Dividend Growth Ideas: AAPL, CSCO, DKS, DLR, HD, HON, IDV

Microsoft Word - Valuentum_DG_Newsletter_04_1_2021_FINAL.docxOracle Beats Consensus Estimate and Raises Its Dividend by 33%
I N S I D E T H I S I S S U E
1 Oracle Beats Consensus Estimate and Raises Its Dividend by 33%
5 Portfolio: Dividend Growth Ideas
6 Why You MUST Stay Active in Investing
10 Cigna is an Intriguing Health Care Idea
16 Honeywell Reaffirms Outlook, Dividend Looks Great
18 Dividend Growth Portfolio Idea Dick’s Sporting Goods Raises Dividend 16%
20 Realty Income’s Dividend Track Record Unfazed by Its Weakened Theater Exposure
21 About the Dividend Cushion™ Ratio
© 2021 Valuentum. All rights reserved. Reproduction by any means is prohibited.
Brian M. Nelson, CFA President, Equity Research [email protected]
Christopher Araos Associate Stock and Dividend Analyst [email protected]
Callum Turcan Associate Investment Analyst, Co- Editor of Valuentum’s Newsletters [email protected]
*NOTE: The goal of the Dividend Growth Newsletter is to highlight ideas with strong dividend growth potential and update readers about new developments in the market. A simulated portfolio of dividend growth ideas is presented on page 5 of each edition.
“As of April 1, the S&P 500 is trading at
~4,020, which is modestly above the top end of our fair
value estimate range of 3,530-3,920. We are
still optimistic on the long-term outlook for the US economy and continue to view the Dividend Growth
Newsletter portfolio as well-positioned for
2021.”
– Callum Turcan
Dividend Growth Ideas: AAPL, CSCO, DKS, DLR, HD, HON, IDV, JNJ, LMT, MSFT, NEM, O, ORCL, QCOM, RSG, SDY, UNH, XLV Most-recently Added: DKS, HD, HON, QCOM, UNH (Nov 27) Most-recently Removed: INTC (Oct 28)
Apri l 1, 2021 Volume 10 Issue 4
Valuentum Securities www.valuentum.com [email protected]
OUR DIVIDEND GROWTH NEWSLETTER
By Callum Turcan
On March 10, Oracle Corporation (ORCL) reported third quarter earnings for fiscal 2021 (period ended February 28, 2021) that beat both consensus top- and bottom-line estimates. We are big fans of its impressive free cash flow generating abilities. The company’s Dividend Cushion ratio of 3.0 (a stellar ratio) earns Oracle an “EXCELLENT” Dividend Safety rating, and please note that these metrics incorporate our expectations that Oracle will push through meaningful payout increases over the coming fiscal years. We give Oracle an “EXCELLENT” Dividend Growth rating.
In conjunction with its latest earnings report, Oracle boosted its quarterly dividend up to $0.32 per share, up 33% on a sequential basis. At the new payout level, shares of ORCL yield ~1.8% as of this writing. Management also recently increased Oracle’s share buyback authority by $20.0 billion. We were impressed with the company’s latest earnings report and recent operational updates.
Please see Oracle Beats Consensus …on next page
Page 2 Valuentum’s Dividend Growth Newsletter
Earnings Update
On a GAAP basis, Oracle’s revenues were up 3% year-over-year in the fiscal third quarter with growth at its ‘cloud services and license support’ and ‘cloud license and on-premise license’ offsetting declines elsewhere. As we have noted in the past, Oracle is doing a solid job keeping a lid on its cost structure. In the fiscal third quarter, Oracle’s operating costs fell by 1% year-over-year, which combined with modest revenue growth allowed for nice operating margin expansion. Its GAAP operating margins were up over 240 basis points year-over-year and its GAAP operating income climbed higher by 10% year-over-year in the fiscal third quarter.
Special items, namely a $2.3 billion net tax benefit due to the transfer of assets between certain subsidiaries, allowed for Oracle’s GAAP net income to surge higher by 95% year-over-year last fiscal quarter. Its diluted GAAP EPS more than doubled year-over-year in the fiscal third quarter, hitting $1.68, aided by Oracle’s strong underlying performance, the special tax item, and a sharp drop in its outstanding diluted share count (which was down more than 8% year-over-year).
