Summary
- We discuss three choices for Dividend Kings in February 2023.
- These stocks have 50+ years of dividend growth and high dividend quality and safety scores.
- The three stocks are undervalued or fairly valued relative to their historical P/E ratios.
- The three stocks are Lowe's, Tennant, and National Fuel Gas.
In the recently published 2023 Dividend Kings List , the number increased by one to 40. If we add over-the-counter stocks, the total is now 42. Some investors ask what is unique about the Dividend Kings. The bottom line is they are prosperous companies that have increased their dividend for 50+ years. This achievement is a success measure because they must consistently increase revenue and earnings to raise the dividend over time. Next, once a company is on the Dividend Kings list, it rarely falls off.
Hence, this group of stocks is an excellent place to look for stocks the market is overlooking. We discuss three stocks with high dividend quality and reasonable valuation relative to the market. The stocks are Lowe's ( LOW ), Tennant ( TNC ), and National Fuel Gas ( NFG ).
Criteria for Selection
I initially employ three criteria in a screener to narrow the list down from 40 to three stocks. The bullets below outline what we require.
- At least 50 years of dividend growth for Dividend King status.
- A Dividend Quality Grade of B+ or higher.
- A price-to-earnings [P/E] ratio less than 20X, below the average for the S&P 500 Index.
These criteria result in 10 stocks. To further narrow the list to three, I add two more criteria.
- The stocks must be in different sectors.
- The three most undervalued stocks based on Blended Fair Value .
3 Dividend Kings for February 2023
Lowe’s Companies
My first pick is Lowe’s in the Consumer Discretionary sector. Lowe’s is a stock I have been tracking because of its high dividend growth rate and many years of growth. In addition, the company is No. 2 in the home improvement market, behind Home Depot ( HD ). But investors have sold the stock because of housing market challenges.
First, fears about a prolonged recession and high-interest rates caused homebuilder confidence to decline. In turn, they reduced homebuilding activity in 2022 compared to 2021. Next, high-interest rates have affected existing home sales for most of 2022, which are down from their peak.
But Lowe's beat fourth-quarter estimates and raised its outlook. Comparable sales for home improvement rose by 3.0%. Also, the retailer is growing its Pro sales at a double-digit pace. The CEO stated ,
“We delivered better-than-expected results this quarter, with U.S. comps up 3%, driven by Pro growth of 19% and improved DIY sales trends. Sales on Lowes.com grew 12%, on top of 25% growth last year.”
Lowe's followed the positive results by approving $15 billion in share buybacks. Moreover, the dividend growth rate is nearly 20% CAGR in the trailing 5-year and 10-years. Granted, the forward dividend yield is only 2%, but it is above the 5-year average of ~1.74%. Furthermore, the payout ratio is conservative at about 28%, meaning many future increases to the dividend.
The stock is undervalued, trading at a price-to-earnings ratio (P/E ratio) of ~15.1X, less than the 5-year range. We view Lowe’s as a buy now.
Tennant
The second choice is Tennant in the Industrials sector. This company is probably one of the least well-known Dividend Kings. Also, it is one of the smallest, with a market capitalization of only ~$1.3 billion. Tennant is the market leader in selling floor cleaning equipment and consumables. Besides manual systems, the firm is growing its autonomous floor cleaner sales in partnership with Brain Corp and their navigation software. Tennant has a significant deal with Walmart for these new floor cleaners, and has sold models to other end users.
That said, Tennant missed Q3 2022 results and lowered full-year guidance. The company is struggling with inflationary pressures and foreign currency fluctuations. The bottom line is high input costs and a strong dollar pressure sales, margins, and earnings. The company is trying to raise prices, but this response will take time. According to the CEO ,
“Macroeconomic headwinds, including foreign currency volatility, persisted during the quarter, and we anticipate this environment will continue to impact results. We continue to execute on various strategic actions and make targeted investments to overcome supply chain disruptions and address our backlog of approximately $280 million. While these actions will drive recovery in the long-term, our production is ramping more slowly than previously anticipated, and we are revising guidance accordingly.”
Tennant is yielding only ~1.5%, but this value is above its 5-year average of 1.33%. The dividend is supported by a modest payout ratio of roughly 30%, meaning the dividend safety is high, especially when combined with interest coverage of 16X and a leverage ratio of 1.6X.
This small company is undervalued based on a P/E ratio of roughly 18.2X, below the 5-year range. Moreover, the backlog is growing, suggesting high demand for its products. Accordingly, we view the stock as a buy now.
National Fuel Gas
This month, my third and last pick is National Fuel Gas in the Utility Sector. The company is vertically integrated, operating through four segments: Exploration and Production, Pipeline and Storage, Gathering, and Utility. The company may not be well-known to investors, but it has extensive operations in western New York and Pennsylvania.
Utility stocks have struggled as interest rates increased. As a result, their dividend yields become less competitive as investors can own relatively risk-free U.S. Treasury bonds with similar yields. That said, high natural gas prices led to solid fourth-quarter results. However, natural gas prices have recently declined, and the utility’s stock price has followed.
National Fuel Gas has several projects that should drive top and bottom-line growth over the next few years. It is developing the Marcellus and Utica shales, expanding the pipeline infrastructure in Appalachia, and improving safety and emissions.
The utility has a 3.27% dividend yield, slightly below the 5-year average. But the payout ratio is only 32%, low for a utility. This value provides confidence for dividend safety and future increases. Dividend growth is slow and steady at about 2% to 3% annually. The stock has paid a dividend for 100+ years , pointing to management's commitment.
National Fuel Gas is trading at a low earnings multiple of approximately 10.1X. The firm is projected to increase revenue and earnings over the next few years because of higher production. In addition, European demand for LNG should provide a tailwind for pricing. For these reasons, we think National Fuel Gas is a buy.
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3 Dividend Kings For February 2023