Three new stocks make our Dividend Growth Stocks Model Portfolio this month, which was made available to members on May 27, 2021.
Recap From April’s Picks
On a price return basis, our Dividend Growth Stocks Model Portfolio (+0.1%) outperformed the S&P 500 (-0.4%) by 0.5% from April 29, 2021 through May 25, 2021. On a total return basis, the Model Portfolio (+0.2%) outperformed the S&P 500 (-0.4%) by 0.6% over the same time. The best performing stock was up 6%. Overall, 18 out of the 30 Dividend Growth Stocks outperformed the S&P 500 from April 29, 2021 through May 25, 2021.
More reliable & proprietary fundamental data, proven in The Journal of Financial Economics, drives our research. Our proprietary Robo-Analyst technology[1] scales our forensic accounting expertise (featured in Barron’s) across thousands of stocks[2] to produce an unrivaled database of fundamental data.
The methodology for this model portfolio mimics an All Cap Blend style with a focus on dividend growth. Selected stocks earn an Attractive or Very Attractive rating, generate positive free cash flow (FCF) and economic earnings, offer a current dividend yield >1%, and have a 5+ year track record of consecutive dividend growth. This model portfolio is designed for investors who are more focused on long-term capital appreciation than current income, but still appreciate the power of dividends, especially growing dividends.
Featured Stock From May: Whirlpool Corp (WHR: $238/share)
Whirlpool Corp (WHR) is the featured stock from May’s Dividend Growth Stocks Model Portfolio.
Whirlpool has grown revenue by 1% compounded annually and net operating profit after-tax (NOPAT) by 2% compounded annually over the past ten years. More recently, the firm has grown NOPAT by 4% compounded annually over the past five years. The firm’s trailing-twelve-month return on invested capital (ROIC) sits at 12%, which is greater than the company’s average ROIC of 8% since 2010.
Figure 1: Whirlpool’s NOPAT & Revenue Since 2011
Sources: New Constructs, LLC and company filings
Steady Dividend Growth Supported by FCF
Whirlpool has increased its regular dividend in every year for the last eight years and from $2.38/share in 2013 to $4.85/share in 2020, or 9% compounded annually. The current quarterly dividend, when annualized, equals $5.60/share, and provides a 2.4% dividend yield.
More importantly, Whirlpool’s strong free cash flow (FCF) supports the firm’s growing dividend payments. Whirlpool generated a cumulative $6.6 billion (44% of current market cap) in FCF while paying $1.5 billion in dividends from 2016 to 2020, per Figure 2. In the TTM period, Whirlpool Corp generated $2.4 billion in FCF and paid $340 million in dividends.
Figure 2: Free Cash Flow vs. Regular Dividend Payments
Sources: New Constructs, LLC and company filings
Companies with FCF well in excess of dividend payments provide higher quality dividend growth opportunities because we know the firm generates the cash to support a higher dividend. On the other hand, the dividend of a company where FCF falls short of the dividend payment over time cannot be trusted to grow or even maintain its dividend because of inadequate free cash flow.
WHR Has Upside Potential
At its current price of $238/share, WHR has a price-to-economic book value (PEBV) ratio of 0.6. This ratio means the market expects Whirlpool’s NOPAT to permanently decline by 40%. This expectation seems overly pessimistic for a firm that has grown NOPAT by 6% compounded annually over the past two decades.
Even if Whirlpool’s NOPAT margin falls to 7% (compared to 8% TTM) and the firm’s NOPAT grows by 1% compounded annually for the next decade, the stock is worth $378/share today – a 59% upside. See the math behind the reverse DCF scenario. Should the firm grow NOPAT more in line with historical growth rates, the stock has even more upside. Add in Whirlpool’s 2.4% dividend yield and history of dividend growth, and it’s clear why this stock is in May’s Dividend Growth Stocks Model Portfolio.
Critical Details Found in Financial Filings by Our Robo-Analyst Technology
Fact: we provide superior fundamental data and earnings models – unrivaled in the world.
Proof: Core Earnings: New Data and Evidence, forthcoming in The Journal of Financial Economics.
Below are specifics on the adjustments we make based on Robo-Analyst findings in Whirlpool’s filings:
Income Statement: we made $796 million in adjustments with a net effect of removing $258 million in non-operating expenses (1% of revenue). See all adjustments made to Whirlpool’s income statement here.
Balance Sheet: we made $9.4 billion of adjustments to calculate invested capital with a net increase of $935 million. The most notable adjustment was $2.8 billion (23% of reported net assets) in other comprehensive income. See all adjustments to Whirlpool’s balance sheet here.
Valuation: we made $11.2 billion in adjustments with a net effect of decreasing shareholder value by $7.1 billion. Apart from total debt, one of the most notable adjustments to shareholder value was $1.4 billion in excess cash. This adjustment represents 9% of Whirlpool’s market value. See all adjustments to Whirlpool’s valuation here.
This article originally published on June 3, 2021.
Disclosure: David Trainer, Kyle Guske II, Alex Sword, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.
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[1] Harvard Business School features our research automation technology in the case Disrupting Fundamental Analysis with Robo-Analysts.
[2] See how our models and financial ratios are superior to Bloomberg and Capital IQ’s (SPGI) analytics in the detailed appendix of this paper.