Four new stocks made December’s Dividend Growth Stocks Model Portfolio, which was made available to members on December 29, 2022.
Recap From November’s Picks
On a price return basis, our Dividend Growth Stocks Model Portfolio (-3.8%) outperformed the S&P 500 (-6.4%) by 2.6%, and on a total return basis, the Model Portfolio (-3.5%) outperformed the S&P 500 (-6.0%) by 2.5%. The best-performing stock outperformed the S&P 500 by 10%. Overall, 20 out of 30 Dividend Growth Stocks outperformed the S&P 500 from November 30, 2022 to December 27, 2022.
On a price return basis, our Dividend Growth Stocks Model Portfolio (+8.2%) outperformed the S&P 500 (+4.2%) by 4.0%, and on a total return basis, the Model Portfolio (+8.5%) outperformed the S&P 500 (+4.2%) by 4.3%. The best-performing stock outperformed the S&P 500 by 25%. Overall, 22 out of the 30 Dividend Growth Stocks outperformed the S&P 500 from October 27, 2022 through November 28, 2022.
This Model Portfolio mimics an “All Cap Blend” style with a focus on dividend growth. Selected stocks earn an Attractive or Very Attractive rating, generate positive free cash flow (FCF) and economic earnings, offer a current dividend yield >1%, and have a 5+ year track record of consecutive dividend growth. This Model Portfolio is designed for investors who favor long-term capital appreciation over current income, but still appreciate the power of growing dividends.
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.
December’s Featured Stock: Tyson Foods, Inc. (TSN: $64/share)
Tyson Foods, Inc. (TSN) is the featured stock from December’s Dividend Growth Stocks Model Portfolio. We made TSN a Long Idea on October 12, 2022. Since then, the stock is down 2% vs. a 4% gain for the S&P 500.
Tyson has grown revenue by 5% compounded annually and net operating profit after-tax (NOPAT) by 15% compounded annually over the past decade. The company’s NOPAT margin rose from 3% in fiscal 2012 (FYE 9/29/12) to 7% in fiscal 2022, while return on invested capital (ROIC) rose from 8% to 11% over the same time.
Figure 1: Tyson’s Revenue and NOPAT Since 2012
Sources: New Constructs, LLC and company filings
FCF Exceeds Dividends by a Wide Margin
Tyson has increased its Class A dividend in each of the past 11 years. The company increased its Class A dividend from $1.28/share in fiscal 2018 to $1.86/share in fiscal 2022, or 10% compounded annually. The current quarterly Class A dividend, when annualized, equals $1.92/share and provides a 3.0% dividend yield.
More importantly, Tyson’s strong free cash flow (FCF) easily exceeds the company’s growing dividend payments. From fiscal 2018 – 2022, Tyson’s cumulative $5.8 billion (17% of enterprise value) in FCF is 2x the $2.9 billion paid out in dividends, per Figure 2.
Figure 2: Free Cash Flow vs. Dividend Payments
Sources: New Constructs, LLC and company filings
Companies with FCF well above dividend payments provide higher-quality dividend growth opportunities because we know the company generates the cash to support a higher dividend. On the other hand, dividends that exceed FCF cannot be trusted to grow or even be maintained.
Tyson Has Upside Potential
At its current price of $64/share, TSN has a price-to-economic book value (PEBV) ratio of 0.4. This means the market expects Tyson’s NOPAT to permanently decline by 60%. This expectation seems overly pessimistic for a company that has grown NOPAT by 10% compounded annually over the past five years and 15% compounded annually over the past 10 years.
Even if Tyson’s NOPAT margin falls to 5% (vs. 7% in fiscal 2022) and the company grows revenue by just 1% compounded annually for the next 10 years, the stock would be worth $100/share today – a 56% upside. In this scenario, Tyson’s NOPAT would fall 2% compounded annually over the next decade. See the math behind the reverse DCF scenario.
Should the company grow NOPAT more in line with historical growth rates, the stock has even more upside. Add in Tyson’s 3.0% dividend yield and a history of dividend growth, and it’s clear why this stock is in December’s Dividend Growth Stocks Model Portfolio.
Critical Details Found in Financial Filings by Our Robo-Analyst Technology
Below are specific adjustments we made based on Robo-Analyst findings in Tyson’s 10-Ks and 10-Qs:
Income Statement: We made $694 million in adjustments with a net effect of removing $301 million in non-operating expenses (1% of revenue). Clients can see all adjustments made to Tyson’s income statement on the GAAP Reconciliation tab on the Ratings page on our website.
Balance Sheet: We made $9.3 billion in adjustments to calculate invested capital with a net increase of $2.5 billion. The most notable adjustment was $4.9 billion (16% of reported net assets) in deferred tax assets. Clients can see all adjustments made to Tyson’s balance sheet on the GAAP Reconciliation tab on the Ratings page on our website.
Valuation: We made $11.9 billion in adjustments with a net decrease to shareholder value of $11.2 billion. Apart from total debt, the most notable adjustment to shareholder value was $2.5 billion in deferred tax liabilities. This adjustment represents 11% of Tyson’s market value. Clients can see all adjustments to Tyson’s valuation on the GAAP Reconciliation tab on the Ratings page on our website.
This article was originally published on January 6, 2023.
Disclosure: David Trainer, Kyle Guske II, Matt Shuler, and Italo Mendonça 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.