The stock market sell-off has been a good time to find new companies that can serve as quality long-term investments and a source of passive income. A good place to start is scanning the list of Dividend Aristocrats -- which are S&P 500 companies that have paid and raised their dividends for at least 25 consecutive years.
Stanley Black & Decker (SWK 0.55%), Air Products & Chemicals (APD 0.49%), and Chevron (CVX -1.02%) are performing much differently in the current market environment -- which is reflected in their stock prices. However, each company has a proven track record of growing its dividend even during challenging times. What's more, the starkly contrasting performance of these three companies provides a good reading on the health of the energy and industrial sectors. Here's what makes each stock a great buy now.
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Value investors will be looking hard at this tools and industrial products company
Lee Samaha (Stanley Black & Decker): The hardware and tools company recently delivered the kind of earnings report that every investor dreads. Guidance was slashed, trading conditions are weakening as end demand wanes, inventory needs to be reduced, cost headwinds are ongoing, and the company is being restructured to reduce costs.
Management started the year guiding toward full-year adjusted earnings per share of $12 to $12.50. But after slashing guidance in the second quarter, it now expects just $5 to $6. Thus, it's not hard to see why the stock is down more than 50% in 2022 as I write. It's probably not how new CEO Don Allan envisaged his first earnings call, but as the former CFO, he will be well acquainted with what the company needs to do.
That said, there's little management can do about weak consumer spending hitting DIY tools sales or unfavorable weather leading to sluggish outdoor equipment sales. However, it can adjust to those issues, and that's precisely what it's doing. The cost reduction plans aim to cut costs by $2 billion in three years. Meanwhile, management believes it can get to around $7.25 in earnings in 2023, a figure that would put Stanley on less than 13 times its 2023 earnings. With more cost reductions and hopefully a better trading environment in the future, the company will have better days. However, be aware that it will still face challenges to reduce inventory while maintaining satisfactory pricing in 2022.
This chemical stalwart has dished dividends for decades, and it shows little signs of slowing down
Scott Levine (Air Products & Chemicals): With the S&P 500 plunging more than 14% year to date, investors haven't had to look far and wide to find quality stocks on sale. But to find superior dividend stocks that are also trading at a discount? That's an exciting opportunity for long-term investors -- and it's exactly what is available now with shares of Air Products & Chemicals, a leading supplier of industrial gases, and its forward dividend yield of 2.6%. Since the start of the year, shares of Air Products have tumbled about 20%, resulting in a great buying opportunity.
Call it what you will -- a summer sale or a back-to-school bargain -- the chance to pick up Air Products' stock at a discount is visible in more than just its lower stock price. Shares are currently trading at 21.2 times forward earnings, representing a bargain compared with its five-year average forward earnings multiple of 24.5.
Skeptics who question the cause for the stock's slide in 2022 won't find anything materially wrong with the company that would preclude them from adding it to their portfolios. The stock's poor performance is, undoubtedly, the result of analysts reducing price targets and fears of an economic slowdown. Analysts' price targets should always be taken with a grain of salt since Wall Street, oftentimes, has shorter investing horizons than the multiyear holding periods we favor. Regarding an economic downturn, Air Products may very well find its business affected, but its 40-year tenure as a Dividend Aristocrat suggests that management has deftly handled downturns before -- and should be able to weather this one as well.
With its industry-leading position as a provider of industrial gases like argon, xenon, oxygen, and nitrogen -- among other dealings -- Air Products is well positioned to sustain its dividend, while its attention to growth opportunities, like hydrogen, suggests that dividend growth is also a strong possibility.
A disciplined oil major with an attractive dividend
Daniel Foelber (Chevron): Chevron may be down just 15% from its 52-week high. But the integrated oil and gas major remains a good value for investors looking for a growing dividend from one of the most efficient and diversified oil and gas companies around.
Chevron booked record quarterly earnings of $11.6 billion or $5.95 per diluted share for Q2 2022 and $17.9 billion in net income in the six-month period ended June 30, 2022. For context, it generated more net income in the first half of 2022 than in any full calendar year in the past five years.
Using traditional valuation metrics like the price-to-earnings ratio on cyclical stocks like Chevron can be unhelpful because earnings vary based on the market cycle. Enter Chevron, which has been the best-performing stock in the Dow Jones Industrial Average in 2022 and has a P/E of just 10.2 even after its stock price has climbed.
Rather, what makes Chevron a good deal is that it can limit losses during downturns and generate outsize profits during boom times while supporting a growing dividend. By contrast, many oil and gas companies were pressured to cut their dividends in 2020 and suffered major losses.
The past two to three years provide the perfect stress test investors can use to gauge performance and management's decisions under different market conditions. Chevron passes with flying colors because it limited losses in 2020, was able to buy assets on the cheap and grow its high-margin Permian Basin portfolio, raised its dividend, has a rock-solid balance sheet, and continues to demonstrate disciplined investing even during favorable conditions.
For example, its Permian production was 15% higher in Q2 2022 than a year ago, but international production was down 13%, and U.S. production was only up 3%. The company is constantly looking for ways to divert capital toward its best-performing assets without overinvesting and leaving itself vulnerable to the next downturn. With a 3.6% dividend yield and an asset portfolio that looks stronger than ever, Chevron is a Dividend Aristocrat that's built to last.
