Summary of January selections
Based on price return, the Safest Dividend Yields model portfolio (+0.1%) outperformed the S&P 500 (+0.0%) by 0.1% from January 20, 2022 to February 16, 2022. total return, the model portfolio (+0.4%) outperformed the S&P 500 (0.0%) by 0.4% over the same period. The best performing large cap stocks rose 15% and the best performing small cap stocks rose 5%. Overall, 8 of the 20 Safest Dividend Yield stocks outperformed their respective benchmarks (S&P 500 and Russell 2000) from January 20, 2022 through February 16, 2022.
This model portfolio only includes stocks that are rated attractively or very attractively, have positive free cash flow and economic earnings, and offer a dividend yield greater than 3%. Companies with high free cash flow offer higher quality and safer dividend yields because I know they have the cash to support the dividend. I think this portfolio offers a particularly well-selected group of stocks that can help clients outperform.
Featured action for February: Conagra Brands Inc.
Conagra Brands, Inc. (CAG) is the star stock in February’s safest dividend yield model portfolio.
Conagra increased its revenue and net operating profit after tax (NOPAT) by 12% and 22% compounded annually, respectively, from fiscal year 2018 (fiscal year is 5/30) to fiscal year 2021. Conagra’s NOPAT increase increased economic profit from $290 million to $929 million. at the same time. In the last twelve months (TTM), economic profits are $693 million, which, although down from fiscal 2021, is still higher than all but four years since 1998.
Figure 1: Economic benefits of Conagra since fiscal year 2018
Free cash flow supports dividend payments
Conagra has paid dividends every year since fiscal 1990 and increased its dividend from $0.90/share in fiscal 2017 to $1.04/share in fiscal 2021. The regular quarterly dividend current, when annualized, offers a dividend yield of 3.5%.
In fiscal 2019, Conagra acquired Pinnacle Foods Inc. for approximately $10.9 billion, which contributed to the company’s free cash flow (FCF) of -$10.5 billion this year -the. Excluding fiscal year 2019, Conagra’s FCF exceeded its dividend payment each year. While FCF has grown from $562 million in fiscal 2018 (the year before the acquisition) to $968 million TTM, Conagra is easily generating enough cash to support its increased dividend. In fiscal years 2020 and 2021, Conagra generated $3.3 billion (19% of current market capitalization) in FCF while paying $888 million in dividends.
Figure 2: Conagra FCF vs dividends since FY 2017
Companies with a high FCF offer higher quality dividend yields because I know the company has the cash to support its dividend. On the other hand, the dividends of companies with a low or negative FCF cannot be trusted as much because the company may not be able to continue paying dividends.
Conagra is underrated
At its current price of $36/share, Conagra has a price-to-economic book value (PEBV) ratio of 0.5. This ratio means that the market expects Conagra’s NOPAT to fall permanently by 50%. This expectation seems overly pessimistic given that Conagra has increased NOPAT by 5% compounded annually over the past decade.
Even if Conagra’s NOPAT margin falls to 11% (lowest in five years, from 12% TTM) and the company’s NOPAT drops 2% compounded annually over the next decade, the stock is worth $69/ share today, an increase of 92%. . Discover the calculations behind this reverse DCF scenario. In this scenario, Conagra’s NOPAT for FY2031 is 3% below TTM levels. If the company develops NOPAT more in line with historical growth rates, the stock has even more potential.
Critical Details Found in Financial Documents by My Company’s Robo-Analyst Technology
Below are details of the adjustments I make based on Robo-Analyst’s findings in Conagra’s 10-Ks and 10-Qs:
Income statement: I made adjustments of $813 million, with the net effect of removing $227 million in non-operating expenses (2% of revenue).
Balance sheet: I made adjustments of $6.1 billion to calculate invested capital with a net increase of $5.4 billion. The most notable adjustment was $4.2 billion (22% of reported net assets) in asset write-downs.
Valuation: I made adjustments of $12.7 billion, which had the net effect of reducing shareholder value by $12.4 billion. Besides total debt, one of the most notable shareholder value adjustments was $1.2 billion in deferred tax liabilities. This adjustment represents 7% of the market value of Conagra.
Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation for writing about a specific stock, style, or theme.