During the first nine months of fiscal 2021, Oracle generated $9.6 billion in free cash flow, up from $8.4 billion during the same period the prior fiscal year. Oracle’s CEO, Safra Catz, mentioned that “recurring revenue, as a percentage of total revenue now represents 72% of total company revenue and we anticipate this trend to continue as cloud services grow” during the firm’s latest earnings which we appreciate. Recurring revenue streams provide for better cash flow profiles due to the highly visible nature of those sales.
Oracle spent $2.4 billion covering its dividend obligations during the first nine months of fiscal 2021 and another $13.0 billion buying back its stock through its repurchase program. The company also spent another $0.6 billion on ‘shares repurchased for tax withholdings upon vesting of restricted stock-based awards’ though it raised $0.9 billion through common stock issuances during this period.
Please note that a portion of Oracle’s share buybacks were partially funded by its balance sheet, which remains strong though there is room for improvement on this front. At the end of February 2021, Oracle had $35.9 billion in cash, cash equivalents, and marketable securities on hand versus $5.8 billion in short-term debt and $63.5 billion in long-term debt. We would like to see Oracle utilize its rock-solid cash flow profile to improve its balance sheet (i.e., reduce its net debt position), though this burden is manageable given Oracle’s strong cash flow profile and ample liquidity on hand.
We are big fans of Oracle’s ability to generate sizable free cash flows in almost any environment. Over the past several fiscal quarters, Oracle’s free cash flow conversion rate (on a trailing twelve-month basis) has been at or above 100% of its GAAP net income.
Operational Update and Guidance
In its latest earnings press release, Oracle noted that revenue at its cloud-based enterprise resource planning (‘ERP’) units Fusion Cloud ERP and NetSuite Cloud ERP were up 30% and 24%, respectively, last fiscal quarter on what appears to be a year-over-year basis. Oracle's Gen2 Cloud Infrastructure unit (includes the Autonomous Database component) posted over 100% revenue growth on what appears to be a year-over-year basis last fiscal quarter, highlighting the firm’s ability to continue growing one of its newer offerings. When Oracle’s Gen2 Cloud Infrastructure was launched back in 2018, the company touted the autonomous database component as being key to giving Oracle an edge over its competitors.
Oracle Beats Consensus …from previous page
Valuentum’s Dividend Growth Newsletter Page 3
The company has done a decent job growing its cloud-oriented businesses over the past few years as Oracle seeks to pivot away from its legacy businesses, though investors were apparently not impressed with its near-term guidance. Oracle provided guidance during its latest earnings call that calls for 5%-7% revenue growth in the fiscal fourth quarter on what appears to be a year-over-year basis, though that growth forecast includes a significant uplift from favorable foreign currency movements. The company noted that “cloud services and license support will grow faster than in Q3, as well as strategic back-office cloud applications” during the earnings call.
