There’s a certain comfort and assurance that comes with constants.

The sun rises in the east.

The sun sets in the west.

And this happens every single day.

While it’s impossible to find businesses that are as constant as the sun, many businesses are nearly perpetual money machines.

How do you find them?

Well, I’d argue that a longstanding track record of consistently increasing dividends is a very good place to start.

And that would lead you straight to dividend growth investing.

This is an investment strategy that involves buying and holding shares in world-class enterprises that pay reliable, rising dividends to their shareholders.

A consistently increasing dividend is only possible when there’s consistently increasing profit.

And that, in and of itself, is evidence of a certain level of constancy.

You can find hundreds of examples of these world-class businesses by perusing the Dividend Champions, Contenders, and Challengers list.

This list contains invaluable information on hundreds of US-listed stocks that have raised dividends each year for at least the last five consecutive years.

I’ve been using this strategy for myself for more than 10 years now.

What’s it done for me?

Well, by living below my means and investing my savings into high-quality dividend growth stocks, I was able to retire in my early 30s.

You can read more about how I did that in my Early Retirement Blueprint.

This concentrated saving and investing has resulted in the FIRE Fund.

That’s my real-money portfolio, and it produces enough five-figure passive dividend income for me to live off of.

Investing in the right businesses has been instrumental to my success.

Jason Fieber's Dividend Growth PortfolioBut valuation at the time of investment has also been critical.

Price is what you pay, but value is what you ultimately get.

An undervalued dividend growth stock should provide a higher yield, greater long-term total return potential, and reduced risk.

This is relative to what the same stock might otherwise provide if it were fairly valued or overvalued.

Price and yield are inversely correlated. All else equal, a lower price will result in a higher yield.

That higher yield correlates to greater long-term total return potential.

This is because total return is simply the total income earned from an investment – capital gain plus investment income – over a period of time.

Prospective investment income is boosted by the higher yield.

But capital gain is also given a possible boost via the “upside” between a lower price paid and higher estimated intrinsic value.

And that’s on top of whatever capital gain would ordinarily come about as a quality company naturally becomes worth more over time.

These dynamics should reduce risk.

Undervaluation introduces a margin of safety.

This is a “buffer” that protects the investor against unforeseen issues that could detrimentally lessen a company’s fair value.

It’s protection against the possible downside.

Investing in high-quality businesses with a certain level of constancy, and doing so when they’re undervalued, could set you up for copious amounts of wealth, passive dividend income, and freedom over the years to come.

Of course, this would require you to first understand valuation.

Don’t worry.

It’s not that difficult.

Fellow contributor Dave Van Knapp has made it easier than ever with Lesson 11: Valuation.

Part of an overarching series of “lessons” on dividend growth investing, it provides a valuation template that can be easily applied toward almost any dividend growth stock out there.

With all of this in mind, let’s take a look at a high-quality dividend growth stock that appears to be undervalued right now…

Corning Incorporated (GLW)

Corning Incorporated (GLW) is a multinational materials science company that manufactures specialty glass, ceramics, optical fiber, and related materials.

Founded in 1851, Corning is now a $28 billion (by market cap) materials mammoth that employs more than 60,000 people.

The company reports results across five major business segments: Optical Communications, 31% of FY 2021 sales; Display Technologies, 26%; Specialty Materials, 14%; Environmental Technologies, 11%; and Life Sciences, 9%. All Other accounts for the remaining 9%.

Corning is an under-the-radar company at the forefront of various technologies.

We’re talking about optical fiber for internet access, glass for smartphones, and specialty materials for advanced R&D processes.

There’s a good chance that the glass you’re interfacing with right now (in order to consume this piece of investment research I’ve made for you) was manufactured by Corning.

Corning is a proven leader in specialty materials, showing its ability to innovate and stay ahead of the pack for many decades now.

Morningstar puts it like this: “Corning is a materials science behemoth with differentiated glass products for televisions, notebooks, mobile devices, wearables, optical fiber, cars, and pharmaceutical packaging. In its 170 years of operation, the company has constantly innovated (including inventing glass optical fiber and ceramic substrates for catalytic converters) and oriented itself toward evolving demand trends that it can serve through its core competency of materials science. Most recently, we point to Corning’s domination of the smartphone cover glass market and deals with U.S. network carriers to supply fiber for 5G buildouts as evidence of the pivot toward growth.”

