Written by Bob Ciura for Sure Dividend
The Dividend Aristocrats are a great place to look for stocks that are well-positioned to deliver exceptional long-term total returns. That is because Dividend Aristocrats by definition are companies that have delivered sustained and consistent profitability over a long period of time.
This means that their business models likely possess the traits of a long-term winning company that can not only survive, but thrive, through recessions, terrorist attacks, and global pandemics.
Furthermore, a streak of 25+ years of consecutive dividend growth means that management teams clearly prioritize shareholders by returning ever-growing amounts of capital to them. It also indicates that management are prudent capital allocators by balancing long-term growth and competitive positioning with the discipline of only investing in the very best opportunities in order to preserve an ever-growing amount of capital to return to shareholders each year.
In this article, we will share three of the most promising Dividend Aristocrats for 2023 from a total return perspective.
#1. 3M Company (MMM)
MMM has grown its dividend for over 60 consecutive years, making it a Dividend King in addition to a Dividend Aristocrat, and giving it one of the very longest dividend growth streaks in the world. It boasts a very diversified business model in which it manufactures approximately 60,000 products and sells them in roughly 200 countries.
Despite its vast portfolio of products and geographic markets, MMM maintains its competitive edge by concentrating its products in its core areas and sells them in each product’s most attractive markets. Given its immense scale, it is also able to invest more into research and development than many of its peers do, enabling it to create more innovative and higher quality products at a lower cost due to economies of scale and investments in the most advanced manufacturing technology.
Its four business segments are: Safety & Industrial (which produces tapes, abrasives, adhesives, personal protective gear, and supply chain management software), Health Care (which produces surgical and other medical supplies as well as drug delivery systems), Transportation & Electronics (which produces fibers and circuits to reduce the cost of using renewable energy sources), and Consumer (which produces office supplies, home improvement products, stationery supplies, and protective materials).
Moving forward, we expect MMM stock to deliver strong total returns from a combination of a 5% annualized earnings per share CAGR over the next half decade, its 5.3% current dividend yield, and 5.3% expected annualized valuation multiple expansion. As a result, we expect MMM to deliver 15.6% annualized total returns moving forward.
#2. V.F. Corporation (VFC)
V.F. Corporation owns a large portfolio of apparel, footwear and accessories businesses that gives it a leading global position in the apparel and fashion industry. With a dividend growth streak of 50 years, it is a Dividend King in addition to being a Dividend Aristocrat. As a result, investors can count on management to maintain growing its dividend per share each year as a top capital allocation priority.
That said, the company is suffering from severe headwinds stemming from input cost inflation and oversupply at its retail chains reducing its pricing power. Its Fiscal 2022 results were very strong, with $3.18 in earnings per share providing 1.6 times coverage of its $1.97 per share dividend. However, in Fiscal 2023 the tables have turned. Due to the aforementioned headwinds along with an expected economic downturn, VFC is now expected to see its earnings per share decline dramatically to $2.00 per share.
In spite of current challenges, we remain bullish on VFC’s long-term dividend growth and total return potential. Between its strong balance sheet and resilient profitability, we expect management to continue growing the dividend – albeit at a slower pace – through the current downturn. Additionally, given its proven track record of successfully executing and integrating accretive acquisitions, investing effectively in its core brands, and generating rapid growth via its direct-to-consumer e-commerce business, we remain very optimistic about its ability to grow earnings-per-share over time.
As a result, we expect VFC to grow its earnings per share at a 10% CAGR from this year’s lows over the next half decade. When combined with its 6.8% dividend yield and expected 4.2% annualized expansion of its valuation multiple over the next five years, we project VFC generating 21% annualized total returns over the next half decade.
#3. Albemarle Corporation (ALB)
ALB is a fairly recent addition to the Dividend Aristocrat club with 27 years of consecutive dividend per share growth. That said, as the world’s largest producer of lithium and its second-largest producer of bromine, we see a bright future ahead of the company and expect it to continue growing its dividend per share for many years to come.
Its three main business segments are Lithium & Advanced Materials, Bromine Specialties, and Catalysts and it benefits from market leading positions in each. Given that Lithium and Bromine have significant applications in the automotive, battery, and electronics industries (among many other applications), the company is seeing strong growth right now. Over the next half decade, we expect rapid expansion of demand for electric vehicles and batteries to drive growth in its businesses. As a result, we forecast a 7.5% earnings per share CAGR over the next half decade.
That said, as a materials producer, the company is still a cyclical business and is highly sensitive to changes in consumer demand. As a result, if we face a steep economic downturn, earnings per share performance may be quite choppy. This explains why management has elected to maintain a very low dividend payout ratio (expected to have come in at 8% in 2022), but also gives us strong confidence that the dividend growth streak will continue for years to come.
When you combine its 7.5% expected earnings per share CAGR with its current 0.6% dividend yield and expected annualized valuation multiple expansion of 5.8%, we project that ALB stock will generate 13.9% annualized total returns over the next half decade.
Dividend Aristocrats like MMM, VFC, and ALB have proven their mettle through thick and thin over the past quarter century and beyond. Given that we are facing considerable uncertainty in the global economy right now with many calling for a recession in the coming quarters, now could be a prudent time to allocate capital to undervalued businesses like those discussed in this article that show considerable potential to generate outsized long-term returns.