Eight new stocks make our Safest Dividend Yields Model Portfolio this month, which was made available to members on July 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 July: Marine Products Corp (MPX: $13/share)
Marine Products Corp (MPX) is the featured stock in July’s Safest Dividend Yields Model Portfolio.
MPX has grown revenue by 15% compounded annually and after-tax operating profit (NOPAT) by 33% compounded annually since 2010. Trailing twelve months (TTM) NOPAT is up 16% over the prior TTM period. NOPAT margin has increased from 3% in 2010 to 9% TTM while return on invested capital (ROIC) has improved from 5% to a top-quintile 36% over the same time.
Figure 1: MPX Profitability Since 2010
Sources: New Constructs, LLC and company filings
MPX’s Free Cash Flow Supports Dividend Payments
Since 2014, MPX has increased its annual dividend from $0.16/share to $0.50/share, or 33% compounded annually. This dividend payment has been supported by MPX’s strong free cash flow. Despite fluctuations year-over-year, the company generates the free cash flow necessary to pay its dividend, per Figure 2. Since 2014, MPX has generated $69 million (15% of market cap) in FCF while paying $69 million in dividends.
Figure 2: MPX’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.
MPX’s Valuation Provides Upside
At its current price of $13/share, MPX has a price-to-economic book value (PEBV) ratio of 1.0. This ratio means the market expects MPX’s NOPAT to never meaningfully grow from current levels. This expectation seems pessimistic given that MPX has grown NOPAT by 8% compounded annually since 2001.
If MPX can maintain TTM NOPAT margins (9%) and grow NOPAT by just 5% compounded annually for the next decade, the stock is worth $19/share today – a 46% 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 Marine Products’ 2018 10-K:
Income Statement: we made $3 million of adjustments with a net effect of removing $1 million in non-operating income (<1% of revenue). See all adjustments made to MPX’s income statement here.
Balance Sheet: we made $14 million of adjustments to calculate invested capital with a net decrease of $9 million. The most notable adjustment was $3 million (4% of reported net assets) related to deferred tax assets. See all adjustments to MPX’s balance sheet here.
Valuation: we made $5 million of adjustments with a net effect of increasing shareholder value by $4 million. The largest adjustment to shareholder value was $3 million in excess cash. This adjustment represents 1% of MPX’s market value. See all adjustments to MPX’s valuation here.
This article originally published on July 25, 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.