Dividend Aristocrats are a unique class of dividend stocks. They are companies that are members of the S&P 500 and have increased their payouts to shareholders for at least 25 years. That’s no small feat. Out of the thousands of publicly traded stocks on the market, only 68 stocks made the cut this year.
This elite group of royals are important because dividend growth stocks tend to outperform all other stocks over time. Looking back to 1930, Ned Davis Research found companies that initiated a dividend and then grew the payout beat every other class of stock, whether they paid a dividend or not.
And yet, Dividend Aristocrats constantly evolve. Each year, more companies cross over the quarter-century threshold of dividend increases. They are added to the group, while others are forced to drop out because they are either removed from the benchmark index or cut their payouts.
Below are three recent dividend royals who cut their payouts and can no longer be considered Aristocrats. Are they better stocks now to buy, or should you run away from them? Let’s find out!
3M (MMM)
Industrial conglomerate 3M (NYSE:MMM) had a 66-year history of raising its payout, but legal liabilities pressured its free cash flow (FCF). With some analysts estimating it could run into the billions of dollars to settle everything, there might be little to nothing left over to support the dividend.
Dividend increases were miserly too. Over the past few years, 3M raised the payout by only a few cents at a time. It meant investors were receiving less income because of the ravaging effects of rampant inflation. To return some value to shareholders, 3M recently spun off its healthcare business Solventum (NYSE:SOLV) into a separately traded company.
However, the unit was responsible for 30% of 3M’s cash flows. As that would further pressure the dividend, the conglomerate reset its payout to 40% of adjusted FCF compared to 60% before the spinoff. While that causes it to lose its Dividend Aristocrat status, does it make 3M a better dividend stock to buy now?
Over just about any timeframe, 3M has significantly underperformed the market. Yet the industrial conglomerate is settling its lawsuits, and clarity is beginning to form. Retiring CEO Mike Roman said, “Paying a competitive dividend has been a priority for 3M for more than 100 years. This will continue to be true” after the spinoff.
MMM stock now sits at an attractive valuation, its balance sheet will be in a better position, and it has the potential for earnings growth going forward. This could be the best time in years to buy 3M stock. Still, investors might want to wait for the dust to settle to see if the conglomerate’s business can turn around.
Walgreens Boots Alliance (WBA)
Drugstore chain Walgreens Boots Alliance (NASDAQ:WBA) was another Dividend Aristocrat with a long track record of raising its payout. Walgreens had 47 years under its belt before deciding to slash it by 48% in January. The shocking news was needed, though, as the pharmacy suffered in the aftermath of the pandemic.
Yet Walgreens has been an even worse performer than 3M. Over the past decade, the pharmacy’s total return was negative 65%, a tremendous destruction of shareholder value. Walgreens sought to shed its U.K.-based Boots pharmacy business and a beauty care products outfit to turn the company around and free up more cash to invest in the industry. When that fell through, it was clear the dividend needed to be cut.
Walgreens is still headed in the wrong direction, and shares are down 33% in 2024. While it may be on track to deliver some $1 billion in cost savings this year, the company has yet to show how that will translate into growth. At this point, Walgreens Boots Alliance remains a dividend stock to avoid.
VF Corp (VFC)
Global apparel and footwear company VF Corp (NYSE:VFC) lost its Dividend Aristocrat status last year. The owner of such notable brands as The North Face, Timberland, Dickies and Vans also suffered from the pandemic, albeit differently than Walgreens. It took on excess debt when consumers were reining in discretionary spending to survive. That led to a build-up in inventory just as inflation was running rampant.
Remarkably, VF’s 10-year stock performance made Walgreens look good. Its total return for the period was negative 72.5%.
VF slashed its dividend by 41% to conserve cash, reducing the quarterly payout from $0.51 to $0.30. It launched numerous cost-cutting measures, including selling non-core assets while eliminating non-strategic spending. When profits kept plunging, it withdrew its full-year outlook and cut the payout again! This time by 70%, down to $0.9 per share.
There is no bottom yet for the apparel stock. With management saying “everything is on the table” at this point, there is no reason for an investor to get near this stock.
On the date of publication, Rich Duprey held a LONG position in MMM, SOLV and WBA stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.