We hope you enjoy this free research on this month’s featured stock for the Safest Dividend Yields Model Portfolio.
The idea behind featuring stocks and sharing research with you is to give you free insights into the uniquely high value-add of our research. We want you to know how we do research, so you know what reliable research looks like. While we’re not giving away the name of the stock, we are giving away our rigorous research techniques.
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Today’s feature provides a summary of how we pick stocks for this Model Portfolio. This summary is not a full Long Idea report, but it gives you insight into the rigor of our research and approach to picking stocks. Whether you’re a subscriber or not, we think it is important that you’re able to see our research on stocks on a regular basis. We’re proud to share our work.
Our write-up is below. We hope you enjoy it. We hope you find value.
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, September’s Safest Dividend Yields Model Portfolio, was updated and published for clients on September 20, 2024.
Recap from August’s Picks
The best performing large-cap stock was up 8%, and the best performing small-cap stock was up 16%. Overall, 9 out of the 16 Safest Dividend Yield stocks outperformed their respective benchmarks (S&P 500 and Russell 2000) from August 21, 2024 through September 18, 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 September: Financials Company
Since 2013, this company has grown revenue and net operating profit after tax (NOPAT) by 24% and 25% compounded annually. The company’s NOPAT margin increased from 31% in 2013 to 34% in the TTM, while invested capital turns remained at 0.4 over the same time. Rising NOPAT margins and stable invested capital turns drive the company’s return on invested capital (ROIC) from 14% in 2013 to 15% in the TTM.
Figure 1: Revenue & NOPAT Since 2013
Sources: New Constructs, LLC and company filings
Free Cash Flow Exceeds Regular Dividend Payments
This company has increased its regular dividend from $0.19/share in 1Q18 to $0.40/share in 3Q24. The current quarterly dividend, when annualized provides a 3.8% dividend yield.
The company’s free cash flow (FCF) easily exceeds its regular dividend payments. From 2018 through 1Q24, this company generated $1.3 billion (25% of current enterprise value) in FCF while paying $867 million in regular dividends. See Figure 2.
Figure 2: FCF Vs. Regular Dividends Since 2018
Sources: New Constructs, LLC and company filings
As Figure 2 shows, this company’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.
This Stock Is Undervalued
At its current price of $42/share, this stock has a price-to-economic book value (PEBV) ratio of 0.6. This ratio means the market expects this company’s NOPAT to fall 40% from TTM levels. This expectation seems overly pessimistic given that the company has grown NOPAT 13% and 25% compounded annually over the last five and ten years, respectively.
Even if the company’s NOPAT margin falls to 20% (below 5-year average of 38% and TTM margin of 34%) and the company’s revenue grows just 6% (compared to 24% compounded annually over the last ten years) compounded annually for the next decade, the stock would be worth $55/share today – a 31% upside. In this scenario, the company’s NOPAT falls <1% 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 this featured stock’s 10-K and 10-Q:
Income Statement: we made nearly $160 million in adjustments with a net effect of removing over $140 million in non-operating expenses. Professional members can see all adjustments made to income statements on the GAAP Reconciliation tab on the Ratings page on our website.
Balance Sheet: we made over $740 million in adjustments to calculate invested capital with a net increase of over $230 million. The most notable adjustment was for total reserves. Professional members can see all adjustments made to balance sheets on the GAAP Reconciliation tab on the Ratings page on our website.
Valuation: we made over $410 million in adjustments, all of which decreased shareholder value. The most notable adjustment to shareholder value was for preferred capital. Professional members can see all adjustments to valuations on the GAAP Reconciliation tab on the Ratings page on our website.
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