Predicting the future in investing is impossible, but companies with strong business models have a higher potential to outperform those without significant competitive advantages. I like to look for companies that consistently deliver dividend increases as well, as dividend growth often indicates a solid business model and a committment to shareholder returns. The downside of such a quality-focused strategy is that such stocks aren’t often on sale.
In this article, we will examine two potential opportunities I found using the GuruFocus All-in-One Screener, a Premium feature, that meet the following criteria:
- A projected future earnings per share growth rate of at least 10% for the next three to five years (the data for this screening criteria comes from Morningstar (MORN, Financial) analyst estimates).
- A rating of modestly undervalued from GuruFocus.
- A dividend yield of at least 2.6%.
- A history of raising dividends for at least 40 consecutive years.
Air Products & Chemicals
The first stock I found using the above screening criteria is Air Products & Chemicals Inc. (APD, Financial), which is one of the largest suppliers of atmosphere and process gases in the world. The company’s end markets include technology, energy, health care and industrial. Business has been successful for a long period of time, enabling Air Products & Chemicals to raise its dividend for 40 consecutive years, earning the company the title of Dividend Aristocrat. The $55 billion company has generated nearly $12 billion in revenue over the last four quarters.
Air Products & Chemicals benefits from customers’ need for industrial gas to run their operations. While these gases often account for a small percentage of capital costs, they are extremely important in the day-to-day operation of certain businesses. For this reason, customers are often highly motivated to lock in long-term contracts, making it expensive to find new gas distributors. As one of the largest names in its industry, this affords Air Products & Chemicals a prime position.
At the same time, Air Products & Chemicals is also acting aggressively to add to its current leadership position. The company has laid out plans to invest $30 billion through 2027, of which more than 80% has already been invested or committed to deals. This massive investment includes, to name a few examples, new separation units in Minnesota and India, a hydrogen fuel cell fueling station in Saudi Arabia and an additional liquid hydrogen plant in California.
Air Products & Chemicals’ earnings per share have a compound annual growth rate of 6% over the last decade. Thanks to its top billing in its industry and investment in future projects, the company’s earnings per share without non-recurring items (NRI) growth rate is expected to accelerate to 16.6% over the next three to five years according to Morningstar analysts.
The stock looks to be trading at a compelling valuation according to the GF Value chart.
Air Products & Chemicals closed Friday’s trading session at $246.53. The stock has a GF Value of $334.45, resulting in a price-to-GF-Value ratio of 0.74. Air Products & Chemicals could provide a return of 35.7% if it were to reach the GF Value. Factor in the dividend yield of 2.6%, which is well above the average yield of 1.6% for the S&P 500 Index, and total returns could push into the high 30% range. Air Products & Chemicals is rated as modestly undervalued by GuruFocus.
Illinois Tool Works
The second name that caught my attention on this screener was Illinois Tool Works Inc. (ITW, Financial), which manufactures products used in a variety of industries. Illinois Tool Works is valued at close to $61 billion and produced revenue of $14.5 billion in 2021.
Illinois Tool Works operates a diversified business model appealing to a wide variety of customers. The company consists of seven distinct business units: Automotive, Food Equipment, Test and Measurements, Polymers and Fluids, Welding, Construction Products and Specialty Products.
No one segment accounts for more than 21% of revenue, limiting the pain that could be felt if a unit experiences significant declines. Revenue is almost evenly split between the U.S. and international markets, adding geographic diversity to the company.
Many of Illinois Tool Works' segments operate in niche markets, which makes the products they supply extremely important to customers. Products are often considered top of the line as they help to lower customer costs, either through easy use that requires less training or helping to reduce the number of steps used in the course of manufacturing. This often leads to customers continuing to work with Illinois Tool Works as the company can help lower its costs, thus improving the profit margin.
Illinois Tool Works has sported an earnings growth rate of 8.5% since 2021. This growth rate is projected to pick up to 10.6% over the next three to five years according to Morningstar analysts.
As a result of a steady business model, Illinois Tool Works has rewarded investors with dividend increases for the past 59 years. This is one of the longest dividend growth streaks in the market place and also qualifies the company as a Dividend King.
Illinois Tool Works looks to be undervalued according to the GF Value chart.
With a recent closing price of $195.40 and a GF Value of $235.25, Illinois Tool Works has a price-to-GF-Value ratio of 0.83. The stock could return as much as 20.4% if it were to trade with its GF Value. This is before factoring in the 2.7% dividend yield that the stock currently offers. Illinois Tool Works is rated as modestly undervalued by GuruFocus.
In my opinion, investors should seek out quality stocks to own, especially when markets are turbulent and might provide rare discounts. Companies with strong business models often have dividend growth streaks that number in the decades.
Air Products & Chemicals and Illinois Tool Works are two high-quality names with leadership positions and competitive advantages that put them ahead of the competition. Both companies also have long track records of dividend growth, with both stocks yielding a full percentage point higher than the average yield of the S&P 500 Index.