Summary from August Recommendations
On a price-return basis, the safest dividend yield model portfolio (-4.5%) was 2.3% below the S & P 500 (-2.2%) from August 20, 2021 to September 21, 2021. On a total return basis, the model portfolio (-2.2%) -4.0%) was at the same time 2.1% below the S & P 500 (-1.9%). Best-performing large caps decreased by 1% and best-performing small caps increased by 2%. Overall, five of the 19 safest dividend yield stocks broke their respective benchmarks (S & P500 and Russell2000) from August 20, 2021 to September 21, 2021.
This model portfolio only includes stocks that have an attractive or very attractive valuation, have positive free cash flow and economic benefits, and offer a dividend yield of greater than 3%. Companies with strong free cash flow know that they have cash to support their dividends, so they offer higher quality and safer dividend yields. We believe this portfolio will provide a uniquely well-selected equity group that will help improve client performance.
September Featured Stocks: Kellogg’s
Kellogg Company (K) is the hottest stock in September’s safest dividend yield model portfolio. Kellogg produces consistent profits throughout all business cycles.
Over the last five years, Kellogg has grown a combined revenue of less than 1% per year and a combined net operating profit (NOPAT) of 1% per year. Kellogg’s NOPAT margin was flat at 10% from 2015 to the last 12 months (TTM), while return on invested capital (ROIC) was flat at 9% over the same period.
The company’s economic profit, or true business cash flow, increased from $ 823 million in 2015 to $ 960 million, which exceeds TTM.
Figure 1: Kellogg Revenue and economic revenue since 2015
Free cash flow supports dividend payment
Kellogg has paid annual dividends since 1957 and has increased dividends annually for the past 16 years. The 2020 dividend will be $ 2.28 per share, and the current quarterly dividend will provide an annual dividend yield of 3.6%.
Since 2015, Kellogg’s Cumulative Free Cash Flow (FCF) has easily covered standard dividend payments. Over the last five years, Kellogg has generated $ 7 billion in FCF (31% of its current market capitalization) and paid a dividend of $ 4.5 billion, according to Figure 2.
Figure 2: Kellogg FCF vs. standard dividend after 2015
Companies with strong FCFs know that the company has cash to support dividends, so they offer higher quality dividend yields. Dividends from companies with low or negative FCFs, on the other hand, are less reliable as companies may not be able to keep paying dividends.
K is underrated
Kellogg’s current price is $ 64 per share and the ratio of price to economic book value (PEBV) is 0.5. This ratio means that the market expects Kellogg’s NOPAT to decline by 50% permanently. Given that Kellogg has grown NOPAT at a rate of 4% each year over the last two decades, this expectation seems overly pessimistic.
Even if Kellogg’s NOPAT margin drops to 8% (the lowest level in 20 years compared to 10% TTM) and the company’s NOPAT falls by 2% each year in the next 10 years, today’s stock price is 1 It is worth $ 99 per share, up 55%. See the math behind this inverse DCF scenario. As the company grows NOPAT further in line with past growth rates, stock prices will rise further.
Important details found in financial filing by my company Robo-Analyst Technology
Below are details of the adjustments made based on the findings of Robo-Analyst at Kellogg’s 10-K and 10-Q.
Income Statement: Adjusted $ 554 million with the net effect of removing $ 162 million in non-operating expenses (1% of revenue). See here all the adjustments made to Kellogg’s income statement.
Balance Sheet: Net increase of $ 3 billion, adjusted $ 3.8 billion to calculate investment capital. The most notable adjustment was $ 1.7 billion in other comprehensive income (14% of reported net assets). See all adjustments on Kellogg’s balance sheet here.
Valuation: I made a $ 10.2 billion adjustment to shareholder value, all of which reduces shareholder value. Apart from total debt, one of the most notable adjustments to shareholder value was minority interests of $ 518 million. This adjustment represents 2% of Kellogg’s market value. See all adjustments to Kellogg’s rating here.
Disclosure: David Trainer, Kyle Guske II, Alex Sword, and Matt Shuler are not rewarded for writing about a particular stock, style, or theme.