3 Discounted Dividend Aristocrats
These high-quality, discounted dividend growth stocks have increased their dividend payouts every year for at least 25 years.
The annual rebalancing and subsequent changes to the S&P 500 Dividend Aristocrats Index have produced a new list of 64 Dividend Aristocrats. These elite companies in the S&P 500 have paid higher dividends every year for at least 25 consecutive years.
Recently, I ranked the 64 Dividend Aristocrats by quality scores according to DVK Quality Snapshots. Follow the link to download a spreadsheet with fundamental and added value data of all 64 Dividend Aristocrats, courtesy of Portfolio Insight.
This article looks at three Dividend Aristocrats trading well below my risk-adjusted Buy Below prices. Two stocks are rated Excellent with quality scores of 23 and 24 (out of 25), respectively, while the other stock is rated Fine with quality scores of 19. The three stocks are discounted by at least 16% relative to my Buy Below prices.
Dividend Aristocrats
The Dividend Aristocrats are S&P 500 stocks with 25 consecutive years of dividend increases.
To become a Dividend Aristocrat, companies must meet several additional criteria, which I list in my recent article ranking the Dividend Aristocrats. For example, there are market capitalization, liquidity, diversification criteria, and special rules governing spin-offs. Visit this page, scroll down, and click on "Methodology" under "Documents" to learn more.
Below is a ranking chart showing the quality scores of Investment Grade Dividend Aristocrats:
Let’s consider the discounts to my risk-adjusted Buy Below prices of the higher-quality Dividend Aristocrats, which I colored green in the above chart. These stocks have quality scores of 19-25, which I rate as Exceptional (25), Excellent (23-24), and Fine (19-22):
The tickers of the stocks with the most significant discounts are SWK, MMM, and MDT. Let’s look at each of these stocks in turn.
Stanley Black & Decker (SWK)
Founded in 1843 and headquartered in New Britain, Connecticut, Stanley Black & Decker is engaged in the tools and storage, industrial, and security businesses worldwide. The company operates in three segments: Tools & Storage, Industrial, and Security. SWK was formerly known as The Stanley Works and changed its name to Stanley Black & Decker, Inc. in March 2010.
SWK is an Industrials Sector stock with a dividend increase streak of 55 years! This makes SWK a member of the even more exclusive Dividend Kings, which are companies that have increased their annual dividend payouts for 50 or more consecutive years!
SWK is rated Fine with a quality score of 19:
The stock yields 2.71% at $116.40 per share, a yield which is 51% higher than its trailing 5-year average yield of 1.80%:
Over the past ten years, SWK has underperformed the SPDR S&P 500 ETF (SPY), an ETF designed to track the companies in the S&P 500:
SWK returned 124% versus the SPY's 290%, a margin of only 0.43-to-1.
If we extend the time frame of comparison to the past 20 years, SWK also underperformed SPY, with total returns of 348% versus SPY's 487%, a somewhat better margin of 0.71-to-1.
SWK’s poor performance is due to a significant drop in the share price from $220 in May 2021 to about $116 today, or about 47%! Before that drop, SWK tracked the S&P 500’s performance quite well, and the stock outperformed SPY over the prior 20-year time frame.
The question is, what does a dividend growth investor get if they invest in SWK?
Here is a chart showing SWK’s dividend growth history through the end of 2021:
SWK is growing its dividend at a steady but decelerating rate. We can see this by dividing the 5-year dividend growth rate [DGR] by the 10-year counterpart: 5.69 ÷ 6.15 = 0.93. A ratio below 1.00 indicates deceleration. The last two increases were higher at 7.19% and 12.86%!
SWK's earnings are consistently growing, with an increase of 17.64% expected for FY 2023 after an anticipated drop of 6.10% in FY 2022:
I love to see steady earnings increases at rates equal to or exceeding the DGR, as with SWK. This gives me confidence that the company will continue to pay and periodically increase its dividend. For SWK, future increases of around 7% per year are likely.
SWK’s earnings payout ratio of 30% is “low for most companies,” according to Simply Safe Dividends:
This means SWK has plenty of room to continue paying and increasing its dividend.
Portfolio Insight’s FV is $168.08, with a 12-month target price of $159.79 (37% upside):
My fair value [FV] estimate of SWK is $158, so I think the stock is trading at a discount of about 26%. My Buy Below price equals the FV estimate for stocks with a quality score of 19 rated Fine. Therefore, my Buy Below price of SWK is $158.
Disclosure: Long SWK
3M (MMM)
3M is a diversified technology company with worldwide operations. The company has leading positions in consumer and office; display and graphics; electronics and telecommunications; health care; industrial; safety, security, and protection services; transportation; and other businesses. MMM was founded in 1902 and is headquartered in St. Paul, Minnesota.