Seven new stocks made November’s Dividend Growth Stocks Model Portfolio, which was made available to members on November 30, 2023.
Recap from October’s Picks
On a price return basis, our Dividend Growth Stocks Model Portfolio (+9.2%) underperformed the S&P 500 (+10.8%) by 1.6% from October 27, 2023 through November 28, 2023. On a total return basis, the Model Portfolio (+9.6%) underperformed the S&P 500 (+10.8%) by 1.2% over the same time. The best performing stock was up 26%. Overall, 8 out of 29 Dividend Growth stocks outperformed their respective benchmarks (S&P 500 and Russell 2000) from October 27, 2023 through November 28, 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 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 favor long-term capital appreciation over current income, but still appreciate the power of growing dividends.
Featured Stock for November: D.R. Horton, Inc. (DHI: $134/share)
D.R. Horton (DHI) is the featured stock in November’s Dividend Growth Stocks Model Portfolio.
D.R. Horton has grown revenue by 19% compounded annually and net operating profit after tax (NOPAT) by 24% compounded annually since fiscal 2013. The company’s NOPAT margin increased from 9% in fiscal 2013 to 14% in fiscal 2023, while invested capital turns rose from 0.6 to 1.3 over the same time. Higher invested capital turns and NOPAT margins drive return on invested capital (ROIC) from 6% in fiscal 2013 to 17% in fiscal 2023.
Figure 1: D.R. Horton’s Revenue & NOPAT Since Fiscal 2013
Sources: New Constructs, LLC and company filings
Free Cash Flow Supports Regular Dividend Payments
D.R. Horton has increased its regular dividend from $0.13/share in 1Q18 to $0.30/share in 4Q23. The current quarterly dividend, when annualized, equals $1.20/share and provides a 0.9% dividend yield.
More importantly, D.R. Horton’s cumulative free cash flow (FCF) easily exceeds its regular dividend payments. From fiscal 2018 through fiscal 2023, D. R. Horton generated $7.1 billion (16% of current enterprise value) in FCF while paying $1.6 billion in dividends. See Figure 2.
Figure 2: D.R. Horton’s FCF vs. Regular Dividends Since Fiscal 2018
Sources: New Constructs, LLC and company filings
Companies with FCF well above dividend payments provide higher-quality dividend growth opportunities. On the other hand, dividends that exceed FCF cannot be trusted to grow or even be maintained.
DHI Is Undervalued
At its current price of $134/share, D.R. Horton has a price-to-economic book value (PEBV) ratio of 0.9. This ratio means the market expects D.R. Horton’s NOPAT to permanently decline 10% from current levels. This expectation seems overly pessimistic given that D.R. Horton has grown NOPAT by 23% compounded annually since fiscal 2018 and 24% since fiscal 2013.
Even if D.R. Horton’s NOPAT margin falls to 12% (lowest level since fiscal 2020 and below the five-year average of 14%), and revenue grows just 3% compounded annually for the next decade, the stock would be worth $166/share today – a 24% upside. See the math behind this reverse DCF scenario. In this scenario, D.R. Horton’s NOPAT would increase just 2% compounded annually through 2033. Should the company’s NOPAT grow more in line with historical growth rates, the stock has even more upside.
Add in D.R. Horton’s 0.9% dividend yield and a 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
Below are specifics on the adjustments we make based on Robo-Analyst findings in D.R. Horton’s 10-K:
Income Statement: we made $499 million in adjustments with a net effect of removing $73 million in non-operating expense (<1% of revenue). Professional members can see all adjustments made to D.R. Horton’s income statement on the GAAP Reconciliation tab on the Ratings page on our website.
Balance Sheet: we made $7.2 billion in adjustments to calculate invested capital with a net increase of $797 million. The most notable adjustment was $4.0 billion (15% of reported net assets) in asset write-downs. Professional members can see all adjustments made to D.R. Horton’s balance sheet on the GAAP Reconciliation tab on the Ratings page on our website.
Valuation: we made $6.9 billion in adjustments, with a net decrease of $913 million in shareholder value. The most notable adjustment to shareholder value was $3.2 billion in total debt. This adjustment represents 7% of D. R. Horton’s market value. Professional members can see all adjustments to D.R. Horton’s valuation on the GAAP Reconciliation tab on the Ratings page on our website.
This article was originally published on December 8, 2023.
Disclosure: David Trainer owns DHI. David Trainer, Kyle Guske II, Italo Mendonça, and Hakan Salt 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.