No matter the industries they operate in, top companies all have one thing in common -- an ability to reward shareholders over time. To do that, they have to deliver on their promises, remain relevant, and often balance creativity and stability.
Target (TGT 0.18%), Louisiana-Pacific (LPX -0.33%), and Air Products and Chemicals (APD 0.43%) have worked wonders for their shareholders for decades, and have what it takes to continue performing for the next several decades, too. Three Motley Fool contributors were asked to take a closer look at these top dividend stocks with multidecade growth potential. Here's what they had to say.
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Target is too good and too cheap to ignore
Daniel Foelber (Target): On the surface, Target stock has it all. A well-known, industry-leading brand. A 3.3% dividend yield backed by over 50 consecutive years of payout raises -- making the retailer a Dividend King. And an inexpensive valuation with a forward price-to-earnings ratio of just 16.2. Yet dig deeper and there are some good (and bad) reasons why Target stock is treading water right above its three-year low.
The glaring issue with Target is its falling operating margin. Operating margin is one of the most important metrics for a retailer because it shows how many cents on the dollar a company earns in operating income relative to each dollar of revenue.
Target's operating margin of 3.5% means that after factoring in all of its operating expenses, such as selling, general, and administrative costs, sales and marketing costs, research and development, depreciation, and amortization, it's making just 3.5 cents on the dollar. That's a razor-thin margin.
TGT Operating Margin (TTM) data by YCharts.
To be fair, Walmart's margins are also down. And Costco Wholesale routinely sports low margins and relies on large volumes to make its sizable profits. But Target features more of a discretionary product mix than Walmart or Costco, and it drives less volume. And for that reason, it has relied on higher margins, typically in the 6% to 8% range.
Target has yet to prove to investors it can return to growth and improve its operating margin back to the range it used to frequent. For that reason, some investors may want to take a wait-and-see approach to the stock.
Still, given its sell-off, buying Target now offers a compelling risk-vs.-reward profile.
It has operated through several economic cycles, and faced company-specific issues outside of the broader economy. What has made this latest period particularly difficult is that Target responded relatively poorly to macroeconomic challenges including inflation and a slowdown in consumer discretionary spending.
Zoom out, however, and it's hard to see a future in which Target doesn't reward long-term shareholders with capital gains and dividend income.
This Warren Buffett holding can outgrow its end markets
Lee Samaha (Louisana-Pacific): Rising interest rates and a slowing housing market might make you hesitant to buy into a stock with heavy exposure to the U.S. real estate market. That said, investing in equities isn't about a single quarter or even a single year, and demand for Louisana-Pacific's wood siding and oriented strand board (OSB) is likely to grow over the long term in line with new housing starts and repair-and-remodeling activity.
Moreover, there are a couple of reasons why sales of the company's products could outgrow their end markets by winning greater market share.
First, Louisiana-Pacific's key raw material, wood fiber, is sustainably sourced, and its SmartSide products are carbon negative. Those attributes might attract enough customers to help Louisana-Pacific win market share over siding alternatives like vinyl, cellular PVC, polymer composites, and brick.
In addition, its OSB offers a price and sustainability advantage over plywood, and can continue to win market share from its key rival for use in boards and panels in home construction.
All told, the company has long-term earnings potential, and although it's facing a challenging 2023, Wall Street analysts expect this to be a trough year, with earnings rebounding strongly in 2024. As such, now could be a good time to buy the stock.
Air Products is an industry leader with a solid competitive advantage
Scott Levine (Air Products): When on the prowl for stocks with the potential for decades of growth, investors might think their best bets would be innovative upstarts. While such companies may provide outsize returns over the long term, they also carry inherently higher risks as investments. Air Products and Chemicals, on the other hand, is an industry stalwart that has ample growth opportunities and a reduced risk profile. And that's not all. The company is also dedicated to its dividend, with a track record of increasing its payout annually for more than 40 straight years.
Over the 80 years it has been in business, Air Products has emerged as a leader in supplying industrial gases and related equipment and services. The company has an expansive global presence, operating in 50 countries, and serves a wide range of industries -- energy, chemicals, manufacturing, food, and medical, to name a few. Over the years, it developed a massive supply and production infrastructure -- including 1,800 miles of industrial gas pipeline and more than 750 production facilities -- and creating something comparable would be no easy task for a would-be new rival to achieve. As such, that infrastructure represents a formidable competitive advantage for Air Products that will help it thrive for years to come.
One growth opportunity, in particular, has the company well-positioned for considerable growth: hydrogen. Global interest in hydrogen solutions has soared recently, and Air Products is at the forefront of the burgeoning hydrogen economy. Adding to its current hydrogen operations, Air Products has invested $11 billion in four hydrogen projects that are in varying stages of development. The first is scheduled to come online in 2024, and the last is expected to commence operations in 2026.
