11 new stocks make our Safest Dividend Yields Model Portfolio this month, which was made available to members on August 21, 2019.
Recap from July’s Picks
Our Safest Dividend Yields Model Portfolio underperformed the S&P 500 from July 19, 2019 through August 19, 2019. The Model Portfolio fell 5.8% on a price return basis and fell 5.5% on a total return basis. The S&P 500 fell 1.6% on a price return and total return basis. The best performing large cap stock was up 14%, and the best performing small cap stock was up 10%. Overall, nine out of the 20 Safest Dividend Yield stocks outperformed the S&P from July 19, 2019 to August 19, 2019.
This Model Portfolio leverages our Robo-Analyst technology[1], which scales our forensic accounting expertise (featured in Barron’s) across thousands of stocks.[2]
This Model Portfolio only includes stocks that earn an Attractive or Very Attractive rating, have positive free cash flow and economic earnings, and offer a dividend yield greater than 3%. Companies with strong free cash flow provide higher quality and safer dividend yields because we know they have the cash to support the dividend. We think this portfolio provides a uniquely well-screened group of stocks that can help clients outperform.
Featured Stock for August: Comerica Inc. (CMA: $60/share)
CMA is the featured stock in August’s Safest Dividend Yields Model Portfolio.
CMA has grown revenue by 4% compounded annually and after-tax operating profit (NOPAT) by 27% compounded annually since 2010. Trailing twelve months (TTM) NOPAT is up 18% over the prior TTM period. NOPAT margin has increased from 6% in 2010 to 32% TTM while return on invested capital (ROIC) has improved from 2% to 13% over the same time.
Figure 1: CMA Profitability Since 2010
Sources: New Constructs, LLC and company filings
CMA’s Free Cash Flow Supports Dividend Payments
Since 2014, CMA has increased its annualized dividend from $0.79/share to $2.61/share TTM, or 27% compounded annually. This dividend payment has been supported by CMA’s strong free cash flow. Since 2014, CMA has generated $3.7 billion (41% of market cap) in FCF while paying $879 million in dividends.
Figure 2: CMA’s FCF vs. Dividends Since 2014
Sources: New Constructs, LLC and company filings
Companies with strong free cash flow provide higher quality dividend yields because we know the firm has the cash to support its dividend. On the flip side, dividends from companies with low or negative free cash flow cannot be trusted as much because the company may not be able to sustain paying dividends.
CMA’s Current Valuation Provides Upside
At its current price of $60/share, CMA has a price-to-economic book value (PEBV) ratio of 0.6. This ratio means the market expects CMA’s NOPAT to permanently decline by 40%. This expectation seems pessimistic given that CMA has grown NOPAT by 11% compounded annually over the past decade and 3% compounded annually over the past two decades.
If CMA can maintain TTM NOPAT margins (32%) and grow NOPAT by just 2% compounded annually for the next decade, the stock is worth $109/share today – an 81% upside. See the math behind this dynamic DCF scenario.
Critical Details Found in Financial Filings by Our Robo-Analyst Technology
As investors focus more on fundamental research, research automation technology is needed to analyze all the critical financial details in financial filings. Below are specifics on the adjustments we make based on Robo-Analyst findings in Comerica’s 2018 10-K:
Income Statement: we made $223 million of adjustments with a net effect of removing $69 million in non-operating income (2% of revenue). See all adjustments made to CMA’s income statement here.
Balance Sheet: we made $3.3 billion of adjustments to calculate invested capital with a net increase of $2.1 billion. The most notable adjustment was $776 million (10% of reported net assets) related to goodwill. See all adjustments to CMA’s balance sheet here.
Valuation: we made $710 million of adjustments with a net effect of increasing shareholder value by $2 million. The largest adjustment to shareholder value was $356 million in overfunded pensions. This adjustment represents 4% of CMA’s market value. See all adjustments to CMA’s valuation here.
This article originally published on August 28, 2019.
Disclosure: David Trainer, Kyle Guske II, and Sam McBride receive no compensation to write about any specific stock, style, or theme.
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[1] Harvard Business School features the powerful impact of our research automation technology in the case New Constructs: Disrupting Fundamental Analysis with Robo-Analysts.
[2] This paper compares our analytics on a mega cap company to other major providers. The Appendix details exactly how we stack up.