Dividend Aristocrats, which are S&P 500 components that have paid and raised their dividends for at least 25 consecutive years, have received more attention as of late thanks to their stability. Many Dividend Aristocrats aren't the fastest growing companies. But by default, they increased their dividends during the COVID-19-induced recession, the worst of the U.S.-China trade war, the financial crisis, and the dot-com bubble burst. Many have done so for far longer.
This track record matters during uncertain times when many investors are more concerned about capital preservation than taking unnecessary risk. 3M (MMM +0.39%), Walmart (WMT 1.14%), and Pentair (PNR +0.22%) are three Dividend Aristocrats that could be worth buying now. Here's why.
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This dividend stock will have you crying "hot diggety dog"
Scott Levine (3M): Continuing to raise a dividend year after year is no easy feat. It's no wonder, therefore, that income investors are so smitten with dividend-paying companies like 3M, which currently offers a forward dividend yield of 4%. The industrial stalwart has raised its dividend for 64 years in a row, illustrating the company's long commitment to rewarding shareholders. Holding the rank of Dividend King (S&P 500 components that have raised their dividend for at least 50 years), however, isn't the only noteworthy aspect that should draw income investors' attention. The stock is also a Dog of the Dow, one of the 10 highest-yielding stocks among the 30 stocks that make up the Dow Jones Industrial Average. For several reasons, it seems that investors considering 3M for their portfolios are certainly barking up the right tree.
When it comes to higher-yielding dividend stocks like 3M, it's important for investors to do their due diligence and confirm that the company's in a financially secure position to sustain its payout to shareholders. Generating strong cash flow consistently, 3M is well suited to continue rewarding shareholders. Over the past 10 years, 3M has consistently generated free cash flow to cover its dividend.
MMM Free Cash Flow Per Share (Annual) data by YCharts.
Granted, like many companies, 3M is facing headwinds with regard to supply chain disruptions, resulting in it reporting lower cash flow in the first quarter of 2022, but management isn't ringing any alarms. The company forecasts adjusted free cash flow (which the company defines as adjusted free cash flow divided by net income) of 90% to 100% for 2022; moreover, it projects adjusted earnings per share of $10.75 to $11.25 for 2022.
Prefer the payout ratio to assess the company's dividend with regard to its financial health? From this perspective, it's also clear that management isn't jeopardizing the company's well-being to satisfy shareholders. Over the past 10 years, 3M has averaged a conservative payout ratio of 54.2%.
Key Data Points
Walmart and its dividend aren't going anywhere
Daniel Foelber (Walmart): It's hard to imagine. But in just one month, Walmart stock went from a 52-week high of $160.77 per share to a 52-week low of $117.27 per share. That's a 27% peak-to-trough decline. Which is normally uncommon. But for Walmart, it's even more bizarre.
After reporting earnings last week, Walmart stock suffered its largest decline since "Black Monday" during the stock market crash of 1987. Target stock followed suit the next day with a 25% plunge. When events like this are happening in the stock market, you know something is up.
Walmart and Target gave a bleak outlook for the economy. To summarize, both companies were pressured to boost revenue during the worst of the pandemic because constrained supply chains required retailers to order ahead due to long lead times. This construct led to record high inventories for both companies, which was fine when consumer spending was healthy during a period of multidecade low unemployment and fiscal stimulus.
But today's rising interest rate environment is leading to tighter consumer spending. Walmart is finding that customers aren't so keen to purchase discretionary products, which provide higher margins, and are instead gravitating more toward lower-margin staples. This shift leaves Walmart with too much inventory that it's going to struggle to sell, as well as a labor force that may be too large if the economy enters a recession.
In sum, the short-term outlook is not good. And Wall Street sold the stock accordingly. However, the long-term outlook is bright. Walmart has an inexpensive forward price-to-earnings ratio of just 19.1. Walmart also has an impressive 46-year track record of paying and raising the dividend along with a 39% decrease in its outstanding share count thanks to stock buybacks. This provides a one-two punch of passive income paired with higher earnings per share.
WMT Dividend data by YCharts
Recessions are turbulent periods. But investors would do well to think about which companies have what it takes to outlast a recession, and which ones could maybe even take more market share during a recession. Walmart certainly fits that mold. Down 24% from its high with a 1.9% dividend yield, Walmart looks like a good buy now.
A stay-at-home play with legs
Lee Samaha (Pentair): Being a Dividend Aristocrat isn't just about offering investors a stable and growing dividend; it's also demonstrating a company's long-term ability to grow earnings and cash flow. Water solutions company Pentair's dividend yield is only 1.7% now, but the company has plenty of potential to increase its dividend in the future significantly. First, management's guidance calls for adjusted earnings per share in the range of $3.70 to $3.80; the midpoint covers the dividend of $0.84 by almost 4.5 times. Moreover, the company's exposure to North American pool equipment gives it plenty of growth potential.
The stock came to prominence during the pandemic as a way to play the stay-at-home investing theme. Consumers shifted spending toward the home and garden in response to the lockdown measures -- great news for pool equipment-focused companies. As such, Pentair's sales grew from almost $3 billion in 2019 to nearly $3.8 billion in 2021.
While there are fears of rising interest rates slowing the housing market and ultimately spending on outdoor activity, readers should note that the pool equipment market is primarily a replacement. The surge in new pools built during the pandemic should result in long-term growth opportunities for the company.
