Investor optimism is back as several growth stocks that had an abysmal year in 2022 are making new 52-week highs. Yet many risk-averse investors may prefer to not chase the hype and instead focus on passive income plays.
Target (TGT -0.70%), Stanley Black & Decker (SWK -0.52%), and Canadian Utilities (CDUAF 0.32%) are three Dividend Kings that have paid and raised their dividends for at least 50 consecutive years. Investing in equal parts of each stock produces a dividend yield of 4% and exposure to three different sectors of the economy. Here's what makes each reliable stock worth a look.
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Buy the dip on Target stock
Daniel Foelber (Target): After a meteoric run to start the year, Target stock has since been under pressure. It's down nearly 13% in the last month, while the S&P 500 is up over 3%.
There are three main reasons for Target's downward pressure. The first is that most retail stocks have been selling off. The SPDR S&P Retail ETF (NYSEMKT: XRT), a benchmark for the industry, is down 3.4% in the last month.
The second is that investors didn't like Target's first-quarter 2023 earnings report, which came out on May 17. The company's growth is at a standstill, inventory problems persist, and margins remain pressured. Theft and retail crime are becoming bigger issues. In fact, Target blamed these two factors as the primary reasons for inventory shrink, which it expects will reduce 2023 profitability by $500 million. Inventory shrink is a term for the difference between accounted inventory and actual inventory.
Target was riding high leading up to the pandemic. Its successful push into e-commerce and curbside pickup has provided diversification from in-store shopping. However, Target has been particularly vulnerable to recent headwinds, which have cast a dark cloud over its near-term performance. Rising interest rates and cautious consumer spending affect Target. Supply chain bottlenecks contributed to inventory mismanagement and forced fire sales, which further compressed its margins.
Looking at the financial metrics, Target looks like a business in decline.
TGT Operating Margin (TTM) data by YCharts
Operating margin has dipped below 4% and now resembles the razor-thin margins that Walmart and Costco Wholesale are used to. Only Walmart has higher volumes and can undercut Target on price. Meanwhile, Target's profits are hovering around a five-year low.
Yet despite these declines, Target's still making enough money to support its generous dividend, although its payout ratio is now 70%, which is above historic levels. Target has a dividend yield of 3% and 51 consecutive years of dividend payments. Its price-to-earnings ratio (P/E) is 24.4. That seems expensive, but that's compared to a weak trailing 12 months of earnings.
Target is an industry-leading company with a powerful brand that's going through a rough patch. This is the exact moment when patient investors could consider stepping in and buying the stock.
Stanley Black & Decker's nearly 4% dividend yield is enticing
Lee Samaha (Stanley Black & Decker): The toolmaker has had a tough couple of years, and its stock price is down nearly 62% over that period. After enjoying the benefit of the boom in DIY spending created by lockdown measures, the company walked into a period of escalating raw material costs and supply chain issues in 2022.
At the same time, DIY spending started its natural correction, and interest rates helped dampen the housing market and consumer spending. The company was forced to try to reduce its inventory in the face of falling sales.
That said, Stanley still has plenty of good long-term earnings drivers. Management has a restructuring plan (including simplifying its supply chain) to cut costs by $2 billion by 2025, with $1 billion occurring in 2023. Moreover, in recent Q1 results, management confirmed it was on track for its inventory reduction plan and cost-cutting initiatives.
Meanwhile, consolidation of its tools industry (management sold its security and access doors businesses in 2022) means it can downsize its operations. The full acquisition of MTD (garden and outdoor products) in late 2021 adds a complementary business to its portfolio.
The long-term future looks bright, but Stanley's still navigating declining end markets, and it wouldn't be surprising to see it miss management's guidance for 2023. Cautious investors may want to monitor the stock before buying. Still, this is definitely a company worth watching closely if you like high-yield stocks and are willing to tolerate some near-term risk.
Canadian Utilities is a regal choice out of the Great White North
Scott Levine (Canadian Utilities): Having hiked its dividend for 51 consecutive years, Canadian Utilities is a fairly new face among the dividend royals, but that doesn't mean it warrants any less attention. In fact, the diversified utility brands itself as having the longest track record of annual dividend increases among publicly traded Canadian companies. This should help allay the concerns of investors who question the sustainability of the company's dividend, which currently represents a meaty 5% forward dividend yield.
It's not only the company's history that suggests the dividend is secure. Looking over its financials, investors will find other signs of reassurance. For one, the company has a solid balance sheet. Because of the capital-intensive nature of their businesses, some utility companies rely heavily on leverage to build their asset bases.
Canadian Utilities has a net debt-to-earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio of 4.8. Granted, this may represent a warning flag to some, but Canadian Utilities generates steady cash flows -- thanks to its operations in regulated markets -- that suggest it's sell-positioned to service its debt and sustain its dividend.
CDUAF Cash from Operations (Annual) data by YCharts.
Additionally, the company's balance sheet maintains an investment grade credit rating from both S&P Global Ratings and Fitch Ratings.
Those looking to supplement their passive income won't be the only ones who'll want to consider powering their portfolios with Canadian Utilities. Value investors will also find the stock compelling. Currently, shares are trading at 4.8 times operating cash flow, representing a discount to their five-year average cash flow multiple of 7.1.
