The whole point of running a business is earning money, so it wouldn’t be a stretch to say that earning is one of the key metrics in measuring a company’s success. With more net income, said companies can increase their value by investing in themselves, expanding their services and product ranges, improving equipment, and innovating in their respective fields. On the flip side, they can also distribute their earnings to shareholders through dividends. This creates shareholder value, making the company more attractive to investors.
However, frequent readers know I don’t analyze stocks using only one metric. Sure, a company's current stock price is one valuation metric. However, when we combine a stock price with earnings, we get the P/E: the ratio between the stock’s price and the company’s earnings per share.
By using P/E, investors can get an idea of how expensive a company is in the eyes of the market. In this article, we’ll apply the study of P/E to one of my favorite groups of stocks, the Dividend Aristocrats.
P/E Explained
P/E utilizes the company’s current stock price and juxtaposes it against its EPS to give people an idea of the validity of its current valuation.
There are two ways to measure P/E. The first uses the last four quarters or twelve months’ earnings, better known as P/E trailing twelve months or ttm. The second calculates using the company’s projected earnings for the next four quarters. This value is called forward P/E. We’ll be using the latter.
Since it’s a ratio of price against future earnings, investors and analysts typically prefer stocks with lower P/E since that potentially means they’re buying the stock for cheap.
Here are the 3 “cheapest” dividend aristocrats based on their P/E.
Archer Daniels Midland (ADM)
Archer Daniels Midland’s FY’23 report fell short of expectations after being delayed due to pending investigations. The Ag Services and Oilseeds, Carbohydrate Solutions, and Nutrition segments experienced YoY declines. The full-year GAAP segment operating profit also saw a 10% drop, while GAAP EPS was 17% lower.
It doesn’t help that ADM got into hot water when certain accounting irregularities were revealed early this year. Vikram Luthar, CFO, and Senior Vice President was immediately put on leave, and the subsequent investigation yielded “material weakness in its internal control over financial reporting related to its accounting practices.”
Its stock price took a nose dive upon the news release and has only recently shown signs of partial recovery, closing 1.89% higher in the last trading session.
ADM’s forward P/E ratio is just 10.32, the lowest of all Dividend Aristocrats at the time of writing. While there are tangible reasons why the stock has been suffering over the past few months, and the company’s future is still cloudy, income investors might want to snag shares of ADM at a steep discount. Analysts rate the stock a “Hold”, and the company pays a $1.85 annual dividend, or about a 3.12% yield. ADM has been increasing dividends for nearly 50 years.
3M Company (MMM)
3M is a well-diversified industrial conglomerate that provides everything from adhesives to tools and equipment. The company enjoys a large global presence and a reputation for being a reliable Dividend Aristocrat and King.
The stock currently has a forward P/E ratio of 10.50, which makes sense, considering prices have been battered by lawsuits and negative press, which took a heavy toll on its bottom line for 2023, which ended at a negative $12.63 EPS. Now that's all behind us, I think it's safe to say that things are looking up for MMM: I think the negatives have been priced in. 3M has also increased dividend payments from $1.50 to $1.51 for the first quarter of 2024, affirming its commitment to shareholders. Based on this, its full-year dividend would be $6.04, or an attractive 5.75% yield based on the current price.
Franklin Resources (BEN)
Franklin Resources, Inc., or Franklin Templeton, is an investment management firm under subsidiaries like ClearBridge Investments, K2, Martin Currie, and more. The company operates in over 150 countries and is considered one of the most prominent investment managers in the world.
BEN’s forward P/E ratio is 10.79. However, unlike ADM (despite its accounting irregularities and potential future legal issues), analysts rate BEN a “Moderate Sell” recommendation. With a $1.21/yr dividend, and based on its last trading price, the dividend represents a cool 4.50% annual yield.
I see the higher dividend yield and recovery prospects as a potential to buy.
Final Thoughts
Just because a company has a low P/E ratio doesn’t mean it's an automatic buy. Remember, the market is has many moving parts, and just about anything can affect stock prices. P/E may be an important part of the bigger picture, but it is just a single part all the same. Never depend on one or two factors when deciding your stock picks, and always do your due diligence.
On the date of publication, Rick Orford did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
