Two Downgrades For Dividend-Growth Investors To Cash In On

When Business Is So Good ... 

Downgrades aren’t events we relish in the stocks we follow but they do often present opportunities that can be used to advantage. Take, for instance, downgrades driven not so much by a deterioration of business but by the size and scope of that business. In today’s news, we have downgrades in two high-quality dividend growth stocks that run along those lines. In the case of 3M’s global supply chain issues and inflation are cutting into results while in the case of Tractor Supply Company the law of large numbers is impacting the pace of growth. In both cases the fundamental picture remains rosy and the outlook for dividends robust. 

3M Company Is Extremely Cheap 

3M Company NYSE: MMM was among the first to warn Q3 results would be impacted by inflation and global supply chain issues plaguing the market today. Monish Patolawala says rising costs for resins, polypropylene, wood pulp, and labor are rising faster than the company can raise prices to offset them. Patolawala also says the semiconductor shortage will last long into 2022 and lowered the company’s expectation for business from that quarter. The good news is that EPS should still come within the company’s previously stated range if at the low end. 

The analyst’s activity in the stock has not been bullish in the wake of the guidance update. Three major sell-side firms have come out to lower the price target with one lowering the rating from Buy to Neutral. The consensus rating is a firm Hold leaning to sell and has been edging lower in recent weeks. The Marketbeat.com consensus price target has also edged lower over the past month but still presents more than 12% upside for share prices. Technically speaking, shares of 3M are trading at a 7-month low and just above a key support level. Price action appears to be overextended at this level and ready for a reversal. 

The risk is support at the $175 level, if that fails to hold 3M Company NYSE: MMM could fall to the $165 level. In either case, the company is trading at only 17X its earnings and well below the broad market average while paying more than 3X the yield. 3M is yielding a safe 3.35% and comes with a 63-year history of distribution increases. 

Tractor Supply Growth Will Slow 

Bank of America downgraded Tractor Supply Company NASDAQ: TSCO on the basis its growth would slow next year. Our response to that is duh, this company is worth over $23 billion and has been growing at a robust double-digit pace in the wake of the pandemic. Bank of American sees the company returning to its low single-digit growth rate in 2022 and for us, that’s fine. The company has not only expanded organic comp sales and held onto them but also expanded its footprint and solidified its brand in the minds of America. Life out here is good. 

The Marketbeat.com consensus rating on the stock is a firm Buy but sentiment has weakened slightly over the past month. Bank of America’s $217 price target isn’t the highest on Wall Street but it is telling. The consensus of $194 assumes the stock is fairly valued at current price levels while the high price target assumes more than 10% of upside is still available. As for the dividend, Tractor Supply Company is yielding a little over 1.0% compared to 3M’s more robust payout but the safety and outlook for growth are far more robust. The payout ratio is a low 26% of earnings and the CAGR nearly 20% compared to 3M’s 59% payout ratio and 6% CAGR.