Buying stocks when they are trading near their all-time highs is never easy. Our instincts tell us that paying a high price for something is a bad deal. But in the stock market, it can be better to pay a premium for quality rather than scooping up shares of poorly run companies just because they are cheap. As Warren Buffett famously said, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
Illinois Tool Works(NYSE: ITW), Lowe's Companies(NYSE: LOW), and Procter & Gamble(NYSE: PG) are three excellent companies with track records of growing their earnings and passing along profits to shareholders through dividend raises. In fact, all three are Dividend Kings, meaning they have raised their payouts annually for over 50 consecutive years.
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Here's why these top stocks are still worth buying in December.
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The industrial conglomerate model at its best
Illinois Tool Works, commonly known as ITW, is an excellent example of a company you've probably never heard of but that has been a phenomenal long-term investment.
ITW's business is divided into seven segments: automotive, construction products, food equipment, polymers & fluids, specialty products, test & measurement and electronics, and welding. In 2023, no segment provided more than 20% of its revenue, nor did any provide less than 12%. The operating margin across the segments averaged 25.1%, which is highly efficient for a company this large and complex.
Management attributes that efficiency to the company's unusual business model. ITW gives each segment a ton of flexibility to operate through an entrepreneurial spirit. The company makes product improvements based on what its customers want instead of researching and developing what it thinks they'll want.
That decentralized approach has led to sustained revenue growth and margin expansion, as operating income has grown faster than revenue. That improved profitability has supported a growing dividend and consistent stock buybacks. ITW prefers to reinvest in its business through buybacks because it is confident in its brands. It has made a meaningful dent in reducing its outstanding share count and has increased its dividend three-fold over the last decade.
ITW's price-to-earnings (P/E) ratio is 24, but that figure was inflated due to a divestiture gain from its recent quarter. Its forward P/E is 27.1 -- indicating that earnings are expected to decrease over the next year without the benefit of that one-off gain.
The stock is undeniably expensive, but it could still be worth buying, as the company is a rock-solid dividend payer with an excellent business model and a path toward further margin expansion.
Lowe's is a capital-returning powerhouse
While you've probably shopped at Lowe's or Home Depot, you may be unaware of just how impressive they've been as investments. Over the past decade, Lowe's has increased its dividend by a staggering 400% and reduced its share count by 42%. Its stock price also increased more than four-fold during this period, crushing the S&P 500. You would be hard-pressed to find a company with a better capital return program than Lowe's.
Both Lowe's and Home Depot have tapped into the nationwide need for home improvement products and services. That boom coincided with a strong housing market, which has undergone a more or less uninterrupted rise since the financial crisis of 2008 and 2009.
Lowe's is an excellent example of how share buybacks can help keep a company's valuation reasonable. Over the past decade, Lowe's has grown its net income by 154%, but its diluted earnings per share are up 344% thanks to buybacks, which have slightly outpaced the growth of its stock price to keep its P/E ratio at a reasonable level of 22.7.
At its current share price, Lowe's dividend yields 1.7% compared to 2.1% for Home Depot, but Lowe's is the far better value, with a forward P/E of 22.9 compared to Home Depot's ratio of 28.3. However, it's worth mentioning that both companies are experiencing weak growth due to weakening consumer discretionary spending, higher interest rates, and a slowdown in home sales.
Lowe's stock price could see some near-term volatility if its results disappoint in 2025, but it remains a good stock to own over the long term.
An ultra-safe dividend stock for risk-averse investors
Procter & Gamble is a textbook example of a recession-proof company. Many of ITW's end markets are cyclical, while Lowe's is heavily dependent on macroeconomic conditions. But demand for P&G's products tends to be consistent no matter what the economy is doing. Consumers are less likely to pull back on paper towels or laundry detergent than on discretionary products like new cars or expensive vacations.
Like ITW, P&G has fostered a business model that helps it stand out from the competition. P&G's elite brand portfolio, highly efficient supply chain and distribution network, and pricing power give it significant advantages over its peers, and those are reflected in its margins.
P&G regularly repurchases stock and has raised its dividend for 68 consecutive years, making it one of the longest-tenured Dividend Kings.
Unfortunately, investors will have to pay a premium for the stock. P&G's P/E ratio is significantly above its historical average. However, its forward P/E is closer to its median levels over the past three to 10 years, so even if P&G's stock price goes nowhere for the next year, if its earnings come in as expected, it will be a fair value compared to historical averages.
Investors who don't mind waiting for P&G's earnings to grow into its valuation may want to consider buying the stock for its ultra-reliable dividend, which yields 2.3% at the current share price.
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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot. The Motley Fool recommends Illinois Tool Works and Lowe's Companies. The Motley Fool has a disclosure policy.
