Eleven new stocks make our Dividend Growth Stocks Model Portfolio this month, which was made available to members on November 24, 2020.
Recap From October’s Picks
On a price return basis, our Dividend Growth Stocks Model Portfolio (+7.3%) underperformed the S&P 500 (+7.7%) by 0.4% from October 29, 2020 through November 20, 2020. On a total return basis, the Model Portfolio (+7.5%) underperformed the S&P 500 (+7.7%) by 0.2% over the same time. The best performing stock was up 29%. Overall, 14 out of the 30 Dividend Growth Stocks outperformed the S&P 500 from October 29, 2020 through November 20, 2020.
Only our research utilizes the superior data and earnings adjustments featured by the HBS & MIT Sloan paper,"Core Earnings: New Data and Evidence” (accepted for publication in The Journal of Financial Economics). The long-term success of our model portfolio strategies highlights the value of our Robo-Analyst technology, which scales our forensic accounting expertise (featured in Barron’s) across thousands of stocks.
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 November: Amdocs, Ltd. (DOX: $66/share)
Amdocs, Ltd. (DOX) is the featured stock from November’s Dividend Growth Stocks Model Portfolio.
Amdocs has grown revenue and net operating profit after-tax (NOPAT) by 10% compounded annually over the past 20 years. Since 2009, Amdocs has grown NOPAT by 4% compounded annually. While the firm’s return on invested capital (ROIC) has slightly decreased from 10.5% in 2009 to 10.4% TTM, its economic earnings, or the true cash flows of the business, have grown from $155 million to $280 million over the same time.
Figure 1: Amdocs’ Revenue & NOPAT Since 2009
Sources: New Constructs, LLC and company filings
Steady Dividend Growth Supported by FCF
Amdocs has grown its dividend by 14% compounded annually over the past four years from $0.67 in 2015 to $1.11 in 2019. The current quarterly dividend, when annualized, equals $1.31/share and provides a 2.0% dividend yield.
More importantly, Amdocs’ strong free cash flow (FCF) supports the firm’s dividend payment. Amdocs generated $1.2 billion (14% of current market cap) in FCF while paying $614 million in dividends from 2015 to 2019, per Figure 2. Over the trailing twelve months, Amdocs generated $273 million in free cash flow and paid $159 million in dividends.
Figure 2: Free Cash Flow (FCF) 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.
DOX Has Upside Potential
At its current price of $66/share DOX has a price-to-economic book value (PEBV) ratio of 0.7. This ratio means the market expects Amdocs’ NOPAT to permanently decline by 30%. This expectation seems overly pessimistic for a firm that has grown NOPAT by 10% compounded annually over the past two decades.
If Amdocs can maintain its TTM NOPAT margin of 12% and grow NOPAT by just 5% compounded annually for the next 10 years, the stock is worth $124/share today – an 88% upside. See the math behind this reverse DCF scenario. Add in Amdocs’ 2.0% dividend yield and history of dividend growth, and it’s clear why this stock is in November’s Dividend Growth Stocks Model Portfolio.
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 as shown in the Harvard Business School and MIT Sloan paper, "Core Earnings: New Data and Evidence”.
Below are specifics on the adjustments we make based on Robo-Analyst findings in Amdocs’ 2019 20-F:
Balance Sheet: we made $1.4 billion of adjustments to calculate invested capital with a net increase of $606 million. The most notable adjustment was $501 million (12% of reported net assets) related to goodwill. See all adjustments to Amdocs’ balance sheet here.
Valuation: we made $2.1 billion of adjustments with a net effect of decreasing shareholder value by $174 million. Apart from total debt, one of the most notable adjustments to shareholder value was $987 million in excess cash. This adjustment represents 11% of Amdocs’ market value. See all adjustments to Amdocs’ valuation here.
This article originally published on December 4, 2020.
Disclosure: David Trainer, Kyle Guske II, Alex Sword, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.
 Harvard Business School features the powerful impact of our research automation technology in the case New Constructs: Disrupting Fundamental Analysis with Robo-Analysts.