As schools start and Summer nears its end, the stock market usually enters a down period. August and September have typically been volatile and exhibit weak returns. So far, the year 2023 has not been an exception.
Instead of buying and selling, it makes sense to hold on to quality sticks with solid long-term prospects. To quote Charlie Munger of Berkshire Hathaway, “It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that.”
If we follow Mr. Munger’s advice, it makes sense to seek out mispriced equities or add to existing positions for the long term. Below are four of our favorite Dividend Contenders in August 2023.
4 Favorite Dividend Contenders in August 2023
UFP Industries (UFPI) is probably a company most people have not heard about. But it has a $6+ billion market capitalization and had $9.6 billion in sales in 2022. The company has a nearly 70-year history selling wood and other products to the housing industry. Today, the business operates in eight countries and reports four segments: UFP Retail Solutions, UFP Construction, UFP Packaging, and UFP International.
Historically, UFP Industries has grown organically and through many tuck-in acquisitions. It has recently purchased PalletOne, CedarPoly, and DWP. These three M&A actions are on top of ten other prior additions. The company’s priority for capital allocation is strategic acquisitions to contribute half its total annual sales growth.
The strategy is seemingly successful because sales have grown from $4,416 million in 2019 to $9,627 million in 2022. Likewise, net earnings and adjusted EBITDA have climbed. However, the company has not sacrificed fiscal discipline. The balance sheet is conservative, with a net cash position. Furthermore, the dividend has grown at a double-digit rate for the past decade and is supported by an ultra-low payout ratio of ~8.7%.
The share price has risen, but UFP Industries trades at a reasonable earnings multiple of about 12X. Investors may want to take a look at this equity.
Next on our list is Williams-Sonoma (WSM), the well-known specialty retailer of upscale indoor and outdoor home furnishings, cookware, and other products. The firm sells its products under the Williams-Sonoma, Pottery Barn, Pottery Barn Teen, Pottery Barn Kids, West Elm, Rejuvenation, and Mark and Graham brands. Total revenue was $8,674.4 million in 2022 and $8,538.6 million in the last twelve months.
Williams-Sonoma grows organically by adding to its store count and offering desirable, trendy items for sale. The formula has proven successful over time. Revenue has grown at ~7.9% CAGR, while earnings per share have climbed even faster at 20%+ CAGR in the past decade.
The firm has paid shareholders a growing dividend for the past 17 years. The forward dividend yield is ~2.74%, supported by a conservative payout ratio of only 18.4%. This low value should permit the continuation of the double-digit dividend growth rate. Moreover, dividend safety is high, with earnings and free cash flow (FCF) covering the payout.
The share price is down because of reduced spending after the pandemic. The forward price-to-earnings (P/E) ratio is only 9.7X, below the 10-year range. Investors may want to dip into this stock now.
Regions Financial (RF) is a large regional bank headquartered in Birmingham, Alabama. It is our third favorite stock of the Dividend Contenders in August 2023. The firm provides personal and corporate banking through three segments: Corporate Bank, Consumer Bank, and Wealth Management. Regions Financial operates over 1,250 branches and 2,000 ATMs in the South, Midwest, and Texas. Today, it is one of the biggest regional banks in the United States, with $99 billion in loans, $127 billion in deposits, and $156 billion in assets.
The bank continues to grow by adding deposits and making loans. Profitability is based on the net interest margin (NIM), the difference between the loan and deposit interest rates. Besides net interest income (NII), the firm charges fees, deriving non-interest income. The values typically fluctuate quarterly, but the bank has earned more over time.
In addition, a bank’s profitability depends on asset quality and capitalization. Regions Financial seemingly has typical asset quality from the perspective of net charge-offs, allowance for credit losses, and non-performing loans. In addition, the bank’s capitalization ratios are greater than the regulatory minimums.
Regions Financial has paid a growing dividend for 11 years. The forward dividend yield is 4.9%, supported by a 32.7% payout ratio. The firm has increased the dividend at a double-digit rate in the past five years. In addition, the dividend quality grade is solid at a ‘B+.’
The share price has been under pressure since this year because of the regional bank crisis. However, unlike some failed banks, Regions Financial has little exposure to start-ups and cryptocurrencies. The stock is owned by some banking ETFs and we view Regions Financial as a long-term buy.
The Hartford Financial Services Group
The Hartford Financial Services Group (HIG) is our fourth favorite equity of the Dividend Contenders in August 2023. The firm is a leader in property and casualty insurance, group benefits, and mutual funds operating in the United States and the United Kingdom. It has five business segments: Commercial Lines, Personal Lines, Property & Casualty, Group Benefits, and Hartford Funds. Total premium, annuity, interest, and dividend revenue was $22,356 million in 2022 and $23,577 million in the trailing twelve months.
Like most insurance companies, Hartford grows by writing more policies and collecting more premiums. Additionally, it invests the premiums in bonds and equities and collects interest and dividends. Also, the firm has a mutual and exchange traded fund (ETF) business where it collects fees. This business grows by adding assets under management (AUM).
Insurance companies must match liabilities to assets through solid underwriting to manage risk. Moreover, Hartford’s fund management business must perform well relative to the overall market. Generally, the company has performed well, growing the top and bottom lines since a low in 2017.
This success has translated to a 13-year streak of rising dividends. The forward dividend yield is ~2.4%, near the 5-year average. But the dividend is growing slightly more than 10% annually on average. The low payout ratio of approximately 21% and the ‘A+’ dividend quality grade provide confidence about the safety.
The share price has been flat for the year, and the P/E ratio is only 9.2X. We see the stock as slightly undervalued and a long-term buy.
A version of this post by Dividend Power originally appeared on Investor Place and was republished with permission.
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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.