Oracle aims to invest more towards businesses that are experiencing strong demand growth of late, and we view this strategy favorably. Should Oracle continue to grow its cloud-oriented operations at a decent clip going forward, that would go a long way to enhancing its cash flow growth outlook. Management noted these investments “will enable [Oracle] to continue to deliver double digit earnings growth, once again, in FY2022 for the fifth year in a row” during the firm’s latest earnings call. Here is additional management commentary concerning Oracle’s near-term forecasts:
“As a result of the increased investment in the [current fiscal] quarter, non-GAAP EPS in USD is expected to grow 7% to 11% and be between a $1.28 and a $1.32 in USD. Non-GAAP EPS in constant currency is expected to be flat to up 4% and be between a $1.20 and a $1.24 in constant currency.” --- Safra Catz, CEO of Oracle
Management noted that Oracle will significantly increase investments towards its Oracle Cloud Infrastructure (‘OCI’) business to better position the company to meet strong demand. During the earnings call, management noted:
“[Oracle] experienced capacity constraints for OCI cloud services as customer workloads expanded dramatically. In addition, we continue to land many new customers, including ISVs [Independent Software Vendors], and we have some very large users coming online shortly that will require significant amounts of capacity. As a result, we're investing aggressively this quarter, this Q4, both OpEx and CapEx to prepare for this increase in cloud consumption and associated revenue in FY2022. As such, we are going to target a 49% operating margin for Q4.” --- CEO of Oracle
The company’s growth outlook is bright. Oracle’s co-founder and CTO, Larry Ellison, noted within the earnings press release that Oracle continues to expand its presence geographically to meet demand. One recent move we found quite intriguing was the launch of Oracle Roving Edge Infrastructure in February 2021, which involves using portable and ruggedized server nodes to enable remote parts of the planet to utilize Oracle’s cloud-based offerings. Here is how a press release described this offering:
Oracle Roving Edge Infrastructure delivers core infrastructure services, platform software, enterprise grade security, and applications to the edge and disconnected locations with Roving Edge Devices, ruggedized, portable, scalable server nodes. It enables customers to operate cloud applications and workloads in the field, including machine learning inference, real-time data integration and replication, augmented analytics, and query-intensive data warehouses. In addition, it delivers cloud computing and storage services at the edge of networks for government and enterprise organizations, enabling low-latency processing closer to the point of data generation and ingestion, which provides timely insights into data.
Beyond expanding its geographical reach, Oracle has also been steadily rolling out material updates to its offerings. In January 2021, the firm announced that Oracle Database 21c was live. According to the press release “Oracle Database 21c contains more than 200 new innovations, including immutable blockchain tables, In-Database JavaScript, native JSON binary data type, AutoML for in-database machine learning (ML), and persistent memory store, as well as enhancements for in-memory, graph processing performance, sharding, multitenant, and security.”
Another significant operational update involved Oracle developing a cloud-based National Electronic Health Records Database along with various management applications for health care needs, specifically to help combat the coronavirus (‘COVID-19’) pandemic. This IT infrastructure is marketed towards US public health agencies and health care providers, with an eye towards supporting vaccine- related activities among other things. In February 2021, Oracle announced that Northwell Health, a non-profit health care provider in New York state, was using Oracle’s IT offerings to meet patient needs during the COVID-19 pandemic. Northwell Health operates roughly two dozen hospitals and uses Oracle’s IT infrastructure to manage its nursing resources, staffing needs, and patient load.
Concluding Thoughts
Oracle does a tremendous job converting its GAAP net income into free cash flow, and its growth outlook is improving on the back of strong demand growth for its cloud-oriented operations. Vaccine distribution efforts should eventually enable public health authorities to contain the COVID-19 pandemic, something that should enable enterprises to resume major IT projects that were delayed by the COVID-19 pandemic, which in turn would support Oracle’s financial outlook. While shares of ORCL initially sold off after its latest earnings report, this latest update reinforces our optimistic view towards Oracle as a rock-solid income growth opportunity. When the dust settles, the market may begin to appreciate some of the understated positives in Oracle’s latest earnings report.
Image Shown: Shares of Oracle have been on a nice upward climb of late.
Disclosure: Callum Turcan does not own shares in any of the securities mentioned above.
Valuentum’s Dividend Growth Newsletter Page 5 The Dividend Growth Newsletter Portfolio
By Valuentum Analysts
Most-recently Added: DKS, HD, HON, QCOM, UNH (Nov 27) Most-recently Removed: INTC (Oct 28)
Goal: The goal of the Dividend Growth Newsletter portfolio is to highlight ideas with strong dividend growth potential and update readers about new developments in the market. The Dividend Growth Newsletter portfolio seeks to find underpriced dividend growth gems that generate strong levels of free cash flow and have solid balance sheets, translating into excellent Valuentum Dividend Cushion ratios. Given market conditions and the importance of diversification, not all stocks in the newsletter portfolio can be undervalued, however. Stocks in the Dividend Growth Newsletter portfolio may have lengthy dividend growth track records spanning decades, but we focus most of our efforts on assessing the future safety and dividend growth potential of ideas. Every subscriber has different goals and different risk tolerances, so where before in the newsletter portfolios, we would outline the specific percentage weighting, we think providing weighting ranges makes much more sense. For example, depending on someone’s risk tolerances, a larger cash position in an overheated market may be prudent. On the other hand, the longer one’s time horizon, perhaps a smaller cash position may make more sense. The Dividend Cushion ratios are so important, so please stay up to date with them. By our estimates, the efficacy of the Dividend Cushion ratio in warning about dividend cuts is roughly 90%. We’re available for any questions.
