Top 3 Dividend Growth Stocks For 2022
Summary
- I list my 3 top-quality dividend growth stocks for 2022. The reasons why these stocks may be attractive to investors in 2022 are examined closely.
- I discuss the dividend safety and valuation of all three dividend growth stocks.
- My picks for 2021 are reviewed and I reflect on their performance.
Olemedia/E+ via Getty Images
As 2022 stars, I like to look ahead and think about my top three dividend growth stock picks for the New Year. This year I am choosing Merck (MRK), Amgen (AMGN), and Lockheed Martin (LMT). But before we examine these three stocks, let's review last year's picks.
How Did I Do Last Year?
Last year I picked Dollar General (DG), International Business Machines (IBM), and Lockheed Martin (LMT). You can see in the chart below that Dollar General was up 13.2%, IBM was up 18.4%, and Lockheed Martin was up 3.4%, with dividends reinvested. This performance was decent in absolute terms, but of course, the S&P 500 Index, Dow 30, and NASDAQ Index performed better in 2021.
However, dividend growth investing is a long-term endeavor, not a one-year pick and dump. All three stocks gave investors dividend increases in 2021. Dollar General increased the quarterly dividend rate 12.5% to $0.36 per share, the 6th year in a row. IBM boosted the quarterly dividend rate 0.6% to $1.64 per share for the 26th annual increase. Lastly, Lockheed Martin raised the quarterly dividend rate 7.7% to $2.80 per share for the 19th year in a row.
Source: StockRover
Dollar General performed well in 2019 at +45% and in 2020 at +35%. Hence, it is reasonable to expect a slowdown in 2021. The company was rapidly opening stores, and the pandemic provided a significant tailwind for revenue and earnings in 2020. The year 2021 was still OK, but the reopening of the US economy caused a change in consumer behavior, and Dollar General could not repeat the enormous growth in 2020. That being said, Dollar General is still an excellent dividend growth stock to own for the long term. The company plans to expand in Mexico and has a new pOpshelf concept.
IBM was a controversial pick and one that most readers didn't like due to declining revenue and rising debt. However, the new CEO has seemingly righted the ship. First, IBM spun off the Managed Infrastructure Services business into a new company called Kyndryl Holdings (KD). This change left IBM with businesses growing about at a 5% rate. Second, IBM's hybrid cloud offerings based on the Red Hat acquisition are growing. In addition, IBM is pursuing bolt-on acquisitions adding to its consulting services and software offering. Lastly, IBM's net debt is falling after peaking in 2019. Investors should do well in the long term, assuming the new CEO delivers on his vision.
Lockheed Martin struggled in 2021 after lowering the outlook. The company's growth platform, the F-35, will probably grow slower than expected. Furthermore, the US exit from Afghanistan and accelerated payments to suppliers will hurt the top and bottom lines. Lockheed Martin's stock price struggled as a result. However, the F-35 is still a platform with decades of growth. Lockheed Martin also has opportunities in hypersonics. The US is pouring resources into this technology to catch both China and Russia, which have operational systems. As a result, Lockheed Martin will continue to be the global leader for defense, and investors should benefit.
The Stock Market Marches Upward
The year 2021 was another excellent one for returns making it three years in a row that investors have done well. The S&P 500 Index was up 29.9%, the NASDAQ was up 22.1%, the Dow 30 was up 18.7%, and the Russell 2000 was up 14.7%. In addition, the indices are trading near their all-time highs.
This year, investors face a challenge with the stock market in aggregate having performed well for three years. However, there are always pockets of value, and the start of 2022 is no exception. A few performed poorly if we examine the 2021 stock market returns at the industry level. For instance, Biotech and Pharmaceuticals performed relatively poorly. Aerospace & Defense was only up about 2.3% in 2021. Investors searching for undervalued stocks should focus on these industries.
Merck's Stock Has Gone Nowhere
The first dividend growth stock I picked for the New Year is Merck, the pharmaceutical giant. Merck's stock price was down (-1.74%) in 2021 and is trading at the same level as early-2019. The company struggled with clinical trial delays, disappointing results for Molnupiravir, and potential generic competition for Januvia. However, Merck is well-positioned for growth in oncology and is making moves to bolster its pipeline.
Merck's primary medicines are Keytruda (cancer immunotherapy), Januvia (diabetes), Gardasil (HPV), Pro Quad (MMR vaccine), Varivax (varicella vaccine), Bridion (muscle relaxant), and Pneumovax 23 (pneumococcal vaccine). Keytruda, Gardasil, and Januvia are blockbuster drugs generating billions of dollars in sales each quarter. In addition, several of the company's other drugs have more than $1 billion annually in sales.
Merck's strength is successful R&D allowing the company to grow organically. Merck's recent FDA approvals are Molnupiravir (COVID-19 antiviral) and Welireg (Hippel-Landau). Welireg adds to Merck's other recent oncology approvals of Lynparza and Lenvima. Additionally, Merck is extending its current drugs to other indications. The focus is Keytruda, which the company is studying for different cancer indications besides renal carcinoma. Merck has strength in oncology and, even after accounting for attrition, should have several newly approved drugs in the next few years.