I think that says it all.

This company hasn’t been around for almost two centuries by accident.

A lot of tech we use and take for granted doesn’t really exist without Corning.

And I’m quite confident that the tech of tomorrow, which is even more exciting, will be possible because of Corning.

That’s what bodes so well for this company’s ability to continue growing its revenue, profit, and dividend for years to come.

Dividend Growth, Growth Rate, Payout Ratio and Yield

As it sits, Corning has increased its dividend for 12 consecutive years.

The company’s 10-year dividend growth rate is 13.4%.

What’s especially impressive here is the consistency of double-digit dividend raises over the last decade.

Even the most recent dividend increase was 12.5%.

I see no real deceleration in the rate of dividend growth here.

Meantime, the stock offers a market-beating 3.2% yield to go along with that consistent double-digit dividend growth.

By the way, that’s 60 basis points higher than its own five-year average yield.

Another great thing here is the payout ratio of 50.2%.

That perfectly balances retaining earnings for business growth against returning capital back to the shareholders.

I like dividend growth stocks in what I call the “sweet spot” – that’s a yield of between 2.5% and 3.5%, paired with a high-single-digit (or higher) dividend growth rate.

The yield is on the high end of the sweet spot, while the dividend growth rate exceeds what I’d usually look for.

Great dividend metrics.

Revenue and Earnings Growth

As great as these metrics are, though, they’re largely looking in the rearview mirror.

But we have to look through the windshield, as investors are risking today’s capital for the rewards of tomorrow.

Thus, I’ll now build out a forward-looking growth trajectory for the business, which will later be instrumental when the time comes to estimate intrinsic value.

I’ll first go over what this company has done over the last decade in terms of its top-line and bottom-line growth.

And I’ll then unveil a professional prognostication for near-term profit growth.

Carefully blending the proven past with a future forecast should give us some idea as to where this business might be going from here.

Corning increased its revenue from $8 billion in FY 2012 to $14.1 billion in FY 2021.

That’s a compound annual growth rate of 6.5%.

Solid top-line growth.

Earnings per share moved from $1.09 to $2.07 (adjusted) over this period, which is a CAGR of 7.4%.

Again, solid.

Corning isn’t lighting the world on fire with business growth, but it’s moving the needle at a good pace.

Substantial buybacks have aided growth on a per-share basis.

Corning’s outstanding share count has been reduced by 45% over the last 10 years.

That’s one of the most remarkable reductions I’ve come across.

However, steady margin erosion has worked against the firm.

Looking forward, CFRA forecasts that Corning will compound its EPS at an annual rate of 24% over the next three years.

CFRA points to their view that “demand is beginning to recover across end markets.”

This number, if it ends up actually transpiring, would represent a meaningful acceleration in bottom-line growth.

While it does look rather aggressive to my eye, I must say that Corning is coming off of a terrific FY 2021.

Revenue grew by 24.5% YOY, and free cash flow nearly doubled YOY.

It remains to be seen how the company finishes FY 2022, let alone the next three years, but Corning doesn’t need to compound its EPS at a 24% annual rate in order for long-term investors to get enthusiastic about investing in the business.

If the next decade ends up looking like the last one, that’d be supportive of a strong total return package.

Multiple levers can be pulled toward this end.

If management can keep modestly growing sales while simultaneously improving margins and aggressively buying back shares at these low levels, you have a recipe for plenty of EPS and dividend growth.

To repackage an old adage from Warren Buffett, Corning appears to have a one-foot bar that can easily be stepped over.

And if CFRA’s number is closer to reality than I think it is, all the better for shareholders.

Either way, I don’t see how Corning doesn’t announce at least high-single-digit dividend raises annually over the foreseeable future.

Layering that on top of the 3.2% yield leaves little to be desired, in my view.

Financial Position

Moving over to the balance sheet, Corning has a very good financial position.

The long-term debt/equity ratio is 0.6, while the interest coverage ratio is over 9.

Profitability is the one area where there’s a lot of room for improvement.

Over the last five years, the firm has averaged annual net margin of 4.7% and annual return on equity of 5.8%.

The good news about this profitability situation is that there’s a tremendous opportunity for management to pull this lever, expand margins, and accelerate EPS growth over the coming years.