Standard Disclaimer: The simulated Dividend Growth Newsletter portfolio is for information purposes only and should not be considered a solicitation to buy or sell any security. Valuentum is not responsible for any errors or omissions or for results
obtained from the use of the simulated Dividend Growth Newsletter portfolio and accepts no liability for how readers may choose to utilize the content.
The Dividend Growth Newsletter portfolio is not a real money portfolio. Results are hypothetical and do not represent actual trading. Actual results
may differ from simulated performance information being presented.
The cash weighting in the Dividend Growth Newsletter portfolio is now ~10%-20%.
The midpoints of our respective weighting ranges approximately
sum to 100% to reflect the range of possible combinations
that may result in various allocations.
DIVIDEND GROWTH IDEAS as of April 1, 2021
Company Name Yrly Div's Paid
($) / Shr
Dividend
Yield %
Rating Price/FV Last Close % of Portfolio
Johnson & Johnson (JNJ) 4.04 2.48% $143.00 2.14 3 1.14 162.83 8.0%12.0%
S&P Dividend ETF SPDR (SDY) 3.18 2.68% 118.74 8.0%12.0%
Cisco (CSCO) 1.48 2.85% $51.00 2.85 7 1.02 51.98 5.0%7.0%
Digital Realty Trust (DLR) 4.64 3.24% $152.00 0.71 3 0.94 143.25 5.0%7.0%
Health Care Sector SPDR ETF (XLV) 1.70 1.46% 116.39 5.0%7.0%
iShares Int'l Select Dividend (IDV) 1.28 4.03% 31.67 5.0%7.0%
Lockheed Martin (LMT) 10.40 2.80% $400.00 1.77 3 0.93 371.02 5.0%7.0%
Microsoft (MSFT) 2.24 0.92% $236.00 4.39 6 1.03 242.35 5.0%7.0%
Oracle (ORCL) 1.28 1.78% $67.00 2.99 6 1.07 71.81 5.0%7.0%
Apple (AAPL) 0.82 0.67% $140.00 7.10 6 0.88 123.00 3.0%4.0%
Newmont Mining (NEM) 2.20 3.56% $67.00 2.71 3 0.92 61.81 3.0%4.0%
Realty Income (O) 2.82 4.33% $61.00 0.69 6 1.07 65.11 3.0%4.0%
Republic Services (RSG) 1.70 1.70% $99.00 1.71 6 1.01 99.72 3.0%4.0%
Qualcomm (QCOM) 2.72 1.97% $164.00 3.39 7 0.84 137.79 1.0%2.0%
Home Depot (HD) 6.60 2.14% $265.00 1.53 7 1.16 307.75 1.0%2.0%
Honeywell Intl (HON) 3.72 1.72% $202.00 2.27 5 1.07 216.80 1.0%2.0%
UnitedHealth Group (UNH) 5.00 1.36% $321.00 3.08 7 1.14 367.07 1.0%2.0%
Dick's Sporting Goods (DKS) 1.45 1.83% $67.00 3.22 6 1.18 79.27 1.0%2.0%
Cash Consideration ~1020%
UR = Under Review
Las t c lo s e and dividend per s hare info rmatio n fo r equitie s re trieved fro m Seeking Alpha . Dividend yie ld info rmatio n fo r ETFs re trieved fro m Seeking Alpha .
