The Top 3 Dividend Aristocrats for 2023

Dividend Aristocrats are stocks that have grown their dividends for at least 25 consecutive years.

Most of these companies have achieved such long dividend growth streaks thanks to their strong business models, which are characterized by a meaningful business moat and resilience to recessions. If these companies did not possess these characteristics, they would not have grown their dividends for decades.

The following three Dividend Aristocrats are excellent considerations for 2023.

You Could Have Had a V.F.

V.F. Corp.  (VFC) was founded in 1899 and has become one of the largest apparel, footwear and accessories companies in the world. Its brands include The North Face, Vans, Timberland and Dickies.

V.F. Corp., which is my top pick for 2023, enjoys strong pricing power thanks to popularity of its premium brands. In addition, thanks to the strength of its brands, the company has proved resilient to recessions.

In the Great Recession, while other retailers saw their earnings collapse, V.F. Corp. posted just a 9% decrease in its earnings per share. In addition, it took only one year to the company to recover from that crisis and post record earnings.

Thanks to its strong brands and its resilience to recessions, V.F. Corp. has become a Dividend King, with 50 consecutive years of dividend growth. There are only 41 companies which have achieved such a long dividend growth streak.

Unfortunately, V.F. Corp. is currently facing a perfect storm due to the double impact of 40-year high inflation on the stock. First of all, high inflation has greatly increased the cost of raw materials, the freight costs and the labor costs of the company. As a result, it has compressed the operating margins of the retailer.

Moreover, the surge of inflation has greatly reduced the real purchasing power of consumers and thus it has led them to tighten their wallets. Due to reduced consumer spending, the inventories of V.F. Corp. have increased enormously. Consequently, the company has resorted to deep discounts in order to reduce its inventory levels.

The impact of inflation on V.F. Corp. was prominent in the latest earnings report of the retailer. In the second quarter of its fiscal year, the company incurred a 4% decrease in its revenue and a sharp contraction in its operating margin, to 12.3% from 16.7%, due to high cost inflation, great discounts offered to customers amid high inventories and lockdowns in China. As a result, V.F. Corp. reported a 24% decrease in its adjusted EPS over the prior year’s quarter.

Notably, the inventories of V.F. Corp. jumped 88% over the prior year’s quarter due to the impact of excessive inflation on consumer spending as well as some supply-chain issues. The company is doing its best to reduce inventories, by pushing forward purchases where possible and by offering attractive discounts in order to enhance consumer purchases. Nevertheless, we expect high inventories to continue to weigh on the margins of the company until inflation subsides.

On the bright side, V.F. Corp. has a rock-solid balance sheet, with a negligible amount of debt, and hence it can easily endure the ongoing downturn. In addition, the Fed has clearly prioritized restoring inflation to its long-term target of 2%. Thanks to its aggressive interest rate hikes, the Fed is likely to achieve its goal sooner or later. When that happens, V.F. Corp. is likely to highly reward investors.

The stock is currently trading at a nearly 10-year low price-to-earnings ratio of 15.0, which is much lower than its 10-year average P/E ratio of 21.5. In addition, the stock is currently offering a nearly 10-year high dividend yield of 6.9%. Its payout ratio has temporarily spiked to 102% but it is likely to revert to sustainable levels in the upcoming years, as the company is likely to begin to recover.

Thanks to its pristine balance sheet and its commitment to keep raising its dividend, albeit at a slow pace, V.F. Corp. is likely to defend its dividend. Given also its exceptionally cheap valuation, it is likely to offer excessive returns to those who purchase it around its depressed stock price.

Stick With This Aristocrat

3M Co.  (MMM) sells more than 60,000 products, which are used every day in homes, hospitals, office buildings and schools around the world. The industrial manufacturer has presence in more than 200 countries.

3M enjoys a wide business moat thanks to its exemplary department of Research & Development (R&D). It has consistently remained focused on its commitment to spend 5%-6% of total revenues (nearly $2 billion per year) on R&D in order to create new products and thus meet ever-evolving consumer needs.

