Dividend Kings Analysis: 3M Is The Most Undervalued

Dividend Kings Analysis: 3M Is The Most Undervalued


In this article I analyze the 30 Dividend Kings, an exclusive group of stocks that have increased their dividend for 50+ consecutive years. The top five stocks in the ranking model in order are Commerce Bancshares (CBSH) [DP Score = 9.09], Target (TGT) [DP Score = 9.07], Stepan Company (SCL) [DP Score = 9.05], Hormel Foods (HRL) [DP Score = 9.04], and Cincinnati Financial (CINF) [DP Score = 9.03]. The highest yielding Dividend King at the moment is Altria (MO). The two gas utilities in the Dividend Kings, Northwest Natural Gas (NWN) and National Fuel Gas (NFG) have yields over 4%and may represent good value at this time. The most undervalued Dividend King from the perspective of earnings multiple is 3M Company (MMM). I view 3M as a buy at a stock price below $160 per share.

Dividend KingsSource: Pixabay


In these analyses I use nine criteria that permits rapid quantitative screening based on the dividend, earnings growth, dividend growth, dividend safety, and valuation. The nine criteria used in quantitative screening are:

  • History of increasing dividends
  • Dividend yield
  • 5-year EPS growth rate
  • 5-year dividend growth rate
  • 10-year dividend growth rate
  • Payout ratio
  • Long-term debt-to-equity ratio (D/E)
  • 5-year beta
  • P/E Ratio for trailing twelve months

The goal here is to identify stocks for further research not make buy or sell decisions. There are often qualitative factors for each stock that must be researched before making an investment decision. For instance, I also evaluate P/E ratio relative to past 5-years or 10-years and dividend-to-free cash flow ratio. Other qualitative factors can also include management history, recent M&A activity, cost cutting, etc.

Top 5 Dividend Kings In Each Criteria

The table below lists the 30 Dividend Kings in order of number of years of paying a growing dividend. These stocks come from a wide range of industries but there are quite a few industrial, consumer staples, and water utility stocks in the table. The green highlighted rectangles in each column list the five stocks that rank the best in that criteria. The red highlighted rectangles indicate negative growth rates. The yellow highlighted rectangles indicate that the data was not available or not applicable. For instance, Sysco (SYY) is reporting negative trailing earnings due to adverse effects of the coronavirus pandemic leading to a negative or undefined P/E ratio.

List of Dividend Kings

List of Dividend Kings

Source: Dividend Power based on data from Dividend Investing Research Center, Seeking Alpha, and Morningstar (as October 2, 2020)

The Dividend King that stand out in this table is Lowe’s Companies (LOW). Lowe’s has four criteria where it is the in the top 5: 5-year EPS growth rate, 5-year dividend growth rate, 10-year dividend growth rate, and payout ratio. The company has a 58-year history of consecutively raising the dividend. Two negatives are that the debt-to-equity ratio is high, and the stock is volatile with a high beta. Lowe’s is a decent company to hold at the right price. You can read the latest bullish analysis on Lowe’s.

Four companies rank in the top 5 for three criteria: Nordson (NDSN), Federal Realty Trust (FRT), Hormel, and Tootsie Roll (TR). Nordson has high dividend growth rates and a low payout ratio, but the yield is low, and the stock is overvalued at an earnings multiple over 30X at the moment. Federal Realty Trust is the only REIT on the Dividend Kings list. Currently, the yield is high, and the trailing 5-year EPS growth rate is high, and the relative valuation is low. Hormel is one of my favorite Dividend Kings. It is currently ranked highly for dividend growth rates and it is not a volatile stock, but the stock is trading at a high valuation. Lastly, we have Tootsie Roll, which is seemingly always overvalued, but the stock has a low payout ratio, little debt, and a negative beta.

Graphical Analysis of Yield Versus Other Criteria

In the following sets of graphs, I plot the dividend yield versus the other select criteria. The individual data points are labeled according to their yields and can be cross-referenced with the table above.

In the first graph I compare dividend yield versus 5-year EPS growth rate. The stock with the highest dividend yield combined with the highest EPS growth rate is Federal Realty Trust. It is yielding over 5% and the dividend growth rate is over 10%, which is a good combination. The stock with the highest yield is Altria at nearly 9%. But Altria is facing challenges and seemingly overpaid for its stake in Juul. I am personally avoiding Altria. There are two stocks with yields over 4%, which are Northwest National Gas (NWN) and National Fuel Gas (NFG). Many utilities are finally providing decent yields. Three stocks are yielding over 3%, which are 3M (MMM), Coca-Cola (KO), and Emerson Electric (EMR). I like 3M and think it’s a buy, especially at below $160 per share.

Dividend Yield vs 5-year EPS Growth RateSource: Dividend Power

In the second and third graphs I compare dividend yield versus 5-year dividend growth rate and also versus 10-year dividend growth rate. The two companies with the highest dividend growth rates over the past 5-years are Hormel and Lowe’s, and over the past 10-years are Lowe’s and Hormel. These two stocks have had consistently high dividend growth rates since I started these analyses of the Dividend Kings. In addition, Hormel, Nordson and Parker-Hannifin (PH) have had double-digit dividend growth rates over both time periods. This does not mean that they will in the future, but Dividend Kings tend to be consistent performers over time.

