I’m back again to give you another free stock pick from our Safest Dividend Yields Model Portfolio. Last week, we shared a free featured stock from our Exec Comp Aligned with ROIC Model Portfolio. In that letter, we came right out and addressed the elephant in the room: why would we give away something so valuable? The answers:

  1. We genuinely believe in improving the integrity of the stock market.
  2. We hope to get your business one day.

So with that out of the way, let’s get to what we’re giving you in this report: a stock that has been in the Safest Dividend Yields Model Portfolio for multiple months and is also in our Focus List Stocks: Long Model Portfolio.

The featured stock summary is an example of the research we do. It is not a full report, but we do think it is important that you’re able to see stocks like this on a regular basis. We hope you come back, and we want you to see the extreme value we deliver.

Usually, when people give away things for free, it’s because it’s worthless to them. That’s not the case here.

We usually charge $600 to $1,000 per month for access to stocks in these Model Portfolios.

We want to earn your trust. Out of the 18 stocks in the Model Portfolio this month, we chose HF Sinclair because of its connection with our Focus List: Long, the best-of-the-best of our Long Ideas.

Our write-up is below. We hope you enjoy it. We hope you find value. Please share with family and friends if you think it would be of interest.

As David shared in a recent training, dividends provide a safe haven in a volatile market, and the stocks in this Model Portfolio have some of the safest dividends in the market.

We update this Model Portfolio monthly, July’s Safest Dividend Yields Model Portfolio, was updated and published for clients on July 19, 2024.

Recap from June’s Picks

On a price return basis, our Safest Dividend Yields Model Portfolio (+6.6%) outperformed the S&P 500 (+1.5%) by 5.1% from June 18, 2024 through July 17, 2024. On a total return basis, the Model Portfolio (+7.0%) outperformed the S&P 500 (+1.9%) by 5.1% over the same time. The best performing large-cap stock was up 24%, and the best performing small-cap s

tock was up 19%. Overall, 8 out of the 18 Safest Dividend Yield stocks outperformed their respective benchmarks (S&P 500 and Russell 2000) from June 18, 2024 through July 17, 2024.

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 July: HF Sinclair (DINO: $50/share)

HF Sinclair (DINO) is the featured stock in July’s Safest Dividend Yields Model Portfolio.

In the trailing-twelve-months (TTM) ended 1Q24, HF Sinclair’s Core Earnings were $1.5 billion, which are higher than any annual period since 2013 excluding the record highs of 2022 and 2023.

Longer-term, HF Sinclair has grown revenue and Core Earnings by 4% and 7% compounded annually from 2013 through the TTM ended 1Q24. The company’s net operating profit after-tax (NOPAT) margin and invested capital turns have fluctuated over the past five years, but HF Sinclair’s return on invested capital (ROIC) improved from 9% in 2019 to 10% over the TTM.

Figure 1: HF Sinclair’s Revenue & Core Earnings Since Fiscal 2013

DINO Revenue and Core Earnings 2013-TTM

Sources: New Constructs, LLC and company filings

Free Cash Flow Exceeds Regular Dividend Payments

HF Sinclair has increased its regular dividend from $0.33/share in 2Q19 to $0.50/share in 2Q24. The current quarterly dividend, when annualized provides a 4.0% dividend yield.

HF Sinclair’s free cash flow (FCF) excluding acquisitions easily exceeds its regular dividend payments. From 2019 through 1Q24, HF Sinclair generated $6.0 billion (43% of current enterprise value) in FCF excluding acquisitions while paying $1.2 billion in dividends. See Figure 2.

Figure 2: HF Sinclair’s FCF Vs. Regular Dividends Since 2019

DINO FCF vs Dividends 2019-TTM

Sources: New Constructs, LLC and company filings

As Figure 2 shows, HF Sinclair’s dividends are backed by a history of reliable cash flows. Dividends from companies with low or negative FCF are less dependable since the company would not be able to sustain paying dividends.

DINO Is Undervalued

At its current price of $50/share, HF Sinclair has a price-to-economic book value (PEBV) ratio of 0.5. This ratio means the market expects HF Sinclair’s NOPAT to fall 50% from TTM levels. This expectation seems overly pessimistic given that HF Sinclair has grown NOPAT 6% and 7% compounded annually since 2018 and 2013, respectively.

Even if HF Sinclair’s NOPAT margin falls to 4.5% (equal to 5-year average and below TTM margin of 5.4%) and the company’s revenue falls 1% compounded annually for the next decade, the stock would be worth $72/share today – a 20% upside. See the math behind this reverse DCF scenario. In this scenario, HF Sinclair’s NOPAT falls 5% compounded annually through 2033. 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 HF Sinclair’s 10-K and 10-Q:

Income Statement: we made nearly $800 million in adjustments with a net effect of removing nearly $500 million in non-operating expenses. Clients can see all adjustments made to HF Sinclair’s income statement on the GAAP Reconciliation tab on the Ratings page on our website.

Balance Sheet: we made over $1.5 billion in adjustments to calculate invested capital with a net increase of over $1.4 billion. The most notable adjustment was for asset write-downs. See all adjustments made to HF Sinclair’s balance sheet on the GAAP Reconciliation tab on the Ratings page on our website.

Valuation: we made over $4.5 billion in adjustments, all of which decreased shareholder value. Apart from total debt, the most notable adjustment to shareholder value was for deferred tax liabilities. See all adjustments to HF Sinclair’s valuation on the GAAP Reconciliation tab on the Ratings page on our website.

This article was originally published on July 29, 2024.

Disclosure: David Trainer, Kyle Guske II, 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.

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