Dividend Kings are the companies that have grown their dividends for at least 50 consecutive years.
There are only 48 companies that belong to this best-of-breed group. Most of them enjoy a meaningful business moat; they are resilient to recessions and thus they have grown their earnings consistently. Otherwise, they would not have achieved such long dividend growth streaks.
Let's discuss discuss the prospects of the three most attractive Dividend Kings for 2023.
Aim High With Lowe's
Lowe's Companies (LOW) is the second-largest home improvement retailer in the U.S., after Home Depot (HD) . Lowe's was founded in 1946 and operates or services approximately 2,200 home improvement and hardware stores in the U.S. and Canada.
Lowe's enjoys some meaningful competitive advantages, namely an immense network, with great economies of scale, and a strong brand. More importantly, the company operates in an essential duopoly with Home Depot. Neither of the two retailers is expanding its store count significantly or is interested in a price war. The existence of an essential duopoly provides a wide business moat to Lowe's.
The merits of operating in a duopoly are clearly reflected in the impressive performance record of the home improvement retailer. During the last decade, Lowe's has grown its earnings per share every single year, at an eye-opening average annual rate of 24%. The company has not decelerated in recent years, as it has grown its bottom line by 25% per year on average over the last five years.
The stock passes under the radar of most income-oriented investors.
Lowe's has achieved its exceptional growth record, not by opening many new stores, but by posting strong comparable sales growth and repurchasing its shares aggressively. The company has reduced its share count by 42% over the last decade. In addition, thanks to its excessive profits, Lowe's has a rock-solid balance sheet. As the stock is currently trading at a nearly 10-year low price-to-earnings ratio of 15.2, management continues repurchasing shares aggressively and thus it keeps enhancing shareholder value.
Lowe's has proved resilient to recessions. In the Great Recession, its EPS declined by less than 20%. Even better, during the coronavirus crisis, the retailer enjoyed unprecedented business momentum and thus it more than doubled its EPS, from $5.74 in 2019 to $12.04 in 2021. Of course, Lowe's cannot keep growing its earnings at this pace indefinitely. Nevertheless, it is expected to report an approximate 14% increase in its EPS for 2022.
Thanks to its wide business moat and its resilience to recessions, Lowe's is a Dividend King, with 60 consecutive years of dividend growth. Due to its lackluster current dividend yield of 2.0%, the stock passes under the radar of most income-oriented investors. However, it is important to note that the company has grown its dividend by 20.0% per year on average over the last decade and by 19.5% per year on average over the last five years.
Given its low payout ratio of 31%, its pristine balance sheet and its reliable growth trajectory, Lowe's is likely to continue raising its dividend at a double-digit rate for many more years. Therefore, the stock is highly attractive for growth-oriented investors as well as for income-oriented investors with a long-term perspective.
ABM Industries
ABM Industries (ABM) is a leading provider of facility solutions, which include janitorial, electrical & lighting, energy solutions, facilities engineering, HVAC & mechanical, landscape & turf, and parking. The company operates with more than 350 offices throughout the U.S. and various international markets, primarily Canada.
ABM Industries is one of the largest players in its industry, primarily thanks to a series of acquisitions of small competitors. As a result, the company enjoys significant economies of scale. Management has repeatedly stated that it always looks for attractive acquisitions, which will help the company remain on its long-term growth trajectory.
ABM Industries has grown its EPS every single year since 2003. This is undoubtedly an extraordinary performance. During the last decade, the company has grown its EPS by 10.1% per year on average. The growth rate of ABM industries and its admirable consistency are testaments to the strength of its business model.
On the other hand, business momentum has somewhat decelerated lately. In the most recent quarter, ABM Industries grew its revenue 19% over the prior year's quarter but its EPS rose only 5% due to increased interest expense amid high interest rates and high cost inflation. Nevertheless, the company still managed to grow its EPS by 2% in the full year, to a new all-time high.
ABM Industries recently raised its dividend by 13% and thus it has now grown its dividend for 55 consecutive years. The company has achieved this exceptional growth streak thanks to its solid business model and its resilience to recessions.
ABM Industries is currently offering an uninspiring dividend yield of 1.9%. The company has grown its dividend by 4.3% per year on average over the last decade and by 4.7% per year on average over the last five years. As ABM Industries has a markedly low payout ratio of 21% and a healthy balance sheet, it is likely to continue raising its dividend for many more years.
A 54-Year Streak
Founded in 1902, Target Corp. (TGT) has approximately 1,850 big box stores, which offer general merchandise and food and serve as distribution points for the burgeoning e-commerce business of the company. After a failed attempt to expand in Canada in 2013-2015, Target has operations solely in the U.S. market.
The primary competitive advantage of Target comes from its everyday low prices on attractive merchandise in its guest-friendly stores. However, competition has heated more than ever in the grocery business in recent years. Due to the ongoing price war, the business moat of Target has shrunk.
Moreover, as consumers tend to reduce their spending during rough economic periods, the retailer is not immune to recessions. Nevertheless, as people spend more time at home during recessions, Target has proved more resilient to economic downturns than most companies. In 2008, its earnings per share dipped only 14%.
Target failed to grow its EPS meaningfully between 2012 and 2017, mostly due to the excessive losses it incurred in its attempted expansion to Canada in 2013-2015 as well as intense competition in the domestic business. However, thanks to its successful turnaround efforts, the company has returned to its long-term growth trajectory in recent years.
Target grew its EPS by an impressive 47% in 2020, partly thanks to the tailwind from the pandemic, and by another 44% in 2021. The company has grown its EPS by 13% per year on average over the last decade.
Unfortunately, Target is currently facing a major downturn due to the surge of inflation to a nearly 40-year high. The surge of inflation has led consumers to become much more conservative in their discretionary expenses. Consequently, Target has experienced soft demand for its products and hence its inventories have greatly increased. In addition, due to high cost inflation, Target has incurred a sharp contraction in its operating margins. As a result, the company is poised to report a nearly 60% plunge in its earnings per share for 2022. This helps explain the 36% decline of the stock off its peak last year.
On the other hand, thanks to the aggressive interest rate hikes implemented by the Fed, inflation is likely to revert to its normal range sooner or later. When that happens, Target is likely to recover strongly from its current downturn.
Target has raised its dividend for 54 consecutive years. The company raised its dividend by 20% last year, as a sign of confidence in a strong recovery. As a result, its payout ratio has spiked to 79%. However, as Target is likely to recover in the upcoming years, its dividend should be considered safe for the foreseeable future.
Final Thoughts
Bear markets are painful for most investors but they also provide unique opportunities to purchase stocks with strong business fundamentals at attractive prices. Those who purchase the above three Dividend Kings around their current prices are likely to be highly rewarded in the long run.
