Despite their falling share prices in 2022, Dow Jones Industrial Index components Home Depot (HD 0.78%), 3M (MMM 0.54%), and Visa (V -0.18%) have been valuable sources of passive income over the last decade. Recording dividend growth of 534%, 147%, and 446%, respectively, in the last 10 years, these mature businesses offer investors shareholder-friendly cash returns.
Exiting a challenging year, these three stocks now trade below historical valuations -- leaving them poised to rebound in 2023 and continue compounding far into the future.
Let's look at what makes them appealing right now.
1. Home Depot
In the last decade, home improvement retailer Home Depot has grown its dividend payments by 534% and lowered its share count by 31%. In what has been a master class in returning cash to shareholders, the company has recorded a total return north of 550% since 2012, easily outpacing its Dow peers.
However, after dropping roughly 22% in 2022, investors can now buy the retailing juggernaut at a discount.
Held back by a tumultuous housing market and a ballooning inventory, the market decided to take a wait-and-see approach on Home Depot's stock as sales growth slowed to 6% in its last quarter.
However, Home Depot is positioned to weather the slower housing market, thanks to a nearly 50-50 split between pro (professional contractor) and do-it-yourself (DIY) sales. So whether new home construction and the housing markets are hot or homeowners are content staying put and remodeling -- the company is set to profit.
And profit, it does.
Owning a steadily improving profit margin of 11%, Home Depot has seen its return on invested capital (ROIC) rise from 16% to 42% over the last decade.
High and rising ROICs highlight outsized profitability from a company's capital, often indicating outperformance potential compared to its peers. Simply put, Home Depot has turned into a compounding machine by earning higher profits relative to its debt and equity over time, making it a great candidate to continue beating the market.
Trading at 19 times earnings, Home Depot's valuation is close to the lowest it has been since 2013, minus the 2020 COVID-19 sell-off.
Ultimately, Home Depot looks like an outstanding Dow stock to buy and hold, thanks to this mix of discounted valuation, improving profitability, steady buybacks, and a growing 2.4% dividend.
2. 3M
If you believe in investor Martin Sosnoff's Law, which states that "the price of a stock varies inversely with the thickness of its research file," you may want to leave buying shares of 3M to value investors.
Sporting four business groups and seemingly endless litigation surrounding 3M's subsidiary Aearo Technologies and its faulty ear plugs, the diverse manufacturing company's file grows thicker by the day.
This doesn't even mention the liability 3M faces using per- and polyfluoroalkyl substances (PFAS) in its manufacturing -- unaffectionately named "forever chemicals" -- that have proven varying toxicity levels to humans. Nor does it touch on 3M's plans to spin off one of its business groups, healthcare, later in 2023.
With all these moving parts, 3M's recent underperformance seems to show some validity to Sosnoff's Law.
So why is the company being mentioned as a stock to soar in 2023 and beyond? First, despite setting aside a $1 billion fund for Aearo's litigation issues, 3M continues to generate strong free cash flow (FCF), averaging roughly $5 billion annually over the last decade.
This cash generation adds crucial stability as the company hopes to solve its litigation issues. Furthermore, it highlights that its net debt of $12.3 billion (half of which matures after 2027) is manageable -- even with litigation ongoing.
Second, on a price-to-operating-cash-flow basis, 3M continues to trade near its lowest levels of the last decade. Despite operating cash flow (OCF) dropping from over $8 billion in 2021 to its current mark of $5.7 billion, 3M's share price drop has left it trading at just 13 times OCF. Facing raw material and logistic inflation of roughly $800 million in 2022, according to management, look for the company's OCF to rise in the new year as its supply chain improves.
Lastly, while investors wait for a solution to litigation concerns and supply chain problems, 3M offers incredible cash returns in dividends and buybacks.
Trading close to an all-time-high dividend yield of 4.8% and having lowered its share count by 20% over the last decade, 3M looks poised to rebound, barring any catastrophic legal outcomes.
3. Visa
With a market capitalization of over $400 billion, don't let Visa's size dissuade you from a potential investment in the digital payment behemoth's incredible network. Despite its size, Visa has continued outperforming its Dow and S&P 500 Index peers over the last five years.
Growing sales and FCF by 8% and 14% annualized since 2020, Visa extended its track record as one of the most shareholder-friendly stocks in the market. Posting dividend growth of 445% over the last five years, Visa boosted its payout by an additional 20% in the fourth quarter of 2022.
Also, management announced a new $12 billion share repurchase program, continuing its history of consistently lowering its share count. Down 19% over the last decade, Visa's lowered share count boosts earnings and FCF per share over time.
Best yet, the company's cross-border volume grew by 36% in Q4, helping lead to a 52% increase in international transaction revenue. Whether card payments, international transactions, or value-added services (acceptance, issuing, risk, advisory, etc.), Visa should continue to thrive in an increasingly digital landscape.
Trading with a price-to-free-cash-flow ratio of 25, the company is near five-year lows, making Visa's fast-growing 0.7% dividend and 26% ROIC look like an excellent investment to consider for a rebound in 2023.