This po rtfo lio is no t a rea l mo ney po rtfo lio . Data as o f April 1, 2021
Why You MUST Stay Active in Investing
Please see Why You MUST …on next page
I don’t care what kind of indexing propaganda you show me. I’m never playing Russian roulette with my money. I want to know the cash-based intrinsic values of the companies in my portfolio, and that's something worth paying for, regardless of the performance of active versus passive. I care more about what could have happened as a measure of risk than any measure of actual standard deviation. That’s why active management is so valuable. It should help you sleep at night. By Brian Nelson, CFA Staying active has tremendous long-term health benefits, including reducing the risk of cardiovascular disease, cancer, and diabetes. We all know this. Sure, we can stay passive on the couch with a bag of chips and the game on, but we know that a sedentary lifestyle will come back to bite us…eventually. I feel the same way about the conversation about active versus passive when it comes to the health of your retirement savings. There may not seem like there’s anything wrong with sitting on the recliner for days at a time, or not counting calories (like one evaluates future free cash flows), but eventually it will catch up to you. This article isn’t a lesson on healthy living, per se, though if this inspires you to get moving and eat wiser all the better. Instead, this is a lesson on why you must stay active in the stock market and monitor your portfolios frequently, resisting the urge to sit on the couch and hold those unhealthy index funds. Just like a sedentary lifestyle with your personal health, you’re taking a big risk with your personal wealth in index funds whether you see it or not. In finance, we see a lot of randomness that we try to explain with “science” or “human behavior,” but the observation may be nothing more than coincidence. Did you know that if the majority share of fund managers during the period 1963-1998 had outperformed the S&P 500 Index in just five more years, the number of years that the majority share of mutual funds would have outperformed the S&P 500 index would have been greater than half during this 36-year period? Here, a largely random dynamic, but finance has written a far-reaching narrative around the active versus passive debate. It goes something like this: “Money managers are not skilled. You can’t beat the market. Fees are too high to outperform. Costs matter above all else. You get what you don’t pay for.” The narrative has grown so prevalent that researchers such as S&P and Morningstar do not even compare money managers to a universal benchmark like the S&P 500. Instead, they are largely comparing fund managers against benchmarks that are close to the fund managers’ own portfolios and are somehow surprised to learn that fund managers cannot outperform a benchmark that approximates their own portfolio after fees. This isn’t research — this is manipulation. Of course, I mean that in the nicest way possible. The reality is that nobody truly knows how the field of active management is performing. Not only are studies not showing how funds are performing relative to the S&P 500 Index, but we don’t even have all the data on active management, itself. For example, studies that measure the performance of active fund and ETF managers are looking at just 15% of the stock market. The indexing narrative has been built around a random outcome woven over years. When it comes to fund analysis, I care more about the distribution of the performance of active mutual funds and ETFs versus the S&P 500 Index. It is a much better gauge of the merits of active management, in my view. For example, I care more about identifying in advance that large cap growth will outperform the S&P 500 Index than I do in the performance of large cap growth funds versus their large cap growth benchmark. I want to know where investors can outperform, not whether the majority of funds in that area of outperformance are beating their benchmark after fees. What good is an outperforming fund relative to its benchmark that isn’t beating the S&P 500 Index?
A version of this article was emailed out to members on March 25.
