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15 Dividend Aristocrats You Can Buy at a Discount

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12.09.2020

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Finding reliable dividend growth stocks in 2020 – a year in which more than 60 S&P 500 companies have already cut their payouts – feels like a daunting task. Fortunately, investors can look to the Dividend Aristocrats.

The Dividend Aristocrats are an elite group including many of Wall Street's best dividend stocks that specialize in consistently rising cash distributions. To become an Aristocrat, a company must deliver at least 25 consecutive years of dividend hikes.

Dividends smooth out returns in times of volatility. They also contribute sizably to overall performance – dividends typically make up one-third of a stock's long-term total returns, according to Standard & Poor's. Those steady dividends and sturdy balance sheets make the Dividend Aristocrats less risky than non-dividend-paying stocks, and have helped drive long-term outperformance against the S&P 500.

But they're hardly impervious to market downturns. And because of the Aristocrats' lack of exposure to highflying stocks such as Amazon.com (AMZN), Netflix (NFLX) and Alphabet (GOOGL), the index has significantly underperformed in 2020.

The upshot, however, is that several Dividend Aristocrats trade at a discount right now. Read on as we examine 15 elite dividend growth stocks that are currently valued at discounts to their industry peers or their own historic valuations (or both).

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Carrier Global (CARR, $30.13) is the popular name behind heating, ventilation, air conditioning (HVAC) and refrigeration systems worldwide. However, Carrier also sells smoke and carbon monoxide detection devices and security systems.

It's also a relatively new standalone investment; Carrier went public in April 2020 via a spinoff from its former parent United Technologies as part of a merger with Raytheon that also created Raytheon Technologies (RTX) and Otis Worldwide (OTIS).

As a standalone business, Carrier was almost immediately hit with headwinds from the COVID pandemic. Sales declined 15% year-over-year during the first half of 2020, and adjusted earnings per share (EPS) dropped 44%. However, management notes orders began strengthening in June, which caused Carrier to slightly boost its 2020 outlook for sales, adjusted operating profits and free cash flow.

Over the long term, Carrier plans to build value for shareholders by trimming more than $600 million from annual costs via better supply chain management and capitalizing on mega-trends, which include rising demand for HVAC from China's growing middle class.

As part of United Technologies, which was a Dividend Aristocrat, Carrier has a 26-year track record of dividend growth. And in June, CARR announced its first standalone dividend, an 8-cent-per-share payout that was delivered in July.

CARR shares don't have much in the way of historical valuations to analyze, of course. But a forward-looking price-to-earnings of 20 is a mid-single-digit discount to its industrial sector peers.

Argus Research, which rates Carrier Global's stock at Buy, writes that "CARR shares appear attractively valued at current prices near $30." UBS (Buy) also notes that the company's fire and security business provides stability during uncertain times.

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Home improvement retailer Lowe's (LOW, $159.53) operates roughly 2,000 stores across the U.S. and Canada, serving more than 18 million customers each week. Ranked by revenues, the company is the nation's second largest home improvement chain behind chief rival Home Depot (HD).

Unlike some other Dividend Aristocrats, LOW stock has prospered during the pandemic, shooting 35% higher year-to-date as consumers spend more on home repair and maintenance. Lowe's comparable-store sales (revenues generated in stores that have been open at least 12 months) jumped 34% year-over-year during the June quarter, overall sales grew an astonishing 135% and adjusted EPS rose 74%. Management said sales momentum was continuing in August, which caused several analysts to raise their 2020 EPS estimates.

Lowes signaled strong confidence in future earnings by hiking its dividend 9.1% in August, to 55 cents per share – its 58th consecutive annual dividend hike.

In an August letter to investors, Bill Ackman's Pershing Square Capital Management highlighted Lowe's as one of its top stock picks. According to Pershing Square, Lowe's is benefiting from recent actions taken to improve competitive positioning and market share. These include improvements to merchandising to drive higher same-store sales, and investments in e-commerce platforms and supply chains to boost profit margins and EPS growth.

Pershing Square said it thinks LOW's shares are undervalued, which they seem to be, given a 19x forward P/E multiple that represents a 20% discount to competitor Home Depot.

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Health care giant Johnson & Johnson (JNJ, $149.70) is a global leader in pharmaceuticals, consumer health and medical devices. The company's portfolio includes 26 products that each generate more than $1 billion of annual sales. These include familiar consumer brands such as Listerine, Tylenol and Neutrogena, as well as prescription drugs Stelara, Xarelto and Imbruvica. More than 70% of JNJ's sales are derived from products that hold No. 1 or 2 market share worldwide.

This strong portfolio has helped the company generate 36 consecutive years of operating earnings growth and 58 years of uninterrupted dividend growth.

Johnson & Johnson's June-quarter sales dropped 11% year-over-year and adjusted EPS fell 35%, largely as a result of deferred medical procedures during the pandemic that impacted the medical devices segment. Despite this, the company tightened the range for full-year sales and adjusted EPS, and it provided guidance that exceeded most analyst estimates.

J&J recently agreed to pay $6.5 billion in cash for Momenta Pharmaceuticals, a developer of treatments for autoimmune diseases. The acquisition gives JNJ a key autoimmune disorder therapy and several drug candidates, each of which could achieve over $1 billion in peak sales.

"Strategically, if successful clinically with approval timelines holding, launches will come at a key time for JNJ when it starts to lose exclusivity in its Immunology franchise in the ~2024 timeframe from Stelara and Simponi," write UBS analysts, which rate the stock at Neutral but see 7% upside over the next 12 months.

The company also is a key player in the race for a COVID-19 vaccine and is expected to launch Phase 3 trials of its vaccine candidate in September. JNJ has 60,000 patients enrolled in these trials, which is twice the size of the trials of other vaccine developers.

Johnson & Johnson boasts an excellent balance sheet showing more than $19 billion of cash, and it has generated $19 billion in free cash flow over the trailing 12 months. Its 68% dividend payout ratio is fine, but not great, indicating a safe dividend, but one that has room for only modest payout growth over time.

Still, a forward P/E of less than 19 offers a nice 15% discount compared to JNJ's health care peers.

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