Stock prices go up and down, but many companies can still increase their dividends each year. The ability to grow dividends over long periods separates the best companies from the weakest.
The Dividend Aristocrats are companies in the S&P 500 index that have increased their dividends for at least 25 consecutive years.
The market-wide sell-off has dragged stocks down on all sides, but we believe this represents a great opportunity to buy stocks of high-quality companies that now have much higher total return potential.
Warren Buffett’s Favorite Life Insurance Company
In late 1951, a young Warren Buffett wrote an article for the Commercial and Financial Chronicle titled, The Security I Like Best. This article profiled a little-known company called GEICO, which was the young investor’s largest shareholder at the time. Following that initial article, over the next decade Buffett wrote four Read more
Three of our favorite dividend aristocrats for total returns currently include:
- Lowe’s Companies Inc. (NYSE: LOW)
- Stanley Black & Decker Inc. (NYSE: SWK)
- Rowe Price Group Inc. (NASDAQ: TROW)
The first is Lowe’s, a major home improvement retailer. The company’s annual sales of nearly $90 billion are second only to Home Depot (NYSE:HD) in the home improvement industry.
Lowe’s operates nearly 2,200 stores, primarily in the United States. The company has operations in Canada and Mexico.
Lowe’s benefited from a limited housing supply, which led to a drastic increase in selling prices in most parts of the country. Customers are spending a lot to update their homes to maximize their profit potential or better enjoy their current home. This has led to strong same-store sales growth over the past few years, with the company posting a two-year stacked growth rate of 35%.
The first quarter saw a slight weakening in results, with comparable sales in the United States falling 3.8%. A 9.3% increase in ticket size was not enough to offset a 13.1% drop in the total number of transactions. Tickets totaling at least $500 remained strong, but smaller tickets fell.
Even with this performance in the first quarter, Lowe’s expects same-store sales to range between a 1% decline and a 1% increase for fiscal 2022. The production of positive same-store sales growth would reflect demand for the company’s products as a result of high growth rates. seen in the past two years.
Lowe’s reaffirmed its earnings per share guidance in the range of $13.10 to $13.60 for fiscal 2022, which would represent an 11% improvement over the prior year at the midpoint of the guidance. We believe Lowe’s can grow earnings per share by 6% per year over the next five years, reflecting the strength of the business as well as the strong starting base for earnings per share.
Lowe’s has increased its dividend for the past 60 years, including a 31% increase for August 3rd Payment. The company also refers to the company as king of dividends due to more than five decades of dividend growth. Stocks yield 2.3%.
Lowe’s shares are currently trading at 13.6 times the midpoint of the company’s guidance for the year. We have a five-year target valuation of 19.5, implying significant tailwinds from the multiple expansion. Reaching our target multiple by 2027 would add 7.5% to annual returns over that period.
In total, we expect Lowe’s to return 15.6% annually over the next five years, driven by a growth rate of 6%, a starting yield of 2.3% and a high single-digit contribution from the multiple expansion.
Stanley Black & Decker
Our next Dividend Aristocrat pick is Stanley Black & Decker, a global leader in power tools, hand tools and related items.
Stanley Black & Decker is the world leader in tools and storage. The company has achieved this leading position due to the high quality nature of its products. The portfolio has a reputation for being the best in the industry, which, combined with a size and scale that most peers cannot match, positions it well for the future.
The company has not hesitated to resort to acquisitions to strengthen its portfolio. Stanley Black & Decker was born following the merger in 2010 between Stanley Works and Black & Decker. Most recently, the company added the Craftsman brand in 2017 and outdoor power equipment maker MTD Products in 2021.
Inflationary pressures impacted the business, although Stanley Black & Decker managed to partially offset these additional costs with price increases, but volume gains were inconsistent. For example, the most recent quarter had sales growth of 20%, but organic growth was down 1% as lower volumes more than offset a 5% increase in realized prices.
Adjusted earnings per share is where the company has really seen the most impact from rising input costs. For example, adjusted earnings per share of $2.10 compares unfavorably to $3.13 the previous year. Stanley Black & Decker also scrapped its full-year guidance, with the company now expecting adjusted earnings per share of $9.50 to $10.50 for 2022, down from $12.00 to $12.50 previously. .
We believe the tailwinds for Stanley Black & Decker remain firmly in place and inflationary costs will eventually subside. We expect the company to experience earnings growth of 8% per year over the next five years, which is slightly below the long-term growth rate of 10%.
Stanley Black & Decker has its own long streak of dividend growth at 54 consecutive years. The company increased its dividend nearly 13% for the payment made last September, the largest increase in nearly a decade. Stanley Black & Decker sells 3%.
Shares are trading at 10.6x expected earnings per share for 2022. We believe the long-term average P/E ratio of 16.5 is a good starting point for the company, which could lead to a contribution 9.3% annual multiple expansion. to total returns until 2027.
In total, we believe that Stanley Black & Decker will return 19.9% per year over the next five years, due to an earnings growth rate of 8%, a starting yield of 3.0% and of a high single-digit increase in multiple expansion.
T. Rowe Prize Group
Our final Dividend Aristocrat pick to consider is T. Rowe Price, a leading financial services company.
With nearly $1.6 trillion in assets under management, T. Rowe Price is one of the largest publicly traded asset managers in the world. This reflects the broad appeal and trust the company has among investors. The company provides a variety of financial services, including mutual funds, advisory services and separate account management for individual and institutional investors, pension plans and financial intermediaries.
T. Rowe Price’s assets under management have a compound annual growth rate of 12% over 10 years. This is an impressive growth rate considering the amount of assets the company manages. Some of this growth is due to market value gains, but the company’s past performance also helps attract new customers, strengthening the size and scale of T. Rowe Price.
The company had a mixed first quarter as revenue rose 1.6% to $1.9 billion, but adjusted earnings per share of $2.62 lagged the company’s performance of $3.01. ‘last year. This is partly explained by an increase of nearly 6% in operating expenses. Most of the weakness was attributed to outflows which reduced assets under management by $18.1 billion.
The good news is that T. Rowe Price continues to attract investment dollars. Inflows for multi-asset, fixed income and alternative products were $6.7 billion, $5.3 billion and $800 million, respectively, for the quarter.
Market volatility will likely persist as risky assets continue to sell on a host of concerns including Fed rate tightening, inflation and the ongoing war in Ukraine, but Rowe Price is a leader in his industry and likely a long term one. winning because of the strength of his business. We believe a 3% earnings growth rate is achievable.
After an 11.1% increase in quarterly dividends earlier this year, T. Rowe Price has increased its dividend for 36 consecutive years. The stock yields 4.4%.
T. Rowe Price is trading at 9.3 times our expected adjusted earnings per share of $11.59 for the year. With a target P/E of 14 for 2027, valuation could be a tailwind of 8.5% to total returns for the period.
Therefore, T. Rowe Price is expected to generate a return of 14.8% per year through 2027. This projection is derived from an earnings growth rate of 3%, a starting return of 4.4% and from a favorable wind to a high number resulting from a multiple expansion.
Market-wide sell-offs often lead to the sale of even the strongest companies. For the opportunistic investor, this can lead to high quality stocks trading at bargain prices.
Lowe’s, Stanley Black & Decker and T. Rowe Price are three of the best companies in their respective industries. All three companies have a dividend growth streak that is measured in decades, evidence of a solid business model.
Lowe’s, Stanley Black & Decker and T. Rowe Price offer the potential for at least an average double-digit total return over the next five years, earning them a Sure Dividend Buy rating each.
Written by Nate Parsh for Sure Dividend