LONG-TERM INVESTING IN HIGH-QUALITY DIVIDEND STOCKS
Sure Dividend
LONG-TERM INVESTING IN HIGH-QUALITY DIVIDEND STOCKS
March 2019 Edition
By Ben Reynolds, Nick McCullum, & Bob Ciura Edited by Brad Beams
Published on March 3rd, 2019
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Table of Contents
Opening Thoughts - On Newell Brands, Value, & Patience - ................................................... 3 Sell Recommendation: Clorox (CLX) ........................................................................................ 4 Sell Recommendation: Nike (NKE)............................................................................................ 5 The Sure Dividend Top 10 ? March 2019 ................................................................................... 6 Analysis of Top 10 Stocks............................................................................................................. 7
AbbVie Inc. (ABBV) .................................................................................................................. 7 Walgreens Boots Alliance Inc. (WBA) .................................................................................... 12 Caterpillar Inc. (CAT)............................................................................................................... 17 Eaton Vance Corp. (EV) ........................................................................................................... 22 Bank OZK (OZK) ..................................................................................................................... 27 Ameriprise Financial Inc. (AMP) ............................................................................................. 32 WestRock Co. (WRK) .............................................................................................................. 37 AT&T Inc. (T) .......................................................................................................................... 42 Cardinal Health Inc. (CAH) ...................................................................................................... 47 Western Digital Corp. (WDC) .................................................................................................. 52 Closing Thoughts - On The Dividend Aristocrats - ................................................................. 57 Real Money Portfolio .................................................................................................................. 58 Buying & Ranking Criteria ....................................................................................................... 59 Portfolio Building Guide ............................................................................................................ 60 Examples................................................................................................................................... 60 Past Recommendations & Sells.................................................................................................. 61 Sell Rules .................................................................................................................................. 61 Current Holds............................................................................................................................ 61 Pending Sells............................................................................................................................. 64 Sold Positions............................................................................................................................ 64 List of Stocks by Dividend Risk Score ...................................................................................... 65 List of Stocks by Sector .............................................................................................................. 70
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Opening Thoughts - On Newell Brands, Value, & Patience -
Newell Brands (NWL) traded over $50/share briefly in the summers of 2016 and 2017. The stock is currently trading for less than $20/share, including a ~20% decline since the company released its 4th quarter earnings on February 15th. What's going on at Newell?
First, the company acquired Jarden in 2016 for a total deal value of $16 billion. Newell over-paid and over-leveraged itself trying to grow rapidly by making a transformative acquisition. The company has had to divest many brands to streamline its operations (certainly a positive) and pay down debt (due to its overly aggressive Jarden acquisition). To the company's credit, the dividend has grown each year since 2010, even through this difficult restructuring period.
Newell released its 4th quarter and fiscal 2018 earnings results on February 15th. Debt was reduced from ~$10.5 billion to ~$7.0 billion on the year, a significant improvement. The company also reduced its share count by more than 7% in fiscal 2018. And, Newell grew adjusted earnings-per-share 4.4% in the quarter versus the same quarter a year ago. But guidance was troubling...
Specifically, the company is expecting operating cash flow of $400 million at the midpoint of its guidance in fiscal 2019 versus $680 million in fiscal 2018. On more careful analysis, the underlying business will be more profitable than the $400 million cash flow number suggests, because it includes reductions of $200 million for divestiture closing costs and taxes, and $200 million for restructuring and related costs. It also does not include operating cash flow from expected divestitures. The first $200 million is obviously a one-time charge. The second $200 million should be, but companies tend to throw more costs into restructuring than are merited. Conservatively, Newell Brands will generate $700 million plus in operating cash flow after fiscal 2019 (assuming no recession occurs). This comes to $1.65/share in operating cash flows at the current share count (versus a dividend of $0.92/share).
But where Newell gets more interesting is how it plans to use the cash from its planned brand divestitures. Newell expects to generate roughly $4 billion in fiscal 2019 from divestitures. This money will be used to further pay down debt and repurchase shares. If management follows its guidance, the share count could fall 30% into fiscal 2020 ? and keep in mind these repurchases are at low valuations, enhancing shareholder value. Also, if any of the company's cost reduction and restructuring moves bear fruit (which we believe is likely), operating cash flows will be even higher. The company could easily have operating cash flows of $3.00/share by the end of fiscal 2020. Assigning a reasonable valuation multiple, the company's shares will likely be worth $30 to $45 by the end of fiscal 2020 making reasonable assumptions about the divestiture plan and share repurchases.
And that's where value and long-term investing come into play. Newell posted worse guidance than we expected for fiscal 2019. But the company's plan remains in place, and it's likely investors will benefit from a significantly reduced share count (done at a low share price no less). This is not the type of opportunity open to someone investing for the next quarter. This story will play out over the next 1 to 2 years. That's why it's important to have a long-term outlook while analyzing shorter-term results closely. Further, understanding the expected value of a security through reasonable analysis can give a reason to hold for the long run. And with stocks like Newell that pay dividends (which management has no plan to change), investors get paid to be patient.
Disclosure: I (Ben Reynolds) am long NWL.
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Sell Recommendation: Clorox (CLX)
As a reminder, we are selling up to two securities a month from our past recommendations that have low expected total returns.
