coming year. Management is projecting that the company will report revenue of approximately $102 billion in 2022 and free cash flow (FCF) of $9 billion. For investors who are fretful that the recent dividend raise may jeopardize the company's financial health, perhaps management's targeted payout ratio of 50% of adjusted earnings per share will allay their concerns -- a target that management said it's on track to achieve in 2022.
Stanley Black & Decker offers great value
Lee Samaha (Stanley Black & Decker): In a market that still looks expensive, Stanley Black & Decker stands out as a beacon of value. The tool and industrial parts maker recently reported its fourth-quarter 2021 earnings and gave its full-year 2022 guidance. The numbers look very good.
For 2022, management expects adjusted earnings per share of $12-$12.50 and FCF of $2 billion. Those figures would put the company on a P/E ratio of less than 14.6 times the midpoint of earnings guidance, and a price-to-FCF multiple of 14.4 times. Those valuations look cheap, and to put it into some context, the price-to-FCF multiple implies Stanley will be generating almost 7% of its market cap in FCF at the end of 2022. Theoretically at least, that's what it could pay in dividends and still grow the business.
That said, the company certainly isn't a low-growth cash cow. On the contrary, the company has plenty of growth opportunities through growing its recent MTD (lawn and garden products) acquisition. In addition, an easing of supply chain issues and raw material costs will help margin expansion.
Meanwhile, its core tools business can grow with the release of new products and the development of brands like Craftsman, and Stanley can continue to take part in industry consolidation through its acquisition strategy. Throw in a multi-year recovery in the auto and aerospace end markets, and Stanley's industrial businesses (engineered fasteners, products, and fittings) can also grow.
It all adds up to a company that will exit 2022 in a lot better shape than it looks right now, and buying in ahead of a strong year of earnings and revenue growth makes sense.
Caterpillar could be a coiled spring for your portfolio
Daniel Foelber (Caterpillar): Caterpillar is a cyclical business whose revenue and earnings tend to ebb and flow with the broader economy. This can make its P/E ratio look dirt cheap one year and expensive the next. To me, Caterpillar isn't undervalued because its P/E is currently just 16.8. It's undervalued because it is putting up record results despite some major headwinds.
SWK PE Ratio data by YCharts
After the U.S.-China trade war derailed what would have likely been a multi-year upswing in Caterpillar's business, the company has been patiently waiting for the next sustained upcycle. As the economy rebounds from the COVID-19 pandemic, Caterpillar is already seeing demand for its products surge worldwide. In the fourth quarter, it grew sales across all regions and its three primary segments -- energy and transportation, construction, and resource industries. However, Caterpillar's profit margin took a hit as it had to pay higher freight costs and expedite many orders to satisfy demand.
The company also mentioned supply chain contractions as a key factor behind business inefficiencies. To be fair, forecasting when and to what extent the economy would rebound was not an easy task. Pair that challenge with inflation, and it's understandable that Caterpillar would lack the demand to satisfy supply. That's what happened in its fourth quarter, as the company struggled to keep short-term costs down as it redirected components and sought to improve its assembly process.
Zoom out, however, and it's impressive to see how well Caterpillar's business is doing despite these challenges. The company posted record-high earnings per diluted share of $11.83, and it wouldn't be surprising if it shattered that record in 2022 as it looks to improve margins. Like many industrial companies, Caterpillar's business is susceptible to the headwinds of rising inflation. But Caterpillar's business is in a great position right now.
Caterpillar's energy and transportation segment is its largest division. And it's thriving thanks to a booming oil and gas industry. Pair that strength with a steady construction market and demand for raw materials that is boosting demand for its mining equipment, and you have a company that is a coiled spring. Caterpillar's strong business supports its over 27 consecutive years of dividend increases, making it a Dividend Aristocrat.
Caterpillar stock looks like a great buy now. And its 2.2% dividend yield is a cherry on top of a healthy underlying business.
