Top 3 Dividend Kings for 2023
There are only 48 companies that belong to this premier group. Most of them enjoy a significant trade gap; they are resistant to recessions and have therefore steadily increased their income. Otherwise, they wouldn’t have had such long streaks of dividend growth.
Let’s discuss the outlook 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 United States, after Home Depot (HD). Lowe’s was founded in 1946 and operates or services approximately 2,200 hardware and hardware stores in the United States and Canada.
Lowe’s enjoys significant competitive advantages, namely a huge network, with great economies of scale, and a strong brand. More importantly, the company operates in an essential duopoly with Home Depot. Neither retailer is significantly increasing its store count or interested in a price war. The existence of an essential duopoly provides a wide market gap for Lowe’s.
The merits of operating in a duopoly are clearly reflected in the home improvement retailer’s impressive performance. Over the past decade, Lowe’s has grown its earnings per share every year, at a telling average annual rate of 24%. The company has not slowed down in recent years, as it has grown its bottom line by 25% per year on average over the past five years.
The stock flies under the radar of most income-oriented investors.
Lowe’s achieved its exceptional growth record, not by opening many new stores, but by posting strong same-store sales growth and aggressively repurchasing its shares. The company has cut its stock count by 42% over the past decade. Plus, thanks to its excessive profits, Lowe’s has a rock-solid balance sheet. As the stock currently trades at a low price/earnings ratio of 15.2 for almost 10 years, management continues to aggressively buy back shares and thus continues to increase shareholder value.
Lowe’s has proven resilient to recessions. During the Great Recession, its EPS fell by less than 20%. Even better, during the coronavirus crisis, the retailer experienced unprecedented business momentum and thus more than doubled its EPS from $5.74 in 2019 to $12.04 in 2021. Of course, Lowe’s can’t continue to grow profits at this rate indefinitely. Nevertheless, it is expected to record an EPS increase of around 14% for 2022.
Thanks to its broad trading moat and resilience to recessions, Lowe’s is a dividend kingpin, with 60 consecutive years of dividend growth. Due to its lackluster current dividend yield of 2.0%, the stock falls under the radar of most income-oriented investors. However, it is important to note that the company has increased its dividend by an average of 20.0% per year over the past decade and by an average of 19.5% per year over the past five years.
Given its low 31% payout ratio, pristine balance sheet, and reliable growth trajectory, Lowe’s looks set to continue raising its dividend at a double-digit rate for many years to come. Therefore, the stock is very attractive to growth-oriented investors as well as income-oriented investors with a long-term perspective.
ABM Industries
ABM Industries (ABM) is a leading provider of facilities solutions, which include janitorial, electrical and lighting, energy solutions, facilities engineering, HVAC and mechanical, fit-out landscaped and grass and parking. The company operates with over 350 offices across the United States and various international markets, primarily in Canada.
ABM Industries is one of the biggest players in its industry, mainly thanks to a series of acquisitions of smaller competitors. The company thus benefits from significant economies of scale. Management has repeatedly stated that it is always looking for attractive acquisitions, which will help the company stay on its long-term growth trajectory.
ABM Industries has grown its EPS every year since 2003. This is undoubtedly an extraordinary achievement. Over the past decade, the company has grown its EPS by an average of 10.1% per year. The growth rate of ABM Industries and its admirable consistency testify to the strength of its business model.
On the other hand, the commercial dynamic has slowed down somewhat lately. In the last quarter, ABM Industries increased its revenue by 19% compared to the prior year quarter, but its EPS only increased by 5% due to increased interest charges in an environment of high interest rates and high cost inflation. Nevertheless, the company still managed to grow its EPS by 2% for the full year, to a new all-time high.
ABM Industries recently increased its dividend by 13% and has therefore increased 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 currently offers an interest-free dividend yield of 1.9%. The company has increased its dividend by an average of 4.3% per year over the past decade and by an average of 4.7% per year over the past five years. As ABM Industries has a significantly low payout ratio of 21% and a healthy balance sheet, it is likely to continue to increase its dividend for many years to come.
A streak of 54 years
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 company’s burgeoning e-commerce business. After a failed attempt to expand into Canada in 2013-2015, Target operates solely in the US market.
Target’s main competitive advantage comes from its everyday low prices on attractive merchandise in its customer-friendly stores. However, competition has intensified more than ever in the grocery sector in recent years. Due to the ongoing price war, Target’s market gap has narrowed.
Additionally, since consumers tend to cut spending during tough economic times, the merchant is not immune to recessions. Nonetheless, as people spend more time at home during recessions, Target has proven more resilient to economic downturns than most companies. In 2008, its earnings per share fell by only 14%.
Target failed to significantly increase its EPS between 2012 and 2017, mainly due to the excessive losses it incurred during its attempted expansion into Canada in 2013-2015 as well as intense competition in the indoor market. However, thanks to its successful turnaround efforts, the company has returned to its long-term growth trajectory in recent years.
Target increased its EPS by 47% in 2020, thanks in part to the tailwind of the pandemic, and an additional 44% in 2021. The company has increased its EPS by 13% per year on average over the past decade.
Unfortunately, Target is currently facing a major downturn due to inflation soaring to a nearly 40-year high. The surge in inflation has led consumers to become much more conservative in their discretionary spending. As a result, Target has experienced low demand for its products and as a result, its inventory has increased significantly. Additionally, due to high cost inflation, Target suffered a sharp contraction in operating margins. As a result, the company is set to report a nearly 60% drop in earnings per share for 2022. This helps explain the stock’s 36% drop from its peak last year. .
On the other hand, thanks to the aggressive interest rate hikes implemented by the Fed, inflation should sooner or later return to its normal range. When that happens, Target is likely to recover strongly from its current downturn.
Target has increased its dividend for 54 consecutive years. The company increased its dividend by 20% last year, in a sign of confidence in a strong recovery. As a result, his payout ratio jumped to 79%. However, as Target is expected to recover in the coming years, its dividend should be considered secure for the foreseeable future.
Final Thoughts
Bear markets are painful for most investors, but they also provide unique opportunities to buy stocks with strong trading fundamentals at attractive prices. Those who buy the above three Dividend Kings around their current prices will likely be very rewarded in the long run.
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