Having low expected total returns does not mean the underlying business is weak in any way. In fact, it could be an incredibly high-quality business that has weak expected total returns due to being significantly overvalued.
And that's the case with Clorox. Clorox is one of the safest businesses around. It does well during recessions. It has trusted disposable consumer products that are unlikely to be replaced by advances in technology. In short, Clorox is the type of business you want to own for the long run at the right price.
But other investors have noticed Clorox's strength and bid the share price up. The stock looks overvalued at current prices. With great businesses, investors can hold when they are unappreciated or fairly valued and take advantage of market mispricing when they are overvalued. That's why we are recommending selling Clorox today.
We first recommended Clorox in the first-ever edition of The Sure Dividend Newsletter (April 2014), where it was ranked 7th out of 10. Since that time, Clorox shares have gone on to deliver total returns1 of 102.9% (15.6% annualized) versus 66.1% (10.9% annualized) for the S&P 500.
Our Clorox recommendation has worked out better than expected, trouncing the market and doubling in value (including dividends).
Clorox's Growth Clorox's earnings-per-share have grown from $4.26 in fiscal 2014 to $6.26 in fiscal 2018, a 46.9% increase (10.1% on an annualized basis). And, the company has grown its earnings-per-share each year since 2014. Clorox's future growth strategy is centered around cost reductions, bolt-on acquisitions, modest organic growth, and share repurchases. The company does not have excellent growth prospects ahead; we forecast just 5% growth annually moving forward.
Clorox's Yield & Valuation What is a fair price-to-earnings ratio for a secure company with a 5% expected growth rate and a slightly-above-average dividend yield of 2.5%? We do not think it's anywhere near 25, around where Clorox's current price-to-earnings ratio is. We peg fair value for Clorox at a price-to-earnings ratio of 19. If the company reverts to our estimate of fair value in 5 years, total returns will be reduced by around 5% annually. When valuation is factored in, Clorox is poised to generate total returns of around 2.5% a year over the next several years. This is about in line with inflation ? and does not properly compensate investors for holding Clorox.
Performance, Recommendation, & Review Our Clorox recommendation delivered strong total returns due to the dual tailwinds of solid earningsper-share growth and a rising valuation multiple. It is time to harvest these gains and reinvest the proceeds into a security with better expected total returns ahead ? like any of those in this month's Top 10. We recommend selling Clorox now.
1 Return data from morning trading 2/28/19.
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Sell Recommendation: Nike (NKE)
We first recommended Nike in the May 2017 edition of The Sure Dividend Newsletter where it was ranked 6th out of 10.
Like Clorox, the reason to sell Nike is because it is significantly overvalued, not because of anything to do with the underlying business. We view Nike as a high-quality brand and industry leader in the athletic apparel space. Since we recommended Nike it has generated total returns2 of 62.1% (30.6% annualized) versus 20.5% (10.9% annualized) for the S&P 500 (SPY). With annual returns nearly 3x those of the S&P 500, our Nike recommendation has worked out far better than we hoped.
Nike's Growth When we first recommended Nike in May of 2017, we expected annual adjusted-earnings-per-share growth of around 11% annually. Today, we are still targeting the same 11.0% growth annually.
When we first recommended Nike in 2017, it was three quarters into its fiscal 2017. Nike generated earnings-per-share of $2.51 in fiscal 2017 and then went on to generate earnings-per-share of just $2.40 in fiscal 2018. But we expect the company to generate earnings-per-share of $2.65 in fiscal 2019, up ~10% from fiscal 2018, and up 5.6% from the fiscal 2017 numbers.
While Nike is a growth company, the strong returns (for the stock) mentioned above did not come primarily from growth. Valuation multiple expansion was the primary return driver.
Nike's Yield & Valuation We recommended Nike with a yield of 1.3% and a price-to-earnings ratio of 23x expected 2017 earnings. Price expansion has reduced Nike's yield to just 1.0% today (despite rising dividends). Nike's historical average price-to-earnings ratio over the last decade is 20.5. With strong growth prospects and high marks for safety, we believe a price-to-earnings ratio of 21.5 is fair for Nike.
But the stock is trading for a sky-high price-to-earnings ratio of 32.5 using expected fiscal 2019 earnings-per-share of $2.65. If Nike reverts to our estimate of a fair price-to-earnings ratio of 21.5 over the next 5 years, it will realize a 7.9% annualized drag on returns. When valuation is factored in, Nike's expected total returns over the next 5 years are just above 4% annually ? not nearly high enough to justify holding Nike shares. The stock is severely overvalued.
Performance, Recommendation, & Review Nike was not the typical Sure Dividend recommendation in that it had a below average yield. We typically look for stocks with higher yields and lower price-to-earnings ratios than Nike. But the stock offered growth and safety at a fair price. And the investment has worked out well, beating the S&P 500 handily since we recommended it.
Since our initial recommendation, Nike has seen its forward price-to-earnings ratio expand from 23 to 32.5 (a 41% jump). The stock now appears significantly overvalued; now is a good time to harvest gains and reinvest into better opportunities. We recommend selling Nike now and reinvesting into a company with better total return potential. Any of this month's Top 10 would make a fine replacement.
2 Total return data from mid-morning 2/28/19.
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