2 Hidden Gem Dividend Aristocrat Bargains You Don't Want To Miss

Aug. 03, 2022 7:00 AM ETPNR, SEIC10 Comments21 Likes

Summary

  • Dividend aristocrats are famous for their dependability, relatively lower volatility, and generating 70% more wealth than the market over time.
  • Smaller dividend champions growing faster than the S&P are likely to eventually make it into the official index, attracting greater investor interest.
  • Buying the aristocrats of tomorrow today is a low-risk strategy for compounding income and wealth over time.
  • SEIC and PNR are dividend champions that are 25% to 33% undervalued and offer 130% total return potential over the next five years, about 3X more than the S&P 500.
  • Each has time-tested business models, solid balance sheets, and management teams, and corporate cultures with strong track records of adapting and overcoming challenges their rivals or the economy throw at them.
  • I do much more than just articles at The Dividend Kings: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »

Money With Open Safe

Michael Burrell/iStock via Getty Images

The dividend aristocrats are some of the most trusted blue-chips on Wall Street, and for good reason.

S&P 500 Dividend Aristocrats

S&P

Since 1990 the aristocrats have delivered 12.3% annual returns, outperforming the S&P by 1.7% per year and with 7% lower annual volatility and 31% better volatility-adjusted returns.

  • 41X total return since 1990
  • 18X inflation-adjusted return
  • 70% more inflation-adjusted wealth over 31 years

However, what's especially impressive is that when the market takes a tumble, the aristocrats tend to fall much less, especially during the tech crash and great recession.

S&P 500 Dividend Aristocrat stocks annual performance

S&P

This shouldn't be a surprise since aristocrats tend to be very stable and well-run companies. Their shareholders are long-term focused and less likely to panic sell than those in high-flying speculative companies.

The aristocrats include 65 of the world's most famous companies, such time-tested giants as Johnson & Johnson (JNJ), PepsiCo (PEP), and 3M (MMM).

The official aristocrats must be in the S&P 500, meaning large-cap US companies. But there are 135 dividend champions, which include foreign aristocrats and small to medium-sized companies, each with 25+ year dividend growth streaks.

These include many wonderful, faster-growing companies, the dividend aristocrats of tomorrow.

So let me show you why SEI Investments (SEIC) and Pentair (PNR) are two hidden gem future aristocrat bargains that could be just what you are looking for in today's turbulent market.

SEI Investments: One Of The First Fintechs In History

What SEI Does

SEI Investments provides investment processing, management, and operations services to financial institutions, asset managers, asset owners, and financial advisors in four material segments: private banks, investment advisors, institutional investors, and investment managers. SEI also has a minority interest in LSV Asset Management, a value equity asset manager with about $99 billion in assets under management. As of Dec. 21, SEI (including LSV) manages, administers, or advises on over $1.3 trillion in assets." - Morningstar

Further Research (Comprehensive Look At The Investment Thesis, Growth Outlook, Risk Profile, and Valuation And Total Return Potential)

Reasons To Potentially Buy SEIC Today

  • 92% quality medium-risk 12/13 Super SWAN (sleep well at night) dividend champion
  • the 65th highest quality company on the Master List (87th percentile)
  • 100% dividend safety score
  • 31-year dividend growth streak
  • 1.5% very safe yield
  • 0.5% average recession dividend cut risk
  • 1.0% severe recession dividend cut risk
  • 25% historically undervalued (potential strong buy)
  • Fair Value: $72.78
  • 14.8X forward earnings vs. 20.5X to 21.5X historical
  • 10.9X cash-adjusted earnings = 0.91 PEG
  • Effective AAA credit rating (No debt and $803 million in cash) = 0.07% 30-year bankruptcy risk
  • 57th industry percentile risk management consensus = above-average, bordering on good
  • 10% to 14% CAGR margin-of-error growth consensus range
  • 12.0% CAGR median growth consensus
  • 5-year consensus total return potential: 14% to 18% CAGR
  • base-case 5-year consensus return potential: 17% CAGR (3X more than the S&P consensus)
  • consensus 12-month total return forecast: 38%
  • Fundamentally Justified 12-Month Returns: 73% CAGR

SEIC 2024 Consensus Total Return Potential

SEIC 2024 Consensus Total Return Potential

(Source: FAST Graphs, FactSet)

SEIC is undergoing a modest turnaround effort which is why growth is expected to flatline through 2024. However, analysts are confident that the new CEO has what it takes to restore this future aristocrat to its historical 12% growth rate.

