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The S&P 500 has declined 25% this year and thus it is going through a bear market. While bear markets are painful to investors, they offer great opportunities to initiate positions in high-quality companies at bargain levels. Dividend Champions are great candidates for income-oriented investors in the ongoing bear market, as most of them have reliable dividend growth streaks. In this article, we will discuss the prospects of three Dividend Champions that are highly attractive right now thanks to their exceptional dividend yields and their cheap valuation levels.
 

Walgreens Boots Alliance (WBA)

Walgreens Boots Alliance is the largest retail pharmacy in both the U.S. and Europe. Through its flagship Walgreens business and other business ventures, the company is present in more than 9 countries, with more than 13,000 stores in the U.S., Europe, and Latin America.

Walgreens enjoys a major competitive advantage, namely its immense scale, which results in great efficiencies. The company is also resilient to recessions, as the demand for drugs does not decrease even under the most adverse economic conditions. The resilience of Walgreens to recessions is particularly important in the current investing environment, as the aggressive interest rate hikes of the Fed have significantly increased the risk of an upcoming recession.

Walgreens has more than doubled its earnings per share over the last decade but it has stalled over the last four years, mostly due to heating competition, which has taken its toll on the margins of the company. It is also important to note that the profit margins in the pharmaceutical business have become an object under scrutiny in recent years. As a result, investors should not expect meaningful margin expansion for the foreseeable future.

Walgreens is also facing another headwind, namely the fading positive effect of the pandemic. In its fiscal third quarter, the company executed only 4.7 million vaccinations, which was much lower than the 11.8 million vaccinations in the previous quarter. As a result, total revenues decreased by 4% and earnings per share slumped 30% over the prior year’s quarter. It is also remarkable that Walgreens eventually decided to retain its Boots business, as it failed to receive an attractive offer.

Due to all these business headwinds, the stock of Walgreens has plunged 39% this year, more than the S&P 500, which has declined 25%. Walgreens has historically outperformed the broad market during bear markets but it has underperformed this time due to the aforementioned headwinds facing its business.

On the bright side, the stock has become exceptionally cheap. It is currently trading at a price-to-earnings ratio of 6.2, which is a 10-year low valuation level. In addition, the stock is offering a 10-year high dividend yield of 6.0%. Given the healthy payout ratio of 36% and the resilient business model of the company, its dividend should be considered safe. Overall, Walgreens is exceptionally attractive for patient investors, who can maintain a long-term perspective during the ongoing bear market.
 

UGI Corporation (UGI)

UGI Corporation is a gas and electric utility that operates in Pennsylvania, in addition to a large energy distribution business that serves the entire U.S. and some international markets. The company was founded in 1882 and has paid consecutive dividends since 1885.

UGI enjoys a wide business moat in its regulated business, but the distribution of propane and LPG is sensitive to the underlying weather conditions. It would thus be reasonable to expect UGI to exhibit a more volatile performance than a typical regulated utility.

However, the company has proved remarkably consistent. It has grown its earnings per share in 8 of the last 9 years, at an 11% average annual rate. As 2012 formed a low comparison base, it is important to put more emphasis on the 5-year growth rate of the company, which is more representative of future growth potential. UGI has grown its earnings per share by 7.6% per year on average over the last five years.

Moreover, UGI is trying to reduce its sensitivity to the gyrations of weather. To this end, the company recently reached an agreement with regulatory authorities. According to this 5-year program, UGI is permitted to adjust the bills of its customers if the weather deviates more than 3% from the 15-year average. This is certainly a significant hedge against unfavorable (warm) weather conditions.

Furthermore, UGI is currently trading at a 10-year low price-to-earnings ratio of 11.4, which is much lower than the historical average of 15.5 for the stock. The cheap valuation level has resulted primarily from the impact of 40-year high inflation on the present value of the future cash flows of the utility. As soon as inflation begins to subside, UGI is likely to enjoy a meaningful expansion of its earnings multiple.

It is also remarkable that UGI has raised its dividend for 35 consecutive years and is currently offering a 10-year high dividend yield of 4.4%. As UGI has a solid payout ratio of 50% and a rock-solid balance sheet, with interest expense consuming only 14% of operating income, it can easily continue raising its dividend for many more years.

The company has grown its dividend by 7.3% per year on average over the last decade and by 7.9% per year on average over the last five years. These growth rates are much higher than the median dividend growth rates of the utility sector of 4.6% and 5.6%, respectively. Overall, investors can lock in a 10-year high dividend yield of 4.4% and rest assured that the dividend will remain on the rise for many more years.
 

V.F. Corporation (VFC)

V.F. Corporation is one of the world’s largest apparel, footwear and accessories companies. Its brands include The North Face, Vans, Timberland, and Dickies. The company has been in existence since 1899.

V.F. Corporation recovered strongly from the pandemic last year but it is now facing a severe downturn due to the surge of inflation to a 40-year high. High inflation has led consumers to tighten their wallets and thus the company recently resorted to great discounts to reduce its inventory levels. In addition, high inflation has greatly increased the costs of V.F. Corporation and hence it exerts great pressure on its operating margins. It is also important to note that inflation has an impact on the valuation of V.F. Corporation, as it reduces the present value of the future cash flows of the company. Overall, inflation has a triple negative effect on V.F. Corporation. This helps explain the 61% plunge in the stock this year.

However, as soon as inflation subsides, V.F. Corporation is likely to highly reward investors off its current 10-year low stock price. V.F. Corporation has raised its dividend for 49 consecutive years and is currently offering a 10-year high dividend yield of 7.1%, with a payout ratio of 65%. Given the rock-solid balance sheet of the company, which has a negligible amount of debt, and its commitment to a growing dividend, the dividend will probably remain safe in the absence of a prolonged recession.
 

Final Thoughts

The above three stocks are trading at 10-year low valuation levels and are offering 10-year high dividend yields, with a meaningful margin of safety. As long as the Fed accomplishes its goal of restoring inflation to normal levels, the three Dividend Champions are likely to highly reward patient investors, who can maintain a long-term perspective during the ongoing bear market.

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