The Top 3 Dividend Aristocrats for 2023

Dividend Aristocrats are stocks which have grown their dividends for a minimum of 25 consecutive years.

Most of those corporations have achieved such long dividend growth streaks because of their strong business models, that are characterised by a meaningful business moat and resilience to recessions. If these corporations didn’t possess these characteristics, they’d not have grown their dividends for many years.

The next three Dividend Aristocrats are excellent considerations for 2023.

You Could Have Had a V.F.

V.F. Corp.  (VFC) was founded in 1899 and has turn out to be one among the most important apparel, footwear and accessories corporations on this planet. Its brands include The North Face, Vans, Timberland and Dickies.

V.F. Corp., which is my top pick for 2023, enjoys strong pricing power because of popularity of its premium brands. As well as, because of the strength of its brands, the corporate has proved resilient to recessions.

Within the Great Recession, while other retailers saw their earnings collapse, V.F. Corp. posted only a 9% decrease in its earnings per share. As well as, it took just one yr to the corporate to get well from that crisis and post record earnings.

Due to its strong brands and its resilience to recessions, V.F. Corp. has turn out to be a Dividend King, with 50 consecutive years of dividend growth. There are only 41 corporations which have achieved such an extended dividend growth streak.

Unfortunately, V.F. Corp. is currently facing an ideal storm as a consequence of the double impact of 40-year high inflation on the stock. To begin with, high inflation has greatly increased the associated fee of raw materials, the freight costs and the labor costs of the corporate. Because of this, it has compressed the operating margins of the retailer.

Furthermore, the surge of inflation has greatly reduced the true purchasing power of consumers and thus it has led them to tighten their wallets. As a result of reduced consumer spending, the inventories of V.F. Corp. have increased enormously. Consequently, the corporate has resorted to deep discounts so as to reduce its inventory levels.

The impact of inflation on V.F. Corp. was distinguished in the most recent earnings report of the retailer. Within the second quarter of its fiscal yr, the corporate incurred a 4% decrease in its revenue and a pointy contraction in its operating margin, to 12.3% from 16.7%, as a consequence of high cost inflation, great discounts offered to customers amid high inventories and lockdowns in China. Because of this, V.F. Corp. reported a 24% decrease in its adjusted EPS over the prior yr’s quarter.

Notably, the inventories of V.F. Corp. jumped 88% over the prior yr’s quarter as a consequence of the impact of excessive inflation on consumer spending in addition to some supply-chain issues. The corporate is doing its best to scale back inventories, by pushing forward purchases where possible and by offering attractive discounts so as to enhance consumer purchases. Nevertheless, we expect high inventories to proceed to weigh on the margins of the corporate until inflation subsides.

On the brilliant side, V.F. Corp. has a rock-solid balance sheet, with a negligible amount of debt, and hence it may well easily endure the continuing downturn. As well as, the Fed has clearly prioritized restoring inflation to its long-term goal of two%. Due to its aggressive rate of interest hikes, the Fed is more likely to achieve its goal eventually. When that happens, V.F. Corp. is more likely to highly reward investors.

The stock is currently trading at a virtually 10-year low price-to-earnings ratio of 15.0, which is far lower than its 10-year average P/E ratio of 21.5. As well as, the stock is currently offering a virtually 10-year high dividend yield of 6.9%. Its payout ratio has temporarily spiked to 102% nevertheless it is more likely to revert to sustainable levels within the upcoming years, as the corporate is more likely to begin to get well.

Due to its pristine balance sheet and its commitment to maintain raising its dividend, albeit at a slow pace, V.F. Corp. is more likely to defend its dividend. Given also its exceptionally low cost valuation, it’s more likely to offer excessive returns to those that purchase it around its depressed stock price.

Stick With This Aristocrat

3M Co.  (MMM) sells greater than 60,000 products, that are used day by day in homes, hospitals, office buildings and schools around the globe. The economic manufacturer has presence in greater than 200 countries.

3M enjoys a large business moat because of its exemplary department of Research & Development (R&D). It has consistently remained focused on its commitment to spend 5%-6% of total revenues (nearly $2 billion per yr) on R&D so as to create recent products and thus meet ever-evolving consumer needs.