Dividend Yield vs 5-year Dividend Growth RateSource: Dividend Power

Dividend Yield vs 10-year Dividend Growth RateSource: Dividend Power

In the fourth graph I compare dividend yield versus D/E ratio as a measure of safety. Stocks with too much long-term debt may not raise the dividend significantly. In the worst case, the dividend may be frozen or cut due to high interest payments or principal payments. In general, D/E ratios of 2.0 or greater is considered to be too high. Most of the Dividend Kings are conservatively managed. Hence, their D/E ratios are relatively low. However, Coca-Cola, Lowe’s Colgate-Palmolive (CL), Altria, and Sysco all have D/E ratios greater than 2.0. Generally, this means that growth, dividends, or share repurchases are being financed with debt. One should take a deeper look at the risks of companies with high D/E ratios.

Dividend Yield vs DE RatioSource: Dividend Power

In the fifth graph I compare dividend yield versus dividend payout ratio as another measure of dividend safety. A stock with a high yield with a low payout ratio is a reasonably safe dividend. Ideally, a stock should be in top left corner of the graph. The list of stocks with a yield over 3% and simultaneously a payout ratio under 65% is usually small. Currently Emerson Electric is the only one that qualified. Several stocks have high or negative payout ratios due to the negative impact of COVID-19 on earnings. This list includes Genuine Parts (GPC), Lancaster Foods (LANC), ABM Industries (ABM), California Water Service (CWT), SJW, Altria, National Fuel Gas, and Sysco.

Dividend Yield vs Payout RatioSource: Dividend Power

In the last graph I compare dividend yield versus trailing P/E ratio as a measure of valuation. In this graph a stock would ideally be located toward the top left corner. I would like to buy stocks with good yields but low valuations and hold forever. After screening, one could compare a stock’s current valuation relative to the historical P/E multiple. The valuation of the Dividend Kings dropped during the pandemic, but stock prices have rebounded. At the moment, 3M is the Dividend King with the lowest valuation. The graph also shows that Federal Realty Trust and Northwest Natural Gas may be a good values at the moment.

Dividend Yield vs TTM PE RatioSource: Dividend Power

Dividend Power’s Ranking Model

In this section I present a scaled ranking model using the aforesaid nine criteria and weight each one according to their importance to me. The model tends to reward stocks with better dividend growth characteristics. But saying that, stocks with low dividend safety or high valuation multiples tend to rank low. Companies with good scores tend to have Dividend Power scores of 9.0 or greater indicating that they are performing well in all nine criteria.

The model also accounts for a stock’s criteria rising above or falling below a critical value. If a criterion is above or below the critical value, then that criterion would be zero. For example, I want stocks that have a payout ratio below 100% but sometimes the payout ratio goes above 100% due to a drop in EPS resulting from economic headwinds, e.g. COVID-19 pandemic, or company specific short-term issues. The model assigns a zero for that specific criteria for these stocks. It is not a sell signal, but the stock will rank low and thus it may not be suitable for adding to the position at that time. Similar logic applies to other criteria.

The top five stocks in the ranking model in order are Commerce Bancshares (CBSH) [DP Score = 9.09], Target (TGT) [DP Score = 9.07], Stepan Company (SCL) [DP Score = 9.05], Hormel Foods (HRL) [DP Score = 9.04], and Cincinnati Financial (CINF) [DP Score = 9.03].

The lowest ranked stock using my ranking methodology is Sysco [DP Score = 4.95] due to the negative 5-year EPS growth rate, high payout ratio, and negative trailing earnings. Note that Altria is the second lowest ranked stock [DP = 5.20]. I exclude Farmers & Merchants Bancorp (OTCQX:FMCB) due to the low volumes and low market capitalization.

This month I discuss 3M Company since it has the lowest valuation of all the Dividend Kings.

3M Company (NYSE:MMM)

3M was founded in 1902 in Minnesota. It is a well-known industrial conglomerate that is broadly diversified with four different business segments: Safety & Industrial, Transportation & Electronics, Healthcare, and Consumer. Major brands include Post-Its, N95 masks, Scotch tapes, Scotch-Brite sponges, ACE bandages, Scotchgard, Command hooks, Thinsulate, and Filtrete filters. The company makes over 60,000 products. Total revenue was $32,136 million in 2019.

3M has had a difficult two years. The company’s top and bottom lines were being adversely affected by the global slowdown in manufacturing, tariffs, and trade wars. In addition, the lawsuits related to PFAS were weighing down the stock price even before the COVID-19 pandemic. The pandemic essentially shutdown many customers reducing demand.

That said, 3M seems to have turned the corner. As I discussed in my earlier article 3M is reducing debt, redeploying capital, and end markets are recovering. This bodes well for future revenue and earnings numbers. Federal stimulus and remote working are driving sales of electronics, and cars. Healthcare demand has almost returned to pre-pandemic levels.

3M has OK dividend safety metrics at the moment based on depressed revenue and earnings. The forward payout ratio is 71% based on a dividend of $5.88 and consensus 2020 earnings of $8.28 per share. Free cash flow of $1,526 million in the most recent quarter covers the quarterly dividend of ~$846 million. Net debt is down about $1.5 billion from end of 2019 and the leverage ratio is now ~2X.

Final Thoughts on The Dividend Kings

The top 5 of my ranking models is a place to start further research. That said, I think the best deal from the perspective of yield and valuation are 3M and Northwest National Gas. The yields are high and the valuations reasonable compared to that of the S&P 500. Investors may also want to take a look at Federal Realty Trust if they are interested in a REIT.

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Disclosure: I am/we are long MMM, KO, CL, HRL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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