Dividend Kings are the stocks that have grown their dividends for at least 50 consecutive years. Only 45 stocks have achieved such long dividend growth streaks. These best-of-breed companies usually have a strong business model, with significant competitive advantages and resilience to recessions. Otherwise, they would not have been able to maintain such long dividend growth records. Some of these stocks are great candidates for the portfolios of income-oriented investors, especially in the turbulent investing environment prevailing right now, with the S&P 500 going through a bear market. In this article, we will discuss the prospects of three high-quality Dividend Kings, which are attractively valued right now.

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Parker-Hannifin (PH)

Parker-Hannifin is a diversified industrial manufacturer that specializes in motion and control technologies. It manufactures components that are relatively obscure but absolutely critical to the operations of heavy machinery, factory equipment and aircrafts. As a result, the company operates in a highly profitable niche and enjoys a wide business moat. It also benefits from great economies of scale thanks to its immense global distribution network.

The strength of the business model of Parker-Hannifin is clearly reflected in its exceptional dividend record. The company has offered a dividend for 71 years and has raised its dividend for 66 consecutive years. It is also remarkable that management recently raised the dividend by 29% but the payout ratio remained solid, at 28%. As a result, Parker-Hannifin has ample room to continue raising its dividend for many more years. The only caveat is the lackluster dividend yield of 1.9% but it is critical to realize that the low yield results from management’s preference to reinvest earnings in the business, which has promising growth prospects.

Parker-Hannifin enjoys markedly strong business momentum. In the most recent quarter, the company grew its revenues by 6% over the prior year’s quarter and its adjusted earnings per share by 18%, from $4.38 to $5.16, thanks to strong demand in most markets, which more than offset the headwind of cost inflation. Parker-Hannifin exceeded analysts’ consensus by an impressive $0.46 and posted record sales and earnings per share. Notably, it has exceeded the analysts’ earnings-per-share estimates for 20 consecutive quarters.

Moreover, Parker-Hannifin has promising growth prospects ahead. It has essentially tripled its earnings per share over the last decade and is now in the process of acquiring 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 25% of the market capitalization of Parker-Hannifin, the acquisition will obviously be a major growth driver for Parker-Hannifin in the upcoming years. The acquisition is expected to close in the running quarter.

Lowe’s Companies (LOW)

Lowe’s Companies is the second-largest home improvement retailer in the U.S., after Home Depot. The company operates or services approximately 2,200 home improvement and hardware stores in the U.S. and Canada.

Lowe’s enjoys strong brand power and great economies of scale. More importantly, it operates in an essential duopoly with Home Depot. Neither of the two are expanding their store count significantly and neither is interested in a price war. As a result, they both enjoy a wide business moat, with exceptionally high profit margins.

The merits of operating in a duopoly are reflected in the outstanding performance record of Lowe’s. The company has grown its earnings per share meaningfully every single year during the last decade, at a 24% average annual growth rate, which is nothing short of impressive. This exceptional growth record has resulted from strong same-store sales growth, expansion of margins and aggressive share repurchases.

Notably, business momentum has accelerated since the onset of the coronavirus crisis thanks to the shift of focus of consumers on improving their home and the unprecedented fiscal stimulus packages offered by the government in response to the pandemic. As a result, while many retailers were severely hurt by the lockdowns imposed in 2020, Lowe’s grew its earnings per share by 54% in 2020 and by another 36% in 2021. Of course, the company cannot keep growing at such a breathtaking pace but it is still expected to grow its bottom line by another 11% this year.

Moreover, the stock is currently trading at a nearly 10-year low price-to-earnings ratio of 15.4, which is much lower than the 5-year average of 19.5 of the stock. The cheap valuation of the stock has resulted primarily from the effect of inflation on the valuation of growth stocks and fears of an upcoming recession. We view these headwinds as temporary and expect the stock to highly reward those who purchase it around its current price.

Dover Corporation (DOV)

Dover Corporation is a diversified global industrial manufacturer, with annual revenues of more than $8 billion. Its key competitive advantage is its focus on niche industries. Dover offers highly engineered products, which are essential to its customers and thus provide the company with strong pricing power.

Dover is much more cyclical and vulnerable to recessions than Parker-Hannifin and Lowe’s. In the Great Recession, Dover incurred a 45% plunge of its earnings per share. Therefore, the stock is not suitable for investors who cannot tolerate high volatility in business performance and stock price.

On the other hand, Dover has exhibited a decent performance record. It has grown its earnings per share at a 6.0% average annual rate over the last decade. It also has promising growth prospects ahead, primarily thanks to positive momentum in the demand for its engineered products. We expect the company to grow its earnings per share by about 8% per year on average over the next five years.

Moreover, the stock is currently trading at a nearly 10-year low price-to-earnings ratio of 15.2, mostly due to fears that the aggressive interest rate hikes of the Fed may cause a recession. While an economic slowdown seems inevitable at the moment, we consider this headwind as temporary and expect the earnings multiple of Dover to expand whenever the economy recovers. As a result, the stock is likely to offer a double reward to those who purchase it around its current price; higher earnings and a greater price-to-earnings ratio.

Final Thoughts

As the S&P 500 has entered into bear market territory this year, many investors are wondering how they should adjust their portfolios. The above three Dividend Kings have strong business models and enjoy significant competitive advantages. As they also trade at attractive valuation levels, they are likely to highly reward the investors who purchase them around their current stock prices.

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