Industrials offer a good source of long-term dividend growth and supply a surprisingly large number of stocks with very long histories of raising dividends. In fact, 13 of the 65 Dividend Aristocrats — stocks that have raised their dividends for 25-plus consecutive years — come from the industrials sector.
Here are three industrial stocks that have raised their dividends for at least 25 consecutive years, and have the ability to produce long-term growth through the full economic cycle:
Stay Glued to 3M Co.
3M (MMM) has increased its dividend for over 60 years in a row. 3M sells more than 60,000 products that are used everyday in homes, hospitals, office buildings and schools around the world. It has about 95,000 employees and serves customers in more than 200 countries. From the second quarter of 2019, 3M is now composed of four separate divisions: Safety & Industrial, Healthcare, Transportation & Electronics, and Consumer.
Its long-term growth has also been supported by the company’s competitive advantages. 3M’s innovation is one of the company’s greatest competitive advantages. The company targets research and development spending equivalent to 6% of sales (around $2 billion annually) to create new products to meet consumer demand. This spending has proven to be beneficial to the company as 30% of sales during the last fiscal year were from products that didn’t exist five years ago. 3M’s commitment to developing innovative products has led to a portfolio of more than 100,000 patents.
3M reported second-quarter earnings results earlier this month, showing revenue decreased 2.8% to $8.7 billion, but was in-line with expectations. Adjusted EPS of $2.48 compared to $2.59 in the prior year, but was $0.04 above estimates.
Organic growth for the quarter was 1% for the quarter. Safety & Industrial had 0.7% organic growth as this segment continues to see gains in industrial adhesives and tapes, abrasives, and masking systems, though personal safety declined once again. Transportation & Electronics improved 0.5% as advanced materials, commercial solutions, and automotive original equipment manufacturers were higher for the quarter.
Transportation & Safety declined year-over-year. Health Care grew 4.4% due to strength in separation and purification sciences, health information systems, medical solutions, and oral care. Food safety revenue was flat, while Consumer declined by 2.5%. 3M said earlier in the week it will plan to spin off its health care business into a separate publicly traded company.
3M provided an updated outlook for 2022, with the company now expecting adjusted EPS of $10.30 to $10.80 for the year, down from $10.75 to $11.25 previously. Still, 3M should remain highly profitable even in the difficult economic environment. This is what has allowed 3M to increase its dividend for so many years. Shares currently yield 4.2%.
Tools for the Job: Stanley Black & Decker
Stanley Black & Decker (SWK) is a world leader in power tools, hand tools, and related items. The company holds the top global position in tools and storage sales. Stanley Black & Decker is second in the world in the areas of commercial electronic security and engineered fastening.
The company missed estimates for the second quarter. Revenue of $4.39 billion for the second quarter missed expectations by $350 million. Still, revenue grew 16% for the quarter. Adjusted EPS of $1.77 missed by $0.36 a share. Plus, the company lowered its full-year guidance, now expecting adjusted EPS in a range of $5.00-$6.00 for 2022.
Going forward, Stanley Black & Decker should be able to return to earnings growth. The company’s main competitive advantage is its global scale, which allows it to cut costs when the economy turns. Along with second-quarter financial results, the company announced a new global cost reduction initiative, which is expected to generate pre-tax savings of $1 billion by the end of 2023, and $2 billion within 3 years.
While recent results have disappointed investors, we believe the stock is now a compelling buy on valuation and dividends. As the share price has declined 48% year-to-date, investors now have the opportunity to buy this global leader for a price-to-earnings of 17.5 and a 3.4% dividend yield. The P/E is much lower than the stock’s average P/E over the past decade, while the dividend yield is near a 10-year high.
The dividend payout ratio is expected to be below 60% at the midpoint of the new guidance range. This indicates the dividend is safe, even with reduced guidance for this year. In the meantime, the company continues to raise the dividend each year, as it has done for over 50 consecutive years.
Meet Matthews International
Matthews International Corporation (MATW) provides brand services, memorialization products and industrial technologies on a global scale. The company’s three business segments are diversified. The SGK Brand Solutions segment is Matthews top sales generator and provides brand development services, printing equipment, creative design services, and embossing tools to the consumer-packaged goods and packaging industries. The Memorialization segment sells memorialization products, caskets, and cremation equipment to funeral home industries. The Industrial technologies segment is smaller than the other two businesses and designs, manufactures and distributes marking, coding and industrial automation technologies and solutions.
The company posted a double-beat for the second quarter. Revenue of $421.7 million beat expectations by $1.9 million, while adjusted EPS of $0.58 beat by two cents a share.
Going forward, Matthews International’s key EPS growth catalysts are acquisitions, and cost reductions. The company is searching for complementary acquisition opportunities, which can extend its capabilities in existing businesses or expand the corporation even further geographically. Matthews is targeting to achieve long-term annual return on invested capital of at least 12% on these acquisitions. Continued debt reductions will reduce interest expenses, and Matthews International is working on cost structure improvements. The company is also committed to repurchasing shares opportunistically with excess cash flow.
The dividend payout ratio for Matthews International has been very conservative and is expected to reach 29% for this year. This implies a very secure payout. The company has a competitive advantage in that it is uniquely diversified across its businesses, which allows it to weather different storms on a consolidated basis. Matthews International also differentiates itself by offering a broad range of services on a global scale where it can gain market share in a fragmented industry.
Matthews International has increased its dividend for 28 consecutive years, while the stock yields 3.1%. (Note: MATW is technically not on an Aristocrat, because it does not meet the minimum market cap requirement, but has increased its dividends for longer than a quarter century.)
Get an email alert each time I write an article for Real Money. Click the “+Follow” next to my byline to this article.