This strategy has actually born fruit, as nearly one-third of the revenues of 3M within the last fiscal yr got here from products that didn’t exist five years ago. The unique R&D department of 3M has resulted in a portfolio of greater than 100,000 patents.

Similar to most corporations, 3M is currently facing a headwind as a consequence of high cost inflation. Nonetheless, because of its dominant business position, the corporate has strong pricing power. Because of this, it has been capable of pass its increased costs to its customers via material price hikes. That is clearly reflected within the business performance of 3M, as the corporate is anticipated to post nearly all-time high earnings per share for 2022.

While 3M has proved resilient to the highly inflationary environment prevailing immediately, it’s currently facing one other major threat, namely quite a few pending lawsuits. There are nearly 300,000 claims that its earplugs, which were utilized by U.S. combat troops and were manufactured by Aearo Technologies, a subsidiary of 3M, were defective.

The subsidiary of 3M filed for bankruptcy but a U.S. judge ruled that this bankruptcy wouldn’t prevent lawsuits from burdening 3M. Because of this, nobody can predict the ultimate amount of liabilities that 3M may have to pay to its plaintiffs.

Then again, 3M has achieved one among the longest dividend growth streaks within the investing universe, with 64 consecutive years of dividend growth. It has achieved such an extended dividend growth streak because of its wide business moat and its resilience to recessions.

Furthermore, as a consequence of the aforementioned threat from the many lawsuits, the stock has plunged to a virtually nine-year low level. Because of this, it’s currently offering a virtually 10-year high dividend yield of 4.7%.

Notably, 3M has a rock-solid balance sheet, with an interest coverage ratio of 12.1 and net debt to market cap of only 32%. Given also its healthy payout ratio of 58% and its reliable business performance, 3M is more likely to proceed raising its dividend for a lot of more years.

Not Your Typical Commodity Producer

Albemarle (ALB) is the most important producer of lithium and the second-largest producer of bromine on this planet. The 2 products account for about 75% of the sales of the corporate.

Albemarle produces lithium from its salt brine deposits within the U.S. and Chile in addition to from two joint ventures in Australia. The assets in Chile are characterised by exceptionally low production cost of lithium.

Albemarle has exhibited a highly volatile performance record, with a decline in its EPS in 4 of the last nine years. That is natural for a commodity producer, given the dramatic swings of commodity prices.

Through the last decade, Albemarle has grown its EPS at a median annual rate of just one.7%. Furthermore, the corporate has proved vulnerable to recessions, as commodity prices are likely to plunge during opposed economic periods.

Then again, Albemarle isn’t a typical commodity producer. The corporate has an exceptionally strong growth catalyst in place because of the exponential growth of electrical vehicles. Lithium is a serious component of electrical vehicles.

Due to the immense growth of the sales of electrical vehicles, the value of lithium has skyrocketed to an all-time high and hence Albemarle is prospering, with record EPS. The corporate is anticipated to report a greater than five-fold increase in its EPS for 2022, from $4.05 in 2021 to an all-time high of about $20.75. To supply a perspective, the previous 10-year high profit per share of Albemarle was $6.04, in 2019.

Even higher, the sales of electrical vehicles are expected to proceed growing at a quick pace for several years. This trend will provide a powerful tailwind to the business of Albemarle.

Furthermore, Albemarle is currently trading at a 10-year low price-to-earnings ratio of 10.7, which is far lower than the 10-year average P/E ratio of 13.7 of the stock. Due to its low cost valuation and its promising growth prospects, Albemarle is more likely to highly reward investors within the upcoming years.

Final Thoughts

V.F. Corporation and 3M have turn out to be exceptionally low cost as a consequence of the headwinds facing their businesses. We expect these high-quality Dividend Aristocrats to get well from the present downturn and highly reward investors with a long-term perspective. Nonetheless, the stocks are suitable just for patient investors, who can ignore stock price volatility for an prolonged period.

Albemarle is very attractive as well, but for a special reason, as the corporate is prospering because of the secular growth of electrical vehicles. Nevertheless, as a commodity producer, Albemarle is very cyclical and hence it isn’t a buy-and-hold-forever stock. Each time it reverts towards its historical average valuation level, investors should consider taking their profits on the stock.

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