The stock market has entered bear market territory this year due to 40-year high inflation and fears that the resultant interest rate hikes of the Fed may cause a recession. This is a painful period for most investors but it is also a great opportunity for investors with a long-term perspective to purchase cheap dividend stocks. In this article, we will discuss the prospects of three stocks that offer attractive dividends and have become markedly cheaply valued, namely Williams-Sonoma (WSM), 3M Company (MMM) and Hanesbrands (HBI).

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Williams-Sonoma

Williams-Sonoma is a specialty retailer that operates home furnishing and houseware brands, such as Williams-Sonoma, Pottery Barn, West Elm, Rejuvenation and Mark & Graham. The company owns traditional retail locations but also sells its products through e-commerce and direct-mail catalogs.

Williams-Sonoma has greatly benefited from the pandemic, as people spend more time at home and the government has offered immense fiscal stimulus packages in response to the health crisis. This is clearly reflected in the blowout earnings of the company in the last two years. Williams-Sonoma has more than tripled its earnings per share in the last two years, from $4.49 in 2019 to $8.61 in 2020 and $14.85 in 2021.

The positive momentum has remained in place so far this year. In the first quarter, comparable revenue grew 9.5% over last year’s quarter thanks to growth of 14.6% and 12.8% in Pottery Barn and West Elm, respectively. Williams-Sonoma grew its earnings per share 20%, from $2.93 to $3.50, and exceeded the analysts’ estimates by an eye-opening $0.61. It was the ninth consecutive quarter in which the retailer exceeded the analysts’ consensus by a wide margin.

Moreover, management reiterated its long-term guidance for mid-to-high single digit annual revenue growth, including this year, with a path to reach $10 billion in sales by 2024 (from $8.2 billion in 2021). On the other hand, given the high comparison base formed this year and an expected deceleration of the economy, we expect the company to grow its earnings per share by 4% per year on average over the next five years.

Thanks to its impressive business momentum, Williams-Sonoma has raised its dividend by 10% this year and thus it has raised its dividend for 16 consecutive years. The stock is currently offering a 2.6% dividend yield with a markedly low payout ratio of 22%. As a result, the company can easily continue raising its dividend meaningfully for many more years.

Williams-Sonoma is currently trading at a 10-year low price-to-earnings ratio of 8.6, which is much lower than our assumed fair price-to-earnings ratio of 14.0 of the stock, which is close to the 7-year average valuation level of the stock. If the stock reverts to its fair valuation level over the next five years, it will enjoy a 10.3% annualized valuation tailwind. Given also its 2.6% dividend and 4.0% expected growth of earnings per share, Williams-Sonoma can offer a 16.4% average annual total return over the next five years.

3M Company

3M is a diversified global manufacturer, which sells more than 60,000 products in more than 200 countries. Its products are used every day at home, in hospitals, office buildings and schools.

As 3M is an industrial manufacturer, it is naturally assumed by most investors to be cyclical and vulnerable to recessions. However, the company has proved fairly resilient to recessions. This has proved to be the case in the coronavirus crisis as well, partly thanks to the increased sales of respiratory devices. 3M incurred just a 4% decrease in its earnings per share in 2020 and rebounded strongly in 2021, with 16% growth of earnings per share, to a new all-time high.

3M has grown its earnings per share at a 5.4% average annual rate over the last decade. We expect the company to continue growing its bottom line at an approximate 5% average annual rate, mostly thanks to its sustained focus on developing new products. 3M has a goal of spending approximately 6% of its revenues on Research & Development (R&D) every year so it has spent $1.7-$2.0 billion per year on R&D in each of the last nine years. Thanks to this strategy, 3M is a pioneer in its business, with more than 100,000 patents.

Thanks to its successful R&D division, 3M has paid a dividend for more than 100 consecutive years and has raised its dividend for 64 consecutive years. This is an extraordinary record, as only 7 other companies have achieved such a long dividend growth streak. Moreover, 3M is currently offering a 4.5% dividend yield, with a healthy payout ratio of 54% and a decent balance sheet. As a result, 3M can easily continue raising its dividend for many more years.

3M is currently trading at a 10-year low price-to-earnings ratio of 12.1, which is much lower than the 10-year average of 19.0 of the stock. If the stock reverts to its fair valuation level over the next five years, it will enjoy a 9.5% annualized valuation tailwind. Given also its 4.5% dividend and 5.0% expected growth of earnings per share, 3M can offer a 17.5% average annual total return over the next five years.

Hanesbrands

Hanesbrands markets and sells everyday basic innerwear and activewear apparel. It sells its products under well-known brands, such as Hanes and Champion, in America, Europe, Australia and the Asia-Pacific region.

Hanesbrands has spent approximately $3.0 billion on acquisitions in the last seven years but with little success. The company is trying to assimilate its acquisitions while it is facing intense competition and a secular shift of consumers towards online purchases. In addition, the company is burdened by high interest expense due to the debt load that has accumulated from past acquisitions.

Hanesbrands has grown its earnings-per-share at a 12.0% average annual rate over the last decade but it has failed to grow its bottom line in the last five years. After four consecutive years of poor sales, the company grew its sales in 2018-2019, but it failed to grow its earnings due to intense competition and high interest expense.

Even worse, the company is currently facing strong headwinds due to supply chain disruptions caused by the pandemic and high cost inflation. In the first quarter, Hanesbrands grew its revenue 5% over last year’s quarter, with 6% growth in the global Champion brand and 1.5% growth in the U.S. innerwear business, but its earnings per share decreased 13% due to the impact of inflation and supply chain disruptions on its margins.

On the bright side, Hanesbrands now has a long-term growth plan, which involves growing the Champion brand globally, growing Innerwear sales with products that appeal to young consumers and improving online sales. We expect Hanesbrands to grow its earnings per share by 6.0% per year on average over the next five years.

Hanesbrands has a payout ratio of only 34% but it has frozen its dividend for 22 consecutive quarters, primarily due to its high debt load and the significant amounts that need to be invested in the business to remain competitive. Fortunately, management is in the process of reducing the debt load and hence the 5.6% dividend is likely to remain intact in the absence of a severe downturn. On the other hand, the dividend may be cut in the event of a prolonged recession.

Hanesbrands is currently trading at a 10-year low price-to-earnings ratio of 6.1, which is much lower than our assumed fair price-to-earnings ratio of 10.0 of the stock. If the stock reverts to its fair valuation level over the next five years, it will enjoy a 10.3% annualized valuation tailwind. Given also its 5.6% dividend and 6.0% expected growth of earnings per share, Hanesbrands can offer a 19.9% average annual total return over the next five years.

Final Thoughts

Bear markets are painful for investors but they offer exceptionally attractive entry points in solid stocks, which can offer excessive total returns in the long run. The above three stocks are trading at 10-year low price-to-earnings ratios and are offering attractive dividends. Whenever the economy recovers from its current downturn, these stocks are likely to highly reward their shareholders.