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Dividend Kings are the stocks that have raised their dividends for at least 50 consecutive years. As it is extremely difficult to achieve such a long dividend growth streak, it is obvious that Dividend Kings have rock-solid business models, with significant competitive advantages and resilience to recessions. Therefore, Dividend Kings are ideal candidates for the portfolios of income-oriented investors. In this article, we will discuss the prospects of the three most attractive Dividend Kings right now, namely 3M (MMM), Stanley Black & Decker (SWK) and Tennant Company (TNC).

3M

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.

The most significant competitive advantage of 3M is its innovation. The company spends approximately 6% of its revenues ($2 billion) on R&D expenses every year in order to create new products, which will attract the interest of consumers. This strategy has certainly born fruit, as 3M has built a portfolio of more than 100,000 patents. It is also impressive that 30% of the sales of the company last year came from products that did not exist five years ago.

As 3M is an industrial manufacturer, most investors would expect the company to be cyclical and vulnerable to recessions. However, this is far from true. 3M has proved resilient throughout the coronavirus crisis, partly thanks to the strong sales of respiratory devices. Its earnings per share dipped only 4% in 2020 and rebounded strongly in 2021, up 16%, to a new all-time high. 3M also proved resilient during the Great Recession.

Moreover, 3M has an exceptional performance record, as it has grown its earnings per share with remarkable consistency. During the last decade, the company has grown its earnings per share almost every year, at a 5.4% average annual rate. Like numerous other companies, 3M is currently facing a strong headwind due to a steep increase in cost inflation. Nevertheless, management has provided guidance for earnings per share of $10.75-$11.25 this year. At the mid-point, this guidance implies 9% growth, to a new all-time high.

Thanks to its admirable earnings growth record, 3M has paid a dividend for more than 100 consecutive years and has grown its dividend for 64 consecutive years. This is an extremely rare accomplishment, as only 7 other companies have achieved such a long dividend growth record.

3M is currently offering a 3.9% dividend yield, which is nearly triple the 1.4% dividend yield of the S&P 500. In addition, 3M has a solid payout ratio of 54% and a healthy balance sheet, as its net debt of $22.6 billion is only 27% of the market capitalization of the stock and less than four times its annual earnings. As a result, 3M will easily continue raising its dividend for many more years.

The only point of concern for 3M is a long series of lawsuits related to an issue with Combat Arms earplugs. Morgan Stanley has stated that it expects 3M to pay approximately $14 billion for these lawsuits in the base scenario. The best-case scenario includes only $2 billion of payments whereas the worst-case scenario includes up to $53 billion of payments. Notably the stock of 3M has shed 26% in the last 12 months, partly due to this pending issue. If the company finally pays an amount close to the base scenario, it will probably handle it easily thanks to its strong balance sheet and its excessive free cash flows.

Stanley Black & Decker

Stanley Black & Decker is a world leader in power tools, hand tools and related items. The company holds the top global position in tools and storage sales, while it is the second-largest in the world in the areas of commercial electronic security and engineered fastening.

The key competitive advantage of Stanley Black & Decker is the exceptional reputation of its products. It is remarkable that the brand name of some of its products is used by consumers as a generic name. Thanks to its brand strength, the company has been able to raise prices in certain product categories without incurring a decline in sales.

Stanley Black & Decker has also been very active in pursuing growth via strategic acquisitions. For instance, it acquired Craftsman Brand in 2017 and thus it has achieved organic growth in North America in every single quarter since the acquisition, with the exception of the first two quarters in 2020 due to the pandemic.

Stanley Black & Decker has an exceptional performance record, as it has grown its earnings per share every single year over the last decade. During this period, the company has grown its bottom line at a 10.2% average annual rate. Due to multi-decade high cost inflation, Stanley Black & Decker expects to incur an approximate 10% decrease in its earnings per share this year. However, we view cost inflation as a temporary headwind and expect the company to return to its reliable growth trajectory next year.

Stanley Black & Decker has raised its dividend for 54 consecutive years. The stock is currently offering a 2.6% dividend yield, which may seem uninspiring on the surface, but there is ample room for future growth. The stock has a payout ratio of only 32%, a solid balance sheet and promising growth prospects. As a result, it is likely to continue raising its dividend at a mid-single-digit rate for many more years.

Tennant Company

Tennant Company is a machinery company that produces cleaning products and offers cleaning solutions to its customers. It is the market leader in the U.S., but it also sells its products in more than 100 countries around the globe.

As Tennant is the leader in its business in the domestic market, it enjoys some material competitive advantages. It enjoys great economics of scale and a superior sales network when compared to its peers.

On the other hand, Tennant has proved less resilient to recessions than most Dividend Kings. While it remained profitable during the Great Recession, it incurred a steep decrease in its earnings per share. It also incurred a 23% decrease in its bottom line in 2020 due to the coronavirus crisis.

Moreover, Tennant has exhibited a more volatile performance record than most Dividend Kings. During the last decade, the company has more than doubled its earnings per share but with much less consistency than 3M and Stanley Black & Decker. Nevertheless, Tennant has decent growth prospects ahead.

Tennant pursues growth inorganically, especially in the Asia/Pacific region, where it benefits from above-average market growth rates. The takeover of Chinese cleaning equipment company Gaomei has improved the growth potential of Tennant in the Chinese market, as well as in other Asian markets, over the next couple of years. Moreover, as the pandemic has begun to subside, Tennant has begun to recover strongly. It posted all-time high earnings per share of $4.39 in 2021 and has provided guidance for earnings per share of $4.40-$5.00 in 2022, implying 7% growth at the mid-point, to a new all-time high.

Tennant has raised its dividend for 50 consecutive years, but it is offering a dividend yield of only 1.6%. The company has a payout ratio of only 21% and hence there is ample room for meaningful dividend hikes. However, Tennant has proved that it prefers to raise its dividend at a slow pace in order to maintain a rock-solid balance sheet and thus have funds available for acquisitions. Consequently, income-oriented investors should not purchase this stock for its dividend, but for its promising growth potential.

Final Thoughts

The S&P 500 has shed 15% this year, mostly due to the surge of inflation to a 40-year high and fears of an upcoming recession due to the aggressive interest rate hikes of the Fed. During such tumultuous periods, many investors panic. The aforementioned Dividend Kings offer a safe haven to investors. Thanks to their resilient business models, their exceptional dividend growth records and their attractive valuation levels, these three stocks are likely to highly reward those who purchase them around their current prices.