This strategy has certainly born fruit, as nearly one-third of the revenues of 3M in the last fiscal year came from products that did not exist five years ago. The unique R&D department of 3M has resulted in a portfolio of more than 100,000 patents.

Just like most companies, 3M is currently facing a headwind due to high cost inflation. However, thanks to its dominant business position, the company has strong pricing power. As a result, it has been able to pass its increased costs to its customers via material price hikes. This is clearly reflected in the business performance of 3M, as the company is expected to post nearly all-time high earnings per share for 2022.

While 3M has proved resilient to the highly inflationary environment prevailing right now, it is currently facing another major threat, namely numerous pending lawsuits. There are nearly 300,000 claims that its earplugs, which were used by U.S. combat troops and were manufactured by Aearo Technologies, a subsidiary of 3M, were defective.

The subsidiary of 3M filed for bankruptcy but a U.S. judge ruled that this bankruptcy would not prevent lawsuits from burdening 3M. As a result, no one can predict the final amount of liabilities that 3M will have to pay to its plaintiffs.

On the other hand, 3M has achieved one of the longest dividend growth streaks in the investing universe, with 64 consecutive years of dividend growth. It has achieved such a long dividend growth streak thanks to its wide business moat and its resilience to recessions.

Moreover, due to the aforementioned threat from the numerous lawsuits, the stock has plunged to a nearly nine-year low level. As a result, it is currently offering a nearly 10-year high dividend yield of 4.7%.

Notably, 3M has a rock-solid balance sheet, with an interest coverage ratio of 12.1 and net debt to market cap of only 32%. Given also its healthy payout ratio of 58% and its reliable business performance, 3M is likely to continue raising its dividend for many more years.

Not Your Typical Commodity Producer

Albemarle (ALB) is the largest producer of lithium and the second-largest producer of bromine in the world. The two products account for about 75% of the sales of the company.

Albemarle produces lithium from its salt brine deposits in the U.S. and Chile as well as from two joint ventures in Australia. The assets in Chile are characterized by exceptionally low production cost of lithium.

Albemarle has exhibited a highly volatile performance record, with a decline in its EPS in four of the last nine years. This is natural for a commodity producer, given the dramatic swings of commodity prices.

During the last decade, Albemarle has grown its EPS at an average annual rate of only 1.7%. Moreover, the company has proved vulnerable to recessions, as commodity prices tend to plunge during adverse economic periods.

On the other hand, Albemarle is not a typical commodity producer. The company has an exceptionally strong growth catalyst in place thanks to the exponential growth of electric vehicles. Lithium is a major component of electric vehicles.

Thanks to the immense growth of the sales of electric vehicles, the price of lithium has skyrocketed to an all-time high and hence Albemarle is thriving, with record EPS. The company is expected to report a more than five-fold increase in its EPS for 2022, from $4.05 in 2021 to an all-time high of about $20.75. To provide a perspective, the previous 10-year high profit per share of Albemarle was $6.04, in 2019.

Even better, the sales of electric vehicles are expected to continue growing at a fast pace for several years. This trend will provide a strong tailwind to the business of Albemarle.

Moreover, Albemarle is currently trading at a 10-year low price-to-earnings ratio of 10.7, which is much lower than the 10-year average P/E ratio of 13.7 of the stock. Thanks to its cheap valuation and its promising growth prospects, Albemarle is likely to highly reward investors in the upcoming years.

Final Thoughts

V.F. Corporation and 3M have become exceptionally cheap due to the headwinds facing their businesses. We expect these high-quality Dividend Aristocrats to recover from the current downturn and highly reward investors with a long-term perspective. However, the stocks are suitable only for patient investors, who can ignore stock price volatility for an extended period.

Albemarle is highly attractive as well, but for a different reason, as the company is thriving thanks to the secular growth of electric vehicles. Nevertheless, as a commodity producer, Albemarle is highly cyclical and hence it is not a buy-and-hold-forever stock. Whenever it reverts towards its historical average valuation level, investors should consider taking their profits on the stock.