We believe that investors can generate superior long-term returns by buying and holding quality dividend growth stocks such as the Dividend Aristocrats.
The Dividend Aristocrats are a group of 65 stocks in the S&P 500 Index, that have increased their dividends for over 25 consecutive years.
Even better, a select few of the Dividend Aristocrats are also undervalued right now, as a result of the broader stock market decline in the past few months.
Pentair plc (PNR), Stanley Black & Decker (SWK), and Franklin Resources (BEN) are among the most attractive Dividend Aristocrats to buy now.
Dividend Aristocrat: Pentair
Pentair operates in the water industry. The company provides water solutions and operates in 3 segments: Aquatic Systems, Filtration Solutions, and Flow Technologies. The company has increased its dividend for over 40 years.
Despite the market downturn this year, business conditions remain very healthy for Pentair. After all, water is a basic necessity of human life. This leads to a steady stream of growth and profitability for Pentair, which explains its long track record of dividend increases.
In the 2022 first quarter, Pentair reported $999 million of revenue, up 15% year-over-year. This result easily beat analyst estimate for the quarter. Core sales, which excludes the impact of currency rate movements, acquisitions, and divestments, grew 12% year over year.
Pentair recorded earnings-per-share of $0.85 for the first quarter, which was up by 5% year over year. Pentair’s earnings-per-share beat the analyst consensus by $0.04.
The company also reiterated its guidance for the current year, forecasting earnings-per-share in a range of $3.70 to $3.80, which indicates solid earnings-per-share growth of around 13% compared to the $3.32 the company earned in 2021. 2022 will also be a new record year for the company, adjusted for the nVent spinoff, according to management.
Shares currently yield 1.7%, while the company usually grows its dividend at a high rate. We expect 6% annual EPS growth through 2027. Finally, shares appear undervalued, leading to expected returns of 12.8% per year.
Dividend Aristocrat: Stanley Black & Decker
Stanley Black & Decker is a global manufacturer of power tools, hand tools, and related items. The company holds the top global position in tools and storage sales. Stanley Black & Decker is second in the world in the areas of commercial electronic security and engineered fastening.
This is a difficult environment for the company, as inflation has been particularly rough for industrial manufacturers. However, the company is still growing revenue at a high rate, including 20% year-over-year revenue growth in the 2022 second quarter. Adjusted earnings-per-share declined 33% for the quarter to $2.10, although the company remained highly profitable and beat estimates.
Revenue in North America fell 3%, but this is being offset by growth in the international markets. Last quarter, Stanley Black & Decker reported 2% growth in Europe and 5% growth in the emerging markets.
Gross margins contracted 610 basis points to 29.3% as higher prices were more than offset by higher commodity inflation and supply chain costs. This is expected to bite into the company’s full-year results. Due to inflationary pressures, the company now expects adjusted earnings-per-share in a range of $9.50 to $10.50, down from $12.00 to $12.50 previously. However, organic revenue is still expected to grow 7% to 8%.
Over the long-term, we expect the company to return to solid earnings-per-share growth once the current inflationary period subsides, as revenue is still growing at a healthy rate. In the meantime, the company remains profitable enough to continue raising its dividend, as it has done for over 50 years in a row. Shares currently yield 2.5%.
Plus, shares are deeply undervalued, with a 2022 P/E ratio of just 12. Overall, we expect annual returns of 16% per year over the next five years for SWK.
Dividend Aristocrat: Franklin Resources
Franklin Resources is a global asset management company with nearly $1.5 trillion in assets under management. The company offers investment management and other services to its customers, including sales, distribution, and shareholder servicing.
The company also has a long history of rewarding shareholders with dividend increases. Franklin Resources has increased its payout for 42 consecutive years, including a 3.6% increase in December 2021.
The current environment is somewhat more challenging for the asset management industry, due to the recent market downturn. Franklin Resources reported a 6% quarter-over-quarter drop in assets under management in the second quarter, the result of declining stock prices and fund outflows. However, the company managed to beat analyst estimates on second-quarter earnings per share, reporting $0.96 per share against $0.81 expected. AUM and earnings-per-share were roughly flat from the same quarter last year.
Franklin Resources has a long track record of navigating market downturns while retaining clients, and quickly returning to growth after downturns end. In the meantime, shares look undervalued with a 2022 P/E ratio of just over 7. Plus, the stock has a 4.7% dividend yield. We expect total returns of 12.8% per year over the next five years.
Bob Ciura has worked at Sure Dividend since October 2016. He oversees all content for Sure Dividend and its partner sites. Bob received a Bachelor’s degree in Finance from DePaul University, and an MBA with a concentration in Investments from the University of Notre Dame.
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