11 new stocks made May’s Safest Dividend Yields Model Portfolio, which was made available to members on May 19, 2023.
Recap from April’s Picks
On a price return basis, our Safest Dividend Yields Model Portfolio (-6.3%) underperformed the S&P 500 (+0.8%) by 7.1% from April 20, 2023 through May 17, 2023. On a total return basis, the Model Portfolio (-5.9%) underperformed the S&P 500 (+0.8%) by 6.7% over the same time. The best performing large-cap stock was up 6%, and the best performing small-cap stock was up 8%. Overall, six out of the 20 Safest Dividend Yield stocks outperformed their respective benchmarks (S&P 500 and Russell 2000) from April 20, 2023 through May 17, 2023.
This report leverages our cutting-edge Robo-Analyst technology to deliver proven-superior[1] fundamental research and support more cost-effective fulfillment of the fiduciary duty of care.
This Model Portfolio only includes stocks that earn an Attractive or Very Attractive rating, have positive free cash flow (FCF) 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 strong FCF supports the dividend. We think this portfolio provides a uniquely well-screened group of stocks that can help clients outperform.
Featured Stock for May: CompX International (CIX: $18/share)
CompX International (CIX) is the featured stock in May’s Safest Dividend Yields Model Portfolio.
Since 2012, CompX has grown revenue by 7% compounded annually and net operating profit after tax (NOPAT) by 17% compounded annually. CompX’s NOPAT margin improved from 5% in 2012 to 12% over the trailing-twelve-months (TTM), while invested capital turns increased from 0.7 to 1.2 over the same time. Rising NOPAT margins and invested capital turns drive the company’s return on invested capital (ROIC) from 3% in 2012 to 14% over the TTM.
Figure 1: CompX’s Revenue & NOPAT Since 2012
Sources: New Constructs, LLC and company filings
Free Cash Flow Exceeds Regular Dividend Payments
CompX has increased its regular dividend from $0.20/share in 2018 to $1.00/share in 2022. The current quarterly dividend, when annualized, equals $1.00/share and provides a 5.5% dividend yield.
More importantly, CompX free cash flow (FCF) easily exceeds its regular dividend payments. From 2018 to 1Q23, CompX generated $82 million (47% of current enterprise value) in FCF while paying $36 million in dividends. See Figure 2.
Figure 2: CompX’s FCF Vs. Regular Dividends Since 2018
Sources: New Constructs, LLC and company filings
As Figure 2 shows, CompX’s regular dividends are backed by a history of reliable cash flows. Dividends from companies with low or negative FCF are less dependable since the company may not be able to sustain paying dividends.
CIX Is Undervalued
At its current price of $18/share, CompX has a price-to-economic book value (PEBV) ratio of 0.6. This ratio means the market expects CompX’s NOPAT to permanently fall 60% from TTM levels. This expectation seems overly pessimistic given that CompX has grown NOPAT by 17% compounded annually since 2012 and 9% compounded annually since 2002.
Even if CompX’s NOPAT margin falls to 10% (10-year average vs. 12% over the TTM) and the company grows revenue by just 2% compounded annually for the next decade, the stock would be worth $29+/share today – a 61% upside. In this scenario, CompX’s NOPAT would grow <1% compounded annually through 2032. Should the company’s NOPAT grow more in line with historical growth rates, the stock has even more upside.
Critical Details Found in Financial Filings by Our Robo-Analyst Technology
Below are specifics on the adjustments we make based on Robo-Analyst findings in CompX’s 10-K and 10-Qs:
Income Statement: we made $3 million in adjustments with a net effect of removing $1 million in non-operating income (<1% of revenue). Clients can see all adjustments made to CompX’s income statement on the GAAP Reconciliation tab on the Ratings page on our website.
Balance Sheet: we made $84 million in adjustments to calculate invested capital with a net decrease of $22 million. The most notable adjustment was $24 billion (15% of reported net assets) in asset write-downs. See all adjustments made to CompX’s balance sheet on the GAAP Reconciliation tab on the Ratings page on our website.
Valuation: we made $55 million in adjustments, with a net increase of $51 million in value. The most notable adjustment to shareholder value was $53 million in excess cash. This adjustment represents 24% of CompX’s market value. See all adjustments to CompX’s valuation on the GAAP Reconciliation tab on the Ratings page on our website.
This article was originally published on May 25, 2023.
Disclosure: David Trainer, Kyle Guske II, and Italo Mendonça receive no compensation to write about any specific stock, style, or theme.
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[1] Our research utilizes our Core Earnings, a more reliable measure of profits, as proven in Core Earnings: New Data & Evidence, written by professors at Harvard Business School (HBS) & MIT Sloan and published in The Journal of Financial Economics.