Title: Three Dividend Champions at Nearly Peak Prices, Yet Still Worth Considering in December
Purchasing stocks when they're near their all-time highs might seem daunting. Our instincts warn us against overpaying. But in the stock market, sometimes it pays off to splurge on quality rather than hoard shares of underperforming companies. As the legendary investor Warren Buffett famously put it, "It's better to buy a wonderful company at a fair price than a fair company at a wonderful price."
Three such wonderful companies are Illinois Tool Works (ITW), Lowe's Companies (LOW), and Procter & Gamble (PG). Each of these Dividend Kings – companies that have annually increased their payouts for over 50 consecutive years – has a stellar track record of growth and rewarding shareholders.
Empire of Efficiency: Illinois Tool Works (ITW)
Illinois Tool Works, or ITW, is a stock you might not have heard of, but one that has delivered exceptional returns over the long term. Its business is divided into seven segments, with no segment accounting for more than 20% or less than 12% of total revenue in 2023. This diversity has allowed ITW to maintain an average operating margin of 25.1% across all segments, which is remarkably high for a company its size and complexity.
The secret to ITW's success lies in its unique business model. Management gives each segment the freedom to operate like an independent entity, empowering them to make product improvements based on client feedback. This decentralized approach has fueled sustained revenue growth and margin expansion. ITW has utilized its profits to boost its dividend and engage in regular stock buybacks, showcasing confidence in its brands.
Despite ITW's high P/E ratio of 24, this figure was inflated due to a divestiture gain from its recent quarter. Its forward P/E is 27.1, indicating a possible decline in earnings over the coming year. However, ITW's solid track record, high-quality business model, and potential for further margin expansion still make it an attractive buy for income-seeking investors.
Lowe's: The Home Improvement Heavyweight
Lowe's, one of the players in the home improvement market along with Home Depot, has been an outstanding investment over the past decade. In that time, Lowe's has nearly quadrupled its dividend and reduced its share count by 42%. And its stock price? It's blown away the S&P 500.
Lowe's has leveraged the nationwide demand for home improvement products and services during the housing market's steady growth since the 2008-2009 financial crisis. And here's the kicker: Through strategic share buybacks, Lowe's has managed to keep its valuation reasonable despite its impressive growth.
As of now, Lowe's dividend yields 1.7%, compared to 2.1% for Home Depot. But Lowe's is the better value, with a lower forward P/E ratio of 22.9 versus Home Depot's 28.3. Both Home Depot and Lowe's are currently experiencing weak growth due to a slowdown in consumer discretionary spending, higher interest rates, and a slump in home sales. However, Lowe's stock price could be poised for a rebound in the long term.
The Ultimate Safe Haven: Procter & Gamble
Procter & Gamble (PG) is a company that's virtually recession-proof. Unlike ITW and Lowe's, PG's end markets tend to be less cyclical, while Lowe's is highly dependent on macroeconomic conditions. But customers continue to purchase P&G's products, such as paper towels and laundry detergent, even in tough economic times due to their necessity.
Procter & Gamble's strategic focus on innovative products, an efficient supply chain, and pricing power gives it an advantage over its peers. The company regularly repurchases shares and has hiked its dividend for 68 straight years, making it a Dividend King.
PG's P/E ratio is significantly higher than its historical average, but its forward P/E is closer to median levels over the past three to 10 years. If P&G's earnings meet expectations, its valuation will be considered fair compared to historical averages. Investors looking for a reliable income stream with potential for moderate capital gains should consider PG, which offers a dividend yield of 2.3%.
Given the context of discussing high-performing companies with strong dividend histories, here are two sentences that contain the words 'finance', 'money', and 'investing':
Investors seeking opportunities in the finance sector might find attractive prospects in these Dividend Kings, as their financial performance and dividend histories suggest potential returns on investing in their shares. The strategic financial management of these companies, such as their share buybacks and dividend increases, has demonstrated their commitment to creating value for their shareholders.