Overall, I see Corning as a great business with the potential to become even greater.

And with economies of scale, IP, vertical integration, R&D, and switching costs, the company does benefit from durable competitive advantages.

Of course, there are risks to consider.

Regulation, litigation, and competition are omnipresent risks in every industry.

The company faces technology risks, and Corning must continue to innovate in order to not get left behind.

Corning’s end markets are sensitive to economic cycles, which leaves Corning somewhat vulnerable to a recession.

Vertical integration is an advantage, but input costs are rising.

Being an international organization, the company is exposed to currency exchange rates and geopolitical risks.

The company is mildly acquisitive, which introduces execution risks.

I believe these risks are really quite acceptable, especially when weighed against the quality of the business.

And the valuation, which currently looks attractive, adds even more weight…

Stock Price Valuation

The stock is trading hands for a P/E ratio of 15.8.

That’s a very undemanding earnings multiple.

There’s also the P/CF ratio of 9.6, which is well off of its own five-year average of 11.1.

And the yield, as noted earlier, is significantly higher than its own recent historical average.

So the stock looks cheap when looking at basic valuation metrics. But how cheap might it be? What would a rational estimate of intrinsic value look like?

I valued shares using a dividend discount model analysis.

I factored in a 10% discount rate and a long-term dividend growth rate of 7%.

That is almost right in line with the company’s demonstrated EPS growth over the last decade, with a small margin of safety thrown in for good measure.

Now, this looks very conservative next to the expectation for EPS growth over the next few years.

The 10-year dividend growth rate is much higher than this, and the payout ratio is just about perfectly balanced.

However, I’m not as sanguine as CFRA on the growth projection.

I think I’m looking at a firm with a high-single-digit EPS growth profile, with the possibility to improve and do even better.

But I’d rather err on the side of caution and lean heavily on what the company has proven.

The DDM analysis gives me a fair value of $38.52.

The reason I use a dividend discount model analysis is because a business is ultimately equal to the sum of all the future cash flow it can provide.

The DDM analysis is a tailored version of the discounted cash flow model analysis, as it simply substitutes dividends and dividend growth for cash flow and growth.

It then discounts those future dividends back to the present day, to account for the time value of money since a dollar tomorrow is not worth the same amount as a dollar today.

I find it to be a fairly accurate way to value dividend growth stocks.

I put together an extremely fair valuation, yet the stock’s pricing shakes out looking cheap.

But we’ll now compare that valuation with where two professional stock analysis firms have come out at.

This adds balance, depth, and perspective to our conclusion.

Morningstar, a leading and well-respected stock analysis firm, rates stocks on a 5-star system.

1 star would mean a stock is substantially overvalued; 5 stars would mean a stock is substantially undervalued. 3 stars would indicate roughly fair value.

Morningstar rates GLW as a 4-star stock, with a fair value estimate of $40.00.

CFRA is another professional analysis firm, and I like to compare my valuation opinion to theirs to see if I’m out of line.

They similarly rate stocks on a 1-5 star scale, with 1 star meaning a stock is a strong sell and 5 stars meaning a stock is a strong buy. 3 stars is a hold.

CFRA rates GLW as a 5-star “STRONG BUY”, with a 12-month target price of $40.00.

I came out slightly low, but we’re all in a pretty tight range. Averaging the three numbers out gives us a final valuation of $39.51, which would indicate the stock is possibly 17% undervalued.

Bottom line: Corning Incorporated (GLW) is an under-the-radar business that puts up really good numbers. Based on what I’m seeing, those numbers stand a good chance of getting even better. With a market-beating yield, a double-digit dividend growth rate, a “perfect” payout ratio, more than 10 consecutive years of divided increases, and the potential that shares are 17% undervalued, long-term dividend growth investors should definitely have this name on their radar.

-Jason Fieber

P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.

Note from D&I: How safe is GLW’s dividend? We ran the stock through Simply Safe Dividends, and as we go to press, its Dividend Safety Score is 77. Dividend Safety Scores range from 0 to 100. A score of 50 is average, 75 or higher is excellent, and 25 or lower is weak. With this in mind, GLW’s dividend appears Safe with an unlikely risk of being cut. Learn more about Dividend Safety Scores here.

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Source: Dividends & Income