While growth and tech stocks faced incredible selling pressure to start 2022, even steady, dividend-paying businesses haven't completely avoided the market's ire. Dividend payer FedEx (FDX 0.12%) and Dividend King Lowe's (LOW -0.04%) have both seen their stock prices fall significantly this year.
The price drops hurt, but these two companies have decades-long megatrends working in their favor, they deliver impressive cash returns to shareholders over time, and their freshly lower stock prices offer the potential for outperforming returns to long-term shareholders.
FedEx: Restarting dividend growth
After receiving a 15% dividend raise in June 2021, FedEx investors are waiting for a new increase in 2022 to show that the international shipper plans to extend its dividend growth. The dividend currently yields 1.4% and is financed using a payout ratio of only 16%. That suggests FedEx has no problem covering its payments to shareholders and has plenty of room for future increases.
| Metric |
FedEx |
|---|---|
| Dividend yield | 1.4% |
| Payout ratio | 16% |
| Dividend potential yield | 8.8% |
| Five-year dividend growth rate annualized | 13% |
| Consecutive years of dividend growth | 1 |
Data source: Ycharts. Dividend potential = Dividend yield/payout ratio.
Thanks to this low payout ratio and solid dividend yield, FedEx offers a massive dividend potential of 8.8%. A stock's dividend potential is determined by taking its dividend yield and dividing that by its payout ratio. This calculation shows the maximum yield possible if a company were to pay out all the profit generated each quarter. While the company's annual dividend increase streak ended in 2020, it has still managed to post a 13% annualized growth rate for its payouts over the last five years.
Best yet for investors, FedEx is well-positioned to continue to thrive as global parcel volume looks to double by 2026, according to Statista.
On top of this, the company plans to finalize the integration of its 2016 acquisition of Netherlands-based TNT Express and its valuable European logistics network this quarter. This integration will allow for interoperability between FedEx and TNT and their ground and air networks.
Image source: Getty Images.
With a more streamlined international operation in place, FedEx looks to begin boosting its profit margins -- drawing value out of the synergies it has hopefully created due to this acquisition. Posting 27% earnings per share (EPS) growth year over year for the third quarter and averaging a 12% increase annually over the last three years, the shipping behemoth looks to be well on its way to realizing this profit potential.
Connecting 99% of the world's GDP and with 94% of its United States customers living within five miles of a FedEx location, the company looks primed to fine-tune its network and continue gaining market share. Moreover, with management guiding for 10% to 15% EPS growth over the long term, FedEx's strong dividend potential looks safer than ever and offers upside to buy-and-hold investors.
Lowe's: A Dividend King
After raising its dividend by 31% last week, Dividend King and home improvement retailer Lowe's showed that returning cash to shareholders remains a top priority. Despite 58 years of consecutive dividend increases, Lowe's is not content inching its payouts to shareholders by a penny or two per share each year but looks to accelerate its rate of returns to investors.
| Metric | Lowe's |
|---|---|
| Dividend yield | 1.6% |
| Payout ratio | 26% |
| Dividend potential yield | 6.3% |
| Five-year dividend growth rate annualized | 18% |
| Consecutive years of dividend growth | 58 |
Data source: Ycharts. Dividend potential = Dividend yield/Payout ratio.
Many Dividend Kings tend to face decelerating dividend growth rates as they age, but Lowe's has ignored this trend by delivering 18% annualized dividend growth over the last five years. Furthermore, the company offers a promising 6.3% dividend potential thanks to its easily manageable payout ratio of 26%.
While Lowe's reported a first-quarter sales drop of 3% year over year thanks to a slow start to the spring season, its EPS rose 9% thanks in part to a rapidly declining share count. During Q1 of 2022 alone, Lowe's repurchased over $4 billion of its shares, or roughly 3% of its total market capitalization.
Best yet for investors, this is not merely a one-quarter, or even one-year, fad for the company.
LOW Shares Outstanding data by YCharts
Over the last decade, Lowe's has nearly cut its total shares outstanding in half -- helping lead to a significant difference between its sales growth and EPS growth over the same time frame.
LOW Revenue (TTM) data by YCharts
While an improving margin profile has also played a role in this outstanding EPS growth, the fact remains that Lowe's is putting on a master class in returning cash to shareholders.
As the company looks to rebound in Q2 with a late spring season, the long-term investment thesis of exceptional shareholder returns through dividend increases and share buybacks looks more robust than ever.
High dividend potential at fair valuations
Despite the promising dividend-growth potential shown by both companies, the two S&P 500 members trade at alluring price-to-earnings ratios amid the broader market's sell-off.
LOW PE Ratio data by YCharts
When you consider that the S&P 500 index's median P/E is 24, it is clear that FedEx and Lowe's offer outsized shareholder returns paired with relatively cheap-looking valuations. Set to ride the long-term tailwinds of increased global shipping volume and the burgeoning American housing market, these two dividend growers make outstanding core holdings for income-seeking investors.
