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Income-oriented investors try to identify stocks that offer attractive dividend yields and are likely to raise their dividends meaningfully year after year. Dividend Kings are great candidates for the portfolios of income-oriented investors. These are the companies that have raised their dividends for at least 50 consecutive years. Most of them enjoy a wide business moat and have proved resilient to recessions. Otherwise, they would not have accomplished such long dividend growth streaks. In this article, we will discuss the prospects of three highly attractive Dividend Kings for 2023, namely Parker-Hannifin (PH), V.F. Corporation (VFC), and Farmers & Merchants Bancorp (FMCB).
 

Parker-Hannifin

Parker-Hannifin is an industrial manufacturer that has great expertise in motion and control technologies. It manufactures components that are obscure but critical to the operations of heavy machinery, factory equipment, and aircraft. As a result, the company operates in a highly profitable niche.

Parker-Hannifin has exhibited an exceptionally consistent growth record. To be sure, the company has grown its earnings per share in 8 of the last 9 years, at a 12.9% average annual rate. This combination of high growth and consistency is certainly admirable and reveals the existence of a wide business moat.

Parker-Hannifin has grown immensely, not only via organic growth but also via several acquisitions. The company acquires smaller competitors and incorporates their products in its vast global distribution network, thus achieving great economies of scale.

Parker-Hannifin recently acquired Meggitt, a global leader in aerospace and defense motion and control technologies, for $8.8 billion in a cash deal. Meggitt offers technology and products on every major aircraft platform and has annual revenues of $2.3 billion. As the deal value is 21% of the market capitalization of Parker-Hannifin, the acquisition will obviously be a major growth driver for the company in the upcoming years. Parker-Hannifin has always maintained a rock-solid balance sheet in order to have sufficient cash for high-return acquisitions.

Thanks to its rock-solid business model, Parker-Hannifin has raised its dividend for 66 consecutive years. The stock passes under the radar of most income investors due to its low payout ratio and its lackluster dividend yield, which currently stands at 1.6%. However, investors should realize that the low current yield results merely from the exceptionally low payout ratio, which management targets in order to preserve funds for acquisitions.

Obviously, the capital allocation of the policy of management has proved successful, as Parker-Hannifin has essentially tripled its earnings per share over the last 9 years. It is also worth noting that the company has grown its dividend by 12.0% per year on average over the last decade and by 13.7% per year on average over the last five years. Given the low payout ratio of 28% and the strong balance sheet of the company, investors should expect many more double-digit dividend hikes in the upcoming years. Overall, while the current dividend yield is uninspiring, Parker-Hannifin is likely to highly reward investors thanks to strong earnings growth and double-digit dividend growth.
 

V.F. Corporation

V.F. Corporation has a history of more than a century and is one of the largest apparel, footwear, and accessories companies in the world. Its brands include The North Face, Vans, Timberland, and Dickies.

Thanks to the popularity of its brands, V.F. Corporation has strong pricing power and has proven resilience to recessions. These are the key characteristics behind the impressive dividend growth record of the company. V.F. Corporation has raised its dividend for 50 consecutive years.

V.F. Corporation is currently facing a severe downturn due to the multiple impacts of nearly 40-year high inflation on the stock. Excessive inflation has pronouncedly increased the cost of raw materials, freight costs and labor costs of V.F. Corporation. Consequently, it exerts great pressure on the operating margins of the retailer.

In addition, due to the impact of inflation on the real purchasing power of consumers, the latter has become somewhat conservative in their spending. As a result, the inventories of V.F. Corporation have jumped 88% over the prior year. This has led the company to offer deep discounts in an effort to reduce its inventory to healthier levels and thus the operating margins of the company are pressured even more.

Given also the impact of inflation on the valuation of the entire stock market, the stock of V.F. Corporation has plunged to a nearly 10-year low level. The stock is currently trading at a nearly 10-year low price-to-earnings ratio of 15.5 and is offering a nearly 10-year high dividend yield of 6.6%.

Thanks to the exceptionally aggressive interest rate policy of the Fed, inflation is likely to revert to healthy levels in the upcoming years. The policy of the Fed has already begun to bear fruit, as inflation has subsided every single month since it peaked last summer. When inflation returns to normal levels, V.F. Corporation is likely to enjoy a strong recovery. Therefore, the stock is ideal for patient investors, who can ignore short-term headwinds and remain focused on the long run.
 

Farmers & Merchants Bancorp

Farmers & Merchants Bancorp is a community bank with 32 locations in California. The stock has a small market capitalization ($769 million) and low liquidity and thus it passes under the radar of most investors. This is a shame, as Farmers & Merchants Bank has paid uninterrupted dividends for 87 consecutive years and has raised its dividend for 57 consecutive years.

Farmers & Merchants Bancorp has a key competitive advantage, namely its exemplary management, which follows a conservative business model. Thanks to the discipline of its management, Farmers & Merchants Bancorp has proved one of the most resilient banks to recessions. In the Great Recession, the worst financial crisis of the last 90 years, most banks incurred severe losses but Farmers & Merchants Bancorp posted just a 9% decrease in its earnings per share and thus kept raising its dividend.

Notably, in the three decades leading to 2015, Farmers & Merchants Bancorp did not perform any acquisitions. However, the company has begun to pursue growth much more aggressively in the last seven years. It acquired Delta National Bancorp in 2016 and thus enhanced its store count by 4. Moreover, in 2018, it acquired the Bank of Rio Vista and thus expanded in the San Francisco East Bay Area. These acquisitions have accelerated growth.

During the last decade, Farmers & Merchants Bancorp has grown its earnings per share almost every year, at an impressive average annual rate of 12.4%. The combination of high growth and consistency are testaments to the strength of the business model of the company and its perfect execution. Given also the strong tailwind from rising interest rates, which will expand the net interest margin of the bank, Farmers & Merchants Bancorp is likely to continue growing its earnings for many more years. Overall, this small-cap bank offers a rare combination of consistent growth, low risk, and resilience to recessions.
 

Final Thoughts

The above three Dividend Kings have robust business models, which have proved robust even under the fiercest economic conditions. Thanks to their business moats and their attractive valuation levels, these stocks are likely to highly reward investors with a long-term perspective.

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