Investors looking for value and income should consider owning shares of companies trading at reasonable valuations and have a track record of raising dividends over long periods of time.
One group that is especially attractive are the Dividend Champions, which are those companies with at least 25 consecutive years of dividend growth. These companies have managed to raise dividends through multiple economic cycles, demonstrating their ability to withstand downturns.
As of Wednesday, the following Dividend Champions have a price-earnings ratio without non-recurring items below 16, are trading a discount to their intrinsic value, have raised dividends for at least 25 consecutive years and offer a market-beating yield of at least 2.6%.
Leggett & Platt
First up is Leggett & Platt, Inc. (LEG, Financial), which manufactures a variety of products, including bedding components, custom tooling, displays, furniture and store fixtures. In total, the company has 14 business units. Leggett & Platt has a market capitalization of $4.7 billion and generates annual revenue of just over $5 billion.
2022 has been a challenging year for the market, but Leggett & Platt has outperformed the S&P 500 so far this year.
Shares of the company are down almost 15% year to date, but have held up better than the 20.5% decline in the market index.
The plus side of the decline is that the stock is now trading at a much more reasonable valuation. Leggett & Platt is trading with a price-earnings ratio without NRI of 12, which is well-below the 10-year average of 18.
The GF Value chart shows that Leggett & Platt is trading at a significant discount to its intrinsic value.
Leggett & Platt recently traded at $35.11. With a GF Value of $50.01, shares have a price-to-GF Value of 0.70. This implies a potential return of more than 42% from current levels.
This potential return does not include the company’s dividend. Leggett & Platt has raised its dividend for 51 consecutive years, earning the company the title of Dividend King. The dividend has a compound annual growth rate of 4.3% since 2012. Shares yield 5%, a favorable figure compared to the 1.6% average yield for the S&P 500. Total returns could be in the mid-40% range when including the stock’s dividend. Leggett & Platt is rated as significantly undervalued.
Polaris
Next up is Polaris Inc. (PII, Financial), a leading provider of recreational vehicles. The company’s product portfolio includes all-terrain vehicles, boats, motorcycles and snowmobiles. The company also provides replacement parts and related accessories through its U.S. dealers. Brands include the namesake Polaris, Ranger, Sportsman and TransAmerica Auto Parts. Polaris is valued at $5.8 billion and had sales in excess of $8 billion in 2021.
Polaris has done quite well relative to the S&P 500.
Shares of Polaris have fallen less than 8% since the start of 2022, compared to the double-digit decline in the index. This reflects the strength of the company as it operates in a niche industry that is more reliant on discretionary spending. Investors appear to believe the company will continue to appeal even as inflation remains high and interest rates rise.
Polaris is trading at 14.8 times price-earnings without NRI. The current multiple compares well to the stock’s average price-earnings ratio of nearly 18 over the last decade.
Polaris’ stock is considerably below its intrinsic value according to the GF Value chart.
Shares are trading at $96.81. GuruFocus estimates the stock’s GF Value at $124.02, giving Polaris a price-to-GF Value of 0.78. Achieving the GF Value level would result in a return of 28%.
The dividend could push total potential returns into the low 30% range. Polaris has increased its dividend for 26 consecutive years. The dividend has a CAGR of 6.1% since 2012. This Dividend Champion yields 2.6%, above its long-term average of 2.1%. Shares are rated as modestly undervalued.
Sonoco Products
The final stock for consideration is Sonoco Products Co. (SON, Financial). In business for more than 120 years, Sonoco Products has earned the reputation as a leading supplier of packaging and industrial products. The company’s product lineup includes paper-based tubes, flexible packaging, point-of-purchase displays and rigid plastic containers. Sonoco Products has a market capitalization of $5 billion and generates annual revenue of $5.6 billion.
As with the other names discussed here, Sonoco Products’ performance versus the market index has been strong.
With a 10% decline in the stock price, Sonoco Products has experienced half of the decline of the S&P 500 thus far in 2022.
Sonoco Products is trading with a price-earnings with NRI ratio of 9.9, which compares very favorably to the stock’s 10-year average of nearly 17.
The stock looks to have strong upside potential according to the GF Value chart.
Using the current share price of $52.51 and the GF Value of $71.15, Sonoco Products has a price-to-GF Value of 0.74. Share price returns could be 35.5% if the stock were to reach its GF Value.
Sonoco Products has increased its dividend for 40 years. The last decade has seen a CAGR of 4.7% for the company’s dividend. The stock yields 3.8%, which is more than twice the average yield of the S&P 500 and Sonoco Products’ average yield of 3.1% for the last 10 years. Total returns could be in the high 30% range inclusive of the dividend. Shares have not been this undervalued since the worst of the Covid-19 pandmeic.
Final thoughts
Leggett & Platt, Polaris and Sonoco Products are three Dividend Champions names trading at reasonable valuations that also happen to offer higher-than-usual yields.
Though all three stocks are down year to date, each name discussed has outperformed relative to the S&P 500 index. This is due to each company’s leadership position in its industry coupled with their exemplary dividend growth histories. These characteristics appear to matter to investors, which is why each stock has held up better than the broad market.
Each stock trades at a sizeable discount to its respective intrinsic value, suggesting that Leggett & Platt, Polaris and Sonoco Products could provide outsized returns for investors buying today.