And while you wait, you have the opportunity for some very attractive 16% annual returns.

SEIC 2027 Consensus Total Return Potential

SEIC 2027 Consensus Total Return Potential

(Source: FAST Graphs, FactSet)

17% potential annual returns are on offer from SEIC, which trades at a 25% historical discount.

Now compare that to the S&P 500.

S&P 2024 Consensus Total Return Potential

S&P 2024 Consensus Total Return Potential

(Source: FAST Graphs, FactSet)

Analysts expect about 9% annual returns from the market in the coming years.

S&P 500 2027 Consensus Return Potential

Year Upside Potential By End of That Year Consensus CAGR Return Potential By End of That Year Probability-Weighted Return (Annualized) Inflation And Risk-Adjusted Expected Returns Expected Market Return Vs. Historical Inflation-Adjusted Return

Conservative Years To Double

2027 48.12% 8.17% 6.13% 3.97% 58.38% 18.14

(Source: DK S&P 500 Valuation And Total Return Tool)

And about the same over the next five years.

  • SEIC offers 2X the market's annual returns over the next five years.

And after 5 years?

Investment Strategy Yield LT Consensus Growth LT Consensus Total Return Potential Long-Term Risk-Adjusted Expected Return Long-Term Inflation And Risk-Adjusted Expected Returns Years To Double Your Inflation & Risk-Adjusted Wealth

10-Year Inflation And Risk-Adjusted Expected Return

SEI Investments Company 1.5% 12.0% 13.5% 9.5% 7.0% 10.3 1.96
Dividend Aristocrats 2.6% 8.6% 11.1% 7.8% 5.3% 13.5 1.68
S&P 500 1.7% 8.5% 10.2% 7.1% 4.7% 15.4 1.58

(Sources: Morningstar, FactSet, YCharts)

Analysts think SEIC can deliver about 14% long-term returns better than the aristocrats and S&P, consistent with the average 15-year rolling return over the past 32 years.

SEIC Rolling Returns Since 1990

SEIC Rolling Returns Since 1990

Portfolio Visualizer Premium

SEIC Investment Decision Score

SEIC Investment Decision Score

DK

SEIC Investment Decision Score

(Source: DK Automated Investment Decision Tool)

SEIC is one of the most reasonable and prudent fast-growing aristocrats on Wall Street for anyone comfortable with its risk profile.

  • 25% discount vs. 4% market premium = 29% better valuation
  • 35% better consensus long-term return potential
  • 2X better risk-adjusted expected return over the next five years

Pentair: One Of The Most Important Companies You've Never Heard Of

What PNR Does

Pentair is a global leader in the water treatment industry, with 10,000 employees and a presence in 25 countries...

Pentair is a pure-play water company manufacturing a wide range of sustainable water solutions, including energy-efficient swimming pool pumps, filtration solutions, and commercial and industrial pumps. Pentair’s business is organized into two segments: consumer solutions and industrial and flow technologies." - Morningstar

Further Research

Reasons To Potentially Buy PNR Today

  • 83% quality medium-risk 12/13 Super SWAN dividend champion
  • the 196th highest quality company on the Master List (61st percentile)
  • 87% dividend safety score
  • 46-year dividend growth streak
  • 1.7% very safe yield
  • 0.5% average recession dividend cut risk
  • 1.7% severe recession dividend cut risk
  • 34% historically undervalued (potential very strong buy)
  • Fair Value: $71.39
  • 13.1X forward earnings vs. 18X to 20X historical
  • 10.5X cash-adjusted earnings = 1.1 PEG vs historical 2.3
  • BBB- stable credit rating = 11% 30-year bankruptcy risk
  • 56th industry percentile risk management consensus = above-average,
  • 5% to 12% CAGR margin-of-error growth consensus range
  • 9.6% CAGR median growth consensus Vs. 8.5% S&P 500
  • 5-year consensus total return potential: 10% to 16% CAGR
  • base-case 5-year consensus return potential: 21% CAGR (4X more than the S&P consensus)
  • consensus 12-month total return forecast: 19%
  • Fundamentally Justified 12-Month Returns: 48% CAGR

PNR 2024 Consensus Total Return Potential

PNR 2024 Consensus Total Return Potential

(Source: FAST Graphs, FactSet)

If PNR grows as expected and returns to historical fair value, it could deliver 27% annual returns, outperforming the S&P 500 by about 3X.