Source: Merck Investor Relations
Merck is also active in M&A and acquired Acceleron Pharma for $11.5 billion. This action strengthens Merck's cardiovascular pipeline and brings the sotatercept asset in late-stage trials, a potential therapy for pulmonary arterial hypertension. The deal also brings Reblozyl (blood disorders) to the portfolio.
Merck's dividend growth is impressive, with 11 years in a row of increases. The dividend growth rate is about 7.4% in the past 5-years and an even faster 9.9% in the trailing 3-years. The forward payout ratio is around 48% leaving room for more increases. Merck's debt will rise, but interest coverage was more than 22X, and the leverage ratio below 1.0X before the Acceleron deal added to dividend safety.
Merck is undervalued now, trading at a price-to-earnings (P/E) ratio of about 13.2X. The average was about 14.1X in the past decade. In addition, the forward dividend yield is ~3.6%, well above the 5-year average. Hence, it is an excellent time to look at Merck now.
Amgen for Biotech
My second pick for a dividend growth stock is Amgen, the world's largest biotech company. Amgen's stock price is down (-2.15%) in 2021. The company has struggled with declining sales for two top sellers, Neulasta (neutropenia) and Enbrel (autoimmune diseases). Neulasta is seeing more competition from biosimilars, and Enbrel is faced with more effective branded competition. However, Enbrel's patents don't expire until 2028.
Amgen's other therapies are growing and should help offset declines from Neulasta and Enbrel. Prolia (osteoporosis) and Xgeva (fracture in cancer patients) are blockbusters. Other drugs with growing sales include Kyprolis (multiple myeloma), Repatha (cholesterol), and Aimovig (migraines). Furthermore, Amgen has made some strong moves to replenish its pipeline. The company bought Otezla (immunology), a blockbuster closing with over $2 billion in sales. In addition, Lumakras (lung cancer) and Evenity (osteoporosis) were recently approved and growing sales.
Amgen has strength in oncology and immunology, and the pipeline has several therapies in Phase 2 or 3 trials. After accounting for attrition, Amgen should have one major product launch per year over the next few years. For example, Tezepelumab (asthma) should be launched in 2022, pending approval. Other important therapies in trials include Bemarituzumab (cancer), Acapatamab (cancer), and Tarlatamab (cancer).
Source: Amgen Investor Relations
Amgen is returning cash to shareholders by share repurchases and dividends. The company has raised the dividend for ten consecutive years. The dividend's compound annual growth rate (CAGR) is impressive at ~31.7% in the past decade, about 17.1% in the past 5-years, and roughly 18.6% in the trailing 3-years. Moreover, the payout ratio is conservative at 46%, leaving room for future increases and providing confidence about dividend safety.
Amgen's forward dividend yield is about 3.5%, more than the 5-year average. The stock is near fair value trading at a P/E ratio of ~13.4X. However, Amgen has a wide moat, and the Chowder Rule gives ~21.0%. Amgen may be a good choice for investors wanting to add biotech to their portfolio.
Lockheed Martin for Hypersonics
For the third stock, I pick Lockheed Martin again. The company is the largest defense contractor globally by revenue. Unfortunately, the stock price plunged by about 10% after Q3 2021 earnings. Investors did not like the lower revenue and earnings in Q3 2021 compared to Q3 2020. Lower volumes for the F-35, the US exit from Afghanistan, and accelerated payments to suppliers caused this result. In addition, Lockheed Martin took a non-cash pension settlement charge. However, the lower revenue outlook for 2022 and weaker growth over the next 5-years really hurt the stock.
Despite the negative outlook, Lockheed Martin should still grow. The F-35 will be around for decades. After initial sales, modernization and sustainment will drive long-term revenue and earnings growth. Lockheed Martin also has an opportunity in hypersonics. The company is acquiring Aerojet Rocketdyne subject to approvals. However, there is some risk that the deal will not be completed due to the FTC review of the deal and resistance in Congress.
However, even if the deal is not completed, Lockheed Martin will still be a significant player in hypersonics and defenses. Both of these categories are priorities for the Pentagon. The company has three primary programs: the Air-Launched Rapid Response Weapon (ARRW), the Conventional Prompt Strike (CPS), and the Long-Range Hypersonic Weapon (LRHW). In addition, the advent of hypersonic missiles on the battlefield means defensive systems are a priority. Lockheed Martin is one of the few companies with the capabilities and workforce to compete for these programs.
Lockheed Martin is a dividend growth stock with 19 years of increases. The dividend growth rate is ~12.6% in the past decade, about 9.4% in the trailing 5-years, and 8.9% in the past 3-years. The payout ratio is a conservative ~42% providing confidence in the dividend safety and leaving room for future increases.
Lockheed Martin is yielding ~3.2% higher than the 5-year average. The stock is trading at a forward P/E ratio of 13.3X, below the 10-year average of 16X. The Chowder Number is over 12%, and the stock is a deal now.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of AMGN, LMT, IBM, DG either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
Recommended For You
Comments (28)