Why You MUST…from previous page
Image: Active domestic equity mutual funds and ETFs represent just 15% of the stock market, hardly enough data to make any conclusions about the merits of individual stock selection. Source: ICI. In finance, we can’t be hasty to jump to conclusions to wrap a narrative around the randomness we witness. What if those five years during 1963-1998 had gone the other way, and the majority share of active funds outperformed the S&P 500 Index in more years over that period? What if the incentive of index licensing fees and quant investing didn’t take off this century, where the concept of investing seemed to change to “factors” as active funds were measured against a very close benchmark instead of the S&P 500 Index? In his book, Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets, Nassim Nicholas Taleb addresses the important concept of alternative histories. What the notion comes down to is that we shouldn’t judge the quality of a strategy or an investment decision based on how actual history played out, but rather by the costs of the alternative, or if history had played out in different way. To better explain what I am getting at, here is an excerpt from his book (courtesy of Farnam Street):
Clearly, the quality of a decision cannot be solely judged based on its outcome, but such a point seems to be voiced only by people who fail (those who succeed attribute their success to the quality of their decision). […]
One can illustrate the strange concept of alternative histories as follows. Imagine an eccentric (and bored) tycoon offering you $10 million to play Russian roulette, i.e., to put a revolver containing one bullet in the six available chambers to your head and pull the trigger. Each realization would count as one history, for a total of six possible histories of equal probabilities. Five out of these six histories would lead to enrichment; one would lead to a statistic, that is, an obituary with an embarrassing (but certainly original) cause of death. The problem is that only one of the histories is observed in reality; and the winner of $10 million would elicit the admiration and praise of some fatuous journalist (the very same ones who unconditionally admire the Forbes 500 billionaires). Like almost every executive I have encountered during an eighteen-year career on Wall Street (the role of such executives in my view being no more than a judge of results delivered in a random manner), the public observes the external signs of wealth without even having a glimpse at the source (we call such source the generator.) Consider the possibility that the Russian roulette winner would be used as a role model by his family, friends, and neighbors. [Continued on next page]
[Continued from previous page] While the remaining five histories are not observable, the wise and thoughtful person could easily make a guess as to their attributes. It requires some thoughtfulness and personal courage. In addition, in time, if the roulette-betting fool keeps playing the game, the bad histories will tend to catch up with him. Thus, if a twenty-five-year- old played Russian roulette, say, once a year, there would be a very slim possibility of his surviving until his fiftieth birthday— but, if there are enough players, say thousands of twenty- five-year-old players, we can expect to see a handful of (extremely rich) survivors (and a very large cemetery). […] The reader can see my unusual notion of alternative accounting: $10 million earned through Russian roulette does not have the same value as $10 million earned through the diligent and artful practice of dentistry. They are the same, can buy the same goods, except that one’s dependence on randomness is greater than the other.
The role of alternative histories comes into play when discussing the COVID-19 pandemic. Indexers, for example, point to odds that the probability of a loss for the S&P 500 from January 1930-January 2021 over any rolling 5-10 year-period is 10%-19%, or about 1 in 6, which just happens to be the chances of getting the bullet in the chamber. Indexers are in many ways playing a game of Russian roulette. They are playing the odds just like that twenty-five-year-old with the gun to their head. The fool that keeps playing the game is eventually going to regret it, and an alternate history related to COVID-19 is a great place to grasp what I’m talking about. Let’s excerpt from the second edition of Value Trap to understand:
“…if it were not for the bold Fed and Treasury actions taken during both the Great Financial Crisis and COVID-19 crisis, practitioners of indexing, modern portfolio theory and the efficient markets hypothesis would probably start to fall out of favor. Many capital-market-dependent assets held in index funds would have gone to $0 due to credit unavailability, correlations would have been even more nonsensical (approaching 1 across asset classes), and active investors would have outperformed tremendously as passive investors were caught like a deer in headlights. Never again would fiduciaries be able to use the efficient markets hypothesis as an excuse to not evaluate business fundamentals and calculate intrinsic values--considerations that efficient markets theorists seem to take pride in not doing.”
In an alternate history, a vast number of companies in index funds were wiped out during the COVID-19 pandemic. Congress/Fed/Treasury refused to bail out anybody. The medical community did not deliver on a COVID-19 vaccine in time to stave off massive human devastation. Asset correlations became nonsensical, relegating most quant analysis to the trash bin. Obviously, this alternate history did not happen. But just because index funds were not devastated this time around does not make the strategy of indexing wise. This alternative history exists, even if it is not observable, as does the bullet in the chamber. In 2020, indexers pulled the trigger of the revolver when COVID-19 hit, and this time the chamber was empty. But as indexers keep playing Russian roulette, will the chamber be empty next time? That’s why I’d go so far as to say that paying a 2% annual fee for a great manager that focuses on in-depth intrinsic value analysis is worth it.
Why You MUST …from previous page
That said, when I refer to active management, I don’t necessarily mean active funds or ETFs. I’m referring to active stock selection--or choosing an active fundamental-focused manager that is heavily experienced in competitive-advantage and discounted-cash flow analysis--a manager that knows what his companies are worth. Certainly not quant funds: During the period 2010-2019, for example, Nomura estimates that