3 high-quality dividend growers to buy on the dip

Key Points

• Old Dominion Freight Lines is an aggressive distribution growth stock on the verge of correction. 
• Avery Dennison offers better value and yield; it's also on the verge of correction. 
• Lennox International has a long path of distribution increases ahead; its price may also correct soon. 

Dividend growth stocks are attractive for many reasons, including their payments, increasing yield on capital, and insulation from market volatility, but there is a catch. These buy-and-hold names span all sectors but often come with higher-than-average valuations and lower-than-average yields, so buying them when the price is down is important. 

Old Dominion Freight Lines NASDAQ: ODFL, Avery Dennison Corporation NYSE: AVY and Lennox International NYSE: LII are three such names on the brink of offering buying opportunities. All produced solid Q4 results and gave a healthy outlook, but none catalyzed a rally. The analysts are raising their targets, so bias and risk are to the upside, but the stock prices may decline before moving higher. Interested investors should be ready to buy when they dip. 

Old Dominion Freight Lines hikes its dividend by 30% 

Old Dominion Freight Lines is not a Dividend King or even an Aristocrat, but it has one of the most robust outlooks for distribution growth on the market. The company stock pays about 0.53% in yield due to the high 30X price multiple, but it is incredibly safe at only 16% of earnings. The company's growth and earnings quality allowed for a 30% increase this quarter, extending the trend of high double-digit increases another year. The increases may slow in the coming years, but there will not be a significant need soon. This year's consensus forecast for earnings growth is 15% and accelerates to 16% in F2025. 

Analysts rate ODFL stock a Hold, but the sentiment and price target are firmed. The sentiment began to firm last year, rising to Hold from Reduce, and the Hold got stronger with an upgrade in early January to positive from Neutral at Susquehanna. The price target has trended high for months and is up 35% compared to last year. The consensus assumes fair value near the current price action, but the latest targets are well above it. The high end of the range assumes a 20% upside for this stock.

Avery Dennison has higher yield, better value, and an equal outlook for growth

Avery Dennison Corporation compares favorably to Old Dominion Freight Lines regarding dividends, health, cost, and outlook. The stock trades at a more reasonable 21x earnings, pays a 1.6% yield, and grows the distribution at a double-digit pace. The pace of increase is less, about 10% in recent years, but may accelerate this year and next. The growth outlook is robust, including an 18% gain this year and a 15% increase next. Growth is forecast to accelerate this year and then slow next year, but next year's figures are likely conservative. 

The analysts favor Avery Dennison, rating it a Moderate Buy, and see it moving 10% higher at the consensus midpoint. The Q4 results sparked one revision: a reiterated Overweight from JPMorgan Chase & Company and a boosted price target. JPMorgan raised its target to align with the consensus of $218; the high $249 price target was set in January by Truist Financial Corp. NYSE: TFC. It implies a 25% upside for this market.

Lennox International stock is ready to improve its value and yield

Lennox International's price action suggests a solid correction is brewing. The stock hit a top and formed a Tower Reversal that is setting a new low now. However, a  move lower would improve the value and the yield of this quality distribution growth play. The yield is middling for this grouping and below the broad market average but incredibly safe with a long road of increases ahead. The payout is less than 25% of its earnings forecast, and Lennox has outperformed its consensus estimates all year. Earnings growth is expected to hold steady this year in the low-double digits and sustain the 12% distribution CAGR. 

Analysts' activity is mixed following the Q4 results but bullish on balance. The three revisions tracked by Marketbeat include a downgrade with price target reduction, a boosted price target and an initiated Buy with a price target well above the consensus. Consensus assumes a 5% upside for the market, and the high-end of the range adds 23%.