Twenty-five consecutive years of dividend growth and economic moats work in these undervalued stocks’ favor.
00:00 Introduction
01:02 Chevron CVX
01:37 Becton Dickinson BDX
Susan Dziubinski: I’m Susan Dziubinski with Morningstar. Companies that have raised their dividends for 25 years or longer are often referred to as dividend aristocrats. Dividend aristocrats are popular with some investors because they believe that companies with a history of dividend growth will be able to continue to grow their dividends in the future. Plus, dividend aristocrats are mature companies run by management teams that prioritize dividends in their capital structures.
But dividend aristocrats can stop increasing their dividends—or worse, cut them. So, how can investors stack the deck in their favor and find dividend aristocrats that are likely to continue to increase their payouts over time? Morningstar research has found that dividend aristocrats with economic moats are less likely to cut their dividends. And what’s an economic moat? An economic moat measures how likely a company is to remain competitive for a decade or more.
Today, we’re looking at two dividend aristocrats with economic moats whose stocks are also undervalued. These stocks look like buys today.
Our first dividend aristocrat to buy is Chevron. Chevron is the second-largest oil company in the United States, and we think the company has carved out a narrow economic moat based on the quality of its upstream portfolio. Although Chevron’s business has a high amount of operating leverage as well as revenue cyclicality, management typically operates with relatively low levels of debt to retain flexibility in times of market weakness. Morningstar calls Chevron’s dividend levels “appropriate” and thinks there’s room for growth. We think Chevron stock is worth $176 per share.
Our next dividend aristocrat to buy is Becton Dickinson. BD is the world’s largest manufacturer and distributor of medical surgical products, such as needles, syringes, and sharps-disposal units. The company generates strong free cash flow to fund its dividend. Morningstar thinks BD has carved out a narrow economic moat: Even though its products are commoditylike, the company’s reputation and scale assure a safe supply, which leads to long-term relationships with clients. This dividend aristocrat looks attractive, trading well below our fair value estimate of $325.
For more dividend stock ideas, be sure to subscribe to Morningstar’s channel and visit Morningstar.com.
Morningstar directors Allen Good and Alex Morozov provided the research behind this segment.
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