During market downturns, investors naturally gravitate toward reliable companies that they can count on to outlast a challenging time and foster long-term growth. A great place to look for opportunities is the coveted list of Dividend Aristocrats, which are S&P 500 components that have paid and raised their dividends for at least 25 consecutive years.

A multi-decade track record of dividend raises usually coincides with a strong balance sheet and earnings growth -- which are two core ingredients for an effective, long-term investment. Yet even Dividend Aristocrats can go on sale during a bear market.

Target (TGT -0.67%), 3M (MMM -0.01%), and A.O. Smith (AOS -1.56%) are down big off their highs. But there's reason to believe that each company is a great value now. 

Two people push a child in a shopping cart through a parking lot.

Image source: Getty Images.

Target looks like a well-rounded value play

Daniel Foelber (Target): Target stock fell over 13% on Wednesday after the company reported worse-than-expected Q3 2022 results. GAAP earnings per share (EPS) were just $1.54 compared to $3.04 in Q3 2021. What's more, the company's operating margin was just 3.9%, and it guided for a Q4 operating margin of 3%. For context, Target's five-year median operating margin is 5.9%.  

Lower earnings and razor-thin margins illustrate the impact of inflation and Target's inability to properly manage costs and inventories. The results were particularly bad after Walmart reported better-than-expected results the day before, boosted revenue, and announced a massive stock buyback program.

There is no denying the disappointment in Target's short-term performance. And in many ways, the stock sell-off is justified considering Target indicated things will get worse before they get better. Target's CFO, Michael Fiddelke, said the following on the company's Q3 2022 earnings call: 

In the current environment, we're facing an even higher degree of uncertainty than a quarter ago, given the volatility we've been seeing recently. And in light of the dramatic changes in shopping patterns we've seen both at Target and across the industry, we believe it's prudent to plan for a wide range of comparable sales outcomes in the fourth quarter that centered around a low single-digit comp decline, consistent with recent trends.

Target's comments sound far from optimistic for the holiday season. The silver lining is that the sell-off presents an intriguing opportunity for long-term investors to scoop up shares of the leading big-box retailer. The long-term investment thesis for Target hasn't changed. The company has enjoyed excellent growth in e-commerce and curbside pickup, which present two ways to grow sales without customers needing to come into the store.

Target's valuation is also attractive as the stock has a price-to-earnings ratio of 17.6. Target is also a Dividend King -- which is an S&P 500 component that has paid and raised its dividend for at least 50 consecutive years. Its quarterly dividend of $1.08 is 20% higher than a year ago. The decline in its stock price paired with the higher dividend has brought its dividend yield to 2.8%.

Target's healthy balance sheet should help the company endure this challenging period. With the stock down 39% from its all-time high, now looks like a good time to consider an investment in Target.

This industrial conglomerate faces challenges that can be overcome

Lee Samaha (3M): I'll start by throwing some twigs at the elephant in the room. Industrial conglomerate 3M's operational performance hasn't been impressive in recent years, and the company faces significant and well-documented legal risks. 

Zeroing in on the operational performance, 3M has struggled to grow revenue in excess of GDP and continues to battle to increase profit margins in a meaningful way, despite making substantial restructuring efforts. Meanwhile, there are ongoing doubts over 3M's pricing power and ability to grow margins in a rising cost environment. 

That said, there's no denying that 3M is a value stock candidate. It currently trades for less than 14 times Wall Street analyst estimates for free cash flow in 2022, and its $5.96 per share dividend gives it a 4.6% yield. Moreover, management plans to spin off its healthcare business in 2023, leading to a more focused industrial company. Furthermore, any positive news on the legal risks will likely lead to share price appreciation. 

All told, while 3M is not a great company now, there's plenty of potential for improvement. And if and when that starts to come to fruition with better revenue growth and margin expansion, then the stock will begin to look attractive again. Down 51% from its all-time high, 3M is one for the watch list in 2023. 

Value investors could warm up to this industrials stock

Scott Levine (A.O. Smith): Down 29% from its all-time high, A.O. Smith's stock has received the cold shoulder in 2022. This shouldn't discourage patient investors, however, from considering positions. The company has a resilient history that stretches back to its founding in 1874 and subsequent incorporation in 1907 -- so it's withstood its share of economic downturns. For more than three decades, A.O. Smith has increased its dividend, which now represents a forward yield of 2%.

A manufacturer of water heating equipment that offers a 2% dividend yield may not seem like a recipe for large returns on investments, but don't tell that to long-term shareholders. A $10,000 investment in A.O. Smith 20 years ago would have resulted in more than $200,000 today, vastly outperforming a similar investment in an S&P 500 index fund.

AOS Total Return Price Chart

AOS Total Return Price data by YCharts.

The stock's previous performance doesn't ensure a similar performance over the next 20 years, but it's certainly an encouraging data point that investors should consider in weighing whether an investment is right for them.

With A.O. Smith shares down about 30% year to date, cautious investors may worry that there's something fundamentally wrong with the business; however, this is hardly the case. Like so many other companies, A.O. Smith is facing headwinds from supply chain disruptions and reduced demand stemming from COVID-19 lockdowns in China. This has adversely affected the company's cash flow -- a phenomenon surely contributing to the stock's sell-off this year. Through the first nine months of 2022, A.O. Smith has generated free cash flow of $164 million, a sharp decrease from the $332 million it generated during the same period in 2021.

Investors would be extremely short-sighted to conclude that the present headwinds preclude the company from prospering in the future. Fortunately, for those who recognize this fact, shares of A.O. Smith are available on the cheap. The stock is trading at 18.5 times forward earnings, representing a discount to its five-year average multiple of 21.1.