PNR 2027 Consensus Total Return Potential

PNR 2027 Consensus Total Return Potential

(Source: FAST Graphs, FactSet)

17% potential annual returns are what analysts expect from PNR, which trades at a 32% historical discount.

  • about 3X better than the S&P 500
Investment Strategy Yield LT Consensus Growth LT Consensus Total Return Potential Long-Term Risk-Adjusted Expected Return Long-Term Inflation And Risk-Adjusted Expected Returns Years To Double Your Inflation & Risk-Adjusted Wealth

10-Year Inflation And Risk-Adjusted Expected Return

Pentair 1.7% 9.6% 11.3% 7.9% 5.4% 13.2 1.70
Dividend Aristocrats 2.6% 8.6% 11.1% 7.8% 5.3% 13.5 1.68
S&P 500 1.7% 8.5% 10.2% 7.1% 4.7% 15.4 1.58

(Sources: Morningstar, FactSet, YCharts)

PNR isn't expected to deliver life-changing returns overnight, but it offers the potential to beat the aristocrats and S&P 500, which can add up over decades.

  • 31% more inflation-adjusted wealth than the S&P 500 over 30 years
  • and with a much safer and slightly faster-growing dividend

PNR Rolling Returns Since 1985

PNR Rolling Returns Since 1985

Portfolio Visualizer Premium

PNR has been delivering modestly market-beating returns for the last 37 years, and that's expected to continue thanks to massive growth potential in global water infrastructure investment.

PNR Investment Decision Score

PNR Investment Decision Score

DK

PNR stock rating

Dividend Kings Automated Investment Decision Tool

PNR is a reasonable and prudent undervalued future aristocrat for anyone comfortable with its risk profile.

  • 34% discount vs. 4% market premium = 39% better valuation
  • 10% better consensus long-term return potential
  • 2X better risk-adjusted expected return over the next five years

Bottom Line: Buy These Future Aristocrats Before Everyone Else Does

There are many different roads to a prosperous retirement you can travel.

  • deep value aristocrats
  • high-yield aristocrats
  • fast-growing aristocrats
  • future aristocrats

SEIC and PNR represent two hidden gem aristocrats that are likely to eventually make the official list, thanks to their growth rates being higher than the broader markets.

That will put them on the radar of more investors and attract fund inflows from NOBL.

The wonderful thing about aristocrat investing is that it involves relatively low fundamental risk because these are some of the world's best managed and often boring businesses.

But you don't need exciting businesses to do well on Wall Street, as the aristocrats' 18X inflation-adjusted returns since 1990 showcase.

In turbulent economic times, with a recession potentially arriving in early 2023, stable businesses with good balance sheets, trustworthy management, and sound long-term risk-management are often the most reasonable choices.

That's what SEIC and PNR offer today, for anyone who is willing to look beyond the short-term pain of this bear market and remember one of the most important truths of Wall Street.

Fortunes are made by buying right and holding on." - Tom Phelps

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This article was written by

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Adam Galas is a co-founder of Wide Moat Research ("WMR"), a subscription-based publisher of financial information, serving over 5,000 investors around the world. WMR has a team of experienced multi-disciplined analysts covering all dividend categories, including REITs, MLPs, BDCs, and traditional C-Corps.


The WMR brands include: (1) The Intelligent REIT Investor (newsletter), (2) The Intelligent Dividend Investor (newsletter), (3) iREIT on Alpha (Seeking Alpha), and (4) The Dividend Kings (Seeking Alpha).


I'm a proud Army veteran and have seven years of experience as an analyst/investment writer for Dividend Kings, iREIT, The Intelligent Dividend Investor, The Motley Fool, Simply Safe Dividends, Seeking Alpha, and the Adam Mesh Trading Group. I'm proud to be one of the founders of The Dividend Kings, joining forces with Brad Thomas, Chuck Carnevale, and other leading income writers to offer the best premium service on Seeking Alpha's Market Place.


My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives.


With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and safe and dependable income streams in all economic and market conditions.


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Disclosure: I/we have a beneficial long position in the shares of SEIC 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.

Additional disclosure: Dividend Kings owns PNR in our portfolios.

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