Photo by Jason Briscoe on Unsplash
 

Income-oriented investors continuously try to identify companies with solid business fundamentals that will provide rising dividends to them. Dividend Champions are great candidates for the portfolios of income-oriented investors. These are the companies that have raised their dividends for at least 25 consecutive years. Most of these companies have strong business models and are resilient to recessions. Otherwise, they would not have achieved such long dividend growth streaks. In this article, we will discuss the prospects of three Dividend Champions that are attractive right now, namely Lowe’s (LOW), Altria (MO), and 3M Company (MMM).
 

Lowe’s

Lowe’s is the second-largest home improvement retailer in the U.S., after Home Depot (HD). The company, which was founded in 1946, operates or services about 2,200 home improvement and hardware stores in the U.S. and Canada.

Lowe’s enjoys one of the widest business moats investors can hope for. The company operates in an essential duopoly, as its major competitor is Home Depot. Even better, neither of the two companies is opening many new stores and neither is interested in a price war. As a result, both companies have been growing their profits at a breathtaking pace for more than a decade.

To be sure, Lowe’s has grown its earnings per share by 24% per year on average over the last nine years and by 25% per year on average over the last five years. The company has grown its earnings every single year throughout the last decade. The impressive growth rate combined with the consistent performance are testaments to the strength of the business model of the company and its exemplary execution.

Lowe’s is likely to slow down its performance this year due to the impact of high inflation on its margins and on consumer spending. As a result, the stock is currently trading at a nearly 10-year low price-to-earnings ratio of 14.7 and is offering a nearly 10-year high dividend yield of 2.1%.

As the Fed has clearly prioritized restoring inflation to its long-term target of 2%, we view the current headwinds as temporary. Thanks to the aggressive policy of the central bank, inflation has declined every month since it peaked last summer. When inflation reverts to normal levels, Lowe’s is likely to accelerate its growth again. It is thus likely to highly reward patient investors, who purchase the stock at its current stock price and wait patiently for inflation to subside.
 

Altria

Altria is a consumer staples giant, with a history of 175 years. The tobacco giant is the producer of the top-selling cigarette brand in the world, namely Marlboro, as well as some non-smokeable products. Marlboro has maintained a market share of about 40% for several years in a row. Altria also has large stakes in global beer giant Anheuser Busch InBev (BUD) and Cronos Group (CRON), a cannabis company.

Altria enjoys strong pricing power thanks to the inelastic demand for cigarettes. As a result, the company has implemented material price hikes year after year and thus it has more than offset the negative effect of the steadily declining consumption per capita of cigarettes on its results. This is clearly reflected in the exceptional growth record of the company.

During the last decade, Altria has grown its earnings per share every single year, at an 8.8% average annual rate. This growth rate combined with the consistency of the tobacco giant is proof of the strength of its business model.

Unfortunately, Altria has been caught off-guard by the transition of consumers towards alternative tobacco products, such as vaping products. In 2018, Altria acquired a 35% stake in Juul, a leader in vaping products, for $12.8 billion but that investment proved disastrous. Since the acquisition, Juul has incurred several hits due to restrictions from regulators and is facing excessive potential fines from regulators in the future. Consequently, Altria recently decided to divest its stake in Juul and essentially admit that its whole investment in the company evaporated.

Other companies would have been devastated by such a failed investment but Altria has such strong business fundamentals that it can absorb the impact of such an excessive write-off. Altria grew its earnings per share by 5% in 2022 and expects to grow its bottom line by another 4% this year, to a new all-time high.

It is also important to note that the stock is currently trading at a nearly 10-year low price-to-earnings ratio of 9.2 and is offering a nearly 10-year high dividend yield of 8.0%, with a 10-year low payout ratio of 75%. The exceptionally cheap valuation of the stock has resulted primarily from its failed investment in Juul and concerns over the transition of consumers towards alternative tobacco projects.

However, given the exceptional performance history of Altria, it is reasonable to expect the tobacco giant to eventually adjust to the changing business landscape. Moreover, the company is likely to keep growing its profits from its traditional products for many more years. Therefore, those who purchase the stock around its current price are likely to be highly rewarded in the upcoming years.
 

3M Company

3M Company sells more than 60,000 products, which are used every day in homes, hospitals, office buildings, and schools around the world. The company sells its products in more than 200 countries.

3M is one of the largest industrial manufacturers in the world but it does not rest on its laurels. Instead, it continuously tries to innovate. To this end, the company spends 5%-6% of its revenues (nearly $2 billion per year) on research & development (R&D). This strategy has undoubtedly born fruit, as nearly one-third of the sales of 3M in the last fiscal year came from products that did not exist five years ago. Thanks to its exemplary R&D department, 3M has built up a portfolio of more than 100,000 patents.

3M has one of the longest dividend growth streaks in the investing universe. To be sure, the company has raised its dividend for 64 consecutive years. This is a testament to the rock-solid business model of the company and its resilience to recessions.

Notably, the stock is currently offering a 10-year high dividend yield of 5.5%. The exceptionally high yield has resulted primarily from a strong headwind facing the company right now, namely a great number of lawsuits. There are nearly 300,000 claims that its earplugs, which were manufactured by Aearo Technologies, a subsidiary of 3M, and were used by U.S. combat troops were defective. The subsidiary of 3M filed for bankruptcy but a U.S. judge ruled that this bankruptcy would not prevent lawsuits from burdening 3M. Consequently, it is virtually impossible to predict the final amount of liabilities that 3M will have to pay to its plaintiffs.

On the bright side, 3M has a rock-solid balance sheet, with an interest coverage ratio of 14.2 and net debt to a market cap of only 38%. Given also its decent payout ratio of 68% and its reliable business performance, 3M is likely to continue raising its dividend for many more years. As soon as 3M leaves its pending litigation issues behind, it is likely to highly reward those who purchase it at its current stock price, which corresponds to a nearly 10-year low price-to-earnings ratio of 13.3.
 

Final Thoughts

The business performance of Lowe’s has somewhat decelerated lately due to high inflation while Altria and 3M are facing non-recurring issues. Due to these factors, which we expect to prove short-lived, these three Dividend Champions have become exceptionally cheap. Given their reliable growth trajectories, the three companies are likely to recover strongly from their current downturns at some point in the future. As a result, they are likely to highly reward patient investors, who can maintain a long-term perspective during the ongoing downturn.

More By This Author:

Dividend Kings in Focus: Walmart Inc.
3 Blue Chip Stocks To Buy Now
3 High-Dividend Stocks To Buy Now