Talk of recession in 2022 has put the spotlight on companies with high-quality earnings and safe dividends. After all, companies with poor earnings quality, or unsustainable dividend payments, tend to cut or even eliminate their dividend payments during recessions. So, companies that have stood the test of time when it comes to dividend payments can be a great addition to your portfolio, and no group of stocks has more longevity than the Dividend Kings.
This is a group of companies that have each raised their dividends to shareholders for at least 50 consecutive years. That means they possess sustainable competitive advantages, management teams willing and able to return rising levels of capital to shareholders, and of course, the ability to weather recessions. In this article, we’ll take a look at three companies for investors looking for rising dividends in any economic environment.
Stanley Black & Decker
Our first stock is Stanley Black & Decker (NYSE: SWK), which is a tool and storage equipment maker based in the US. The company operates globally, selling tools and related products through its Tools & Storage, and Industrial segments. The company sells a wide variety of corded and cordless electric power tools and equipment, hand tools, fastening systems, pipe handling, joint welding equipment and much more.
Stanley Black & Decker was founded in 1843, and through a long history of mergers and acquisitions, has grown to $19 billion in annual revenue and a $16 billion market cap.
The company has produced a very respectable earnings-per-share growth rate of 8% annually in the past decade, owed to a combination of acquisitions and organic growth. Management occasionally buys back stock as well, but that’s a minor factor; Stanley Black & Decker has grown its earnings-per-share the old-fashioned way.
The company’s dividend increase streak stands at 54 years, which is outstanding for any company, but particularly one with inherent leverage to cyclical markets, such as construction. Certainly, part of the reason the dividend has been able to be raised for so long is that Stanley Black & Decker’s recession resistance is quite good. Enough of its business comes from replacement or upgrade cycles for professionals and DIY customers, and it has been able to absorb tough economic periods for decades.
Another reason the dividend has thrived in all kinds of conditions is that the payout ratio is just 32% on this year’s earnings. That means earnings could decline significantly without undue stress on the company’s ability to pay and raise the dividend.
Finally, the current yield is up to 3% today, following a lot of selling in 2022. That’s the highest yield the stock has had for more than a decade, so we see tremendous value in it for new buyers.
3M Company
Our next stock is 3M (NYSE: MMM), a diversified manufacturer of various products that operates globally. The company produces thousands of different products for a huge variety of uses, from safety equipment to industrial supplies, highway and vehicle safety products, health care consumables, stationery and much more. The company was founded in 1902, produces about $36 billion in annual revenue, and trades with a market cap of $73 billion.
3M is a mature company that operates in many end markets that have largely stable demand, but that hasn’t stopped it from producing nearly 6% earnings-per-share growth annually in the past ten years. The company has produced small measures of revenue growth – owed to those mature markets and products – but has worked to expand profit margins, as well as buy back a decent amount of stock.
3M’s dividend increase streak is at 64 years, meaning it has weathered several deep recessions while raising its dividend without incident. Stable revenue and margin profiles certainly help with this, and the payout ratio is just over 50% this year. So like Stanley Black & Decker, it would take an enormous decline in earnings to even threaten the dividend, but 3M is too diversified for that to be a real issue.
Finally, the stock has a huge 4.6% yield at the moment, owed to years of dividend increases, and heavy selling in 2022. This is the stock’s highest yield for over a decade as well.
Lowe’s Companies
Our final stock is Lowe’s Companies (NYSE: LOW), the ubiquitous operator of home improvement stores in the US. The company has about 2,000 big box format hardware stores that collectively generate about $98 billion in annual revenue. The company was founded in 1921 and has paid rising dividends consecutively since 1963.
Lowe’s has produced extraordinary earnings-per-share growth in the past decade, coming out of the Great Recession to ride a decade-plus boom in the construction and home improvement markets to an annualized gain of more than 22%. That sort of growth is obviously unsustainable, but somewhere around 6% is achievable.
We see these gains accruing from a combination of revenue growth and share repurchases, and to a lesser extent, margin expansion. Lowe’s has been extremely aggressive with share repurchases, which will see earnings-per-share higher irrespective of dollar-based earnings.
The company’s dividend is recession resistant despite the inherent cyclicality of the markets it serves primarily because of the very low payout ratio of just 24%. In addition, the company’s cash flow generation is very strong, so even if there is a temporary dip in earnings, Lowe’s has the balance sheet strength to raise the dividend without issue. The fact that Lowe’s dividend was able to survive the Great Recession – which was housing and construction driven – emphasizes the strength of this company as a potential investment.
The yield is just 1.8% today, but that’s still high by Lowe’s historical standards.
Final Thoughts
When investors are looking to invest their capital during tough economic times, dividend resilience and longevity come to the forefront. Not all dividend stocks are created equal, however, and we like the Dividend Kings as a great place to start finding recession-resilient dividends. Stanley Black & Decker, 3M, and Lowe’s all have extraordinary dividend increase streaks, favorable earnings growth profiles, and low payout ratios.
