Historically, stocks that sell for less than $50 a share tend not to be an ideal pond to fish in for dividend growth investments. However, the three businesses in this article are the exception to this hypothesis.
Consider Kroger (KR -0.67%) and Rollins (ROL -0.36%). Executing five 2-for-1 stock splits and eight 1.5-for-1 stock splits, respectively, the companies have low share prices despite posting total returns that have outpaced the S&P 500 index since the 1990s. Meanwhile, Kenvue (KVUE -0.88%) was recently spun off from healthcare behemoth Johnson & Johnson, leaving the newly public company with a temporarily diminutive share price.
Thanks to these events, these three businesses may prove that great dividend stocks are available for less than $50 -- even if they are somewhat rare finds.
Here's what makes them fantastic bedrock investments to hold forever.
1. The market's uncertainty on Kroger could be your opportunity
As the second-largest grocer in the U.S. (behind only Walmart), Kroger may sound like a dull pick, even for dividend growth investors. However, several unfolding developments potentially give the grocer some market-beating catalysts.
First, Kroger's pending $25 billion acquisition of Albertsons and its 2,200 grocery stores would nearly double its store count to around 4,500 locations after a planned divestiture of some store to be acquired by C&S Wholesale Grocers. Should this merger be completed in 2024, it would combine the 27th and 31st-largest retail brands in 2022, creating a powerhouse grocer with roughly half the sales of Walmart's grocery operations. Aiming for the deal to boost earnings per share (EPS) immediately, management also expects the purchase to generate about $1 billion in cost synergies over the first four years.
Second, Kroger's other revenue generators -- precision marketing, personal finance (rewards cards and gift cards), insights, real estate, and ventures -- reached $1.2 billion in operating profit in 2022. These high-margin sales are critical for Kroger and they have already grown to account for an impressive portion of its $3 billion average operating profit during the past five years. The company is launching a new in-house advertising platform in the second quarter, so these alternative profit streams are poised for further growth as brands jockey to reach the 60 million households that shop at Kroger annually.
Best yet, the company's 2.3% dividend is well above its average since 2019.
Data source: YCharts.
Furthermore, its enterprise-value-to-free-cash-flow (EV/FCF) ratio is well below its average over the same time, highlighting the market's uncertainty around the company. However, armed with the immense potential of a successful merger with Albertsons, a business with high-margin alternative profit streams, and 15 consecutive years of dividend growth, Kroger is a fascinating bedrock stock with added upside.
2. Rollins: A serial acquirer in a recession-proof industry
Through its 800 owned and franchised locations, Rollins offers its residential and commercial customers pest control services ranging from rodents and wildlife to insects and termites. As boring as this sounds for an investment proposition, the serial acquirer has seen its total return more than quintuple over the last decade.
Making 115 acquisitions since the start of 2020 (including nine in the second quarter of 2023 alone), Rollins is masterful at deploying the immense amounts of free cash flow (FCF) -- cash left over after expenses for capital maintenance and improvements -- it generates. Actively consolidating its fragmented industry, Rollins has delivered a cash return on invested capital (ROIC) of 33%, highlighting how incredibly well it drives FCF creation via its many acquisitions.
Cash ROIC measures a company's FCF generation compared to its debt and equity, meaning that higher figures show outsized returns on capital deployed. High ROICs are vital for investors, as stocks in the top quintile of highest ROICs have outperformed their peers. Rollins ranks in the top 50 among the S&P 500 when sorting by this metric, showing that the odds are in its favor to keep beating the market.
Best yet for investors, the pest control market is virtually recession-proof, as the company saw sales grow by 5% and 7% across the Great Recession and the pandemic, respectively. While the company trades at a lofty 38 times FCF, its 8% and 20% annualized growth rates for revenue and FCF over the last decade show its ability to live up to a premium valuation. Dropping 20% from its 52-week highs, Rollins' 1.4% dividend yield is its highest since 2014, indicating that now may be a great time to dollar-cost average (DCA) into this steady-Eddie.
3. Kenvue: A 3.8% dividend and a multitude of No. 1 brands
Home to seven global No.1 brands in their product category, recently spun-off Kenvue is a powerhouse of internationally recognizable brands such as Tylenol, Nicorette, Zyrtec, Neutrogena, Listerine, Johnson's, and Band-Aid. Despite these robust brands (not to mention 36 others that are No. 1 in their specific regions), the market has seemingly cast aside Kenvue following its breakup from Johnson & Johnson.
Now down 21% from its all-time highs, the company is an under-the-radar dividend play for investors. Kenvue paid a yield of 3.8% after announcing its first quarterly dividend of $0.2, but many financial websites still show Kenvue with a dividend yield of 0.9%, as it has only made its first quarterly payment. These weird little discrepancies often make recently spun-off companies attractive, as the market occasionally ignores or doesn't understand them.
However, the folks running the S&P 500 announced in late August that Kenvue would be replacing Advance Auto Parts in its index. This is of interest to investors as it will require institutional buying from tracking funds that mirror the S&P 500 index, potentially providing the company with a lift over the next year or two.
This short-term catalyst pairs nicely with the longevity of the company's array of brands and the recession-proof nature of the consumer health industry. Trading around 15 times forward FCF, Kenvue's 3.8% dividend should handsomely reward shareholders as it inches sales up by 3% to 5% annually -- making this bedrock business a great, hidden dividend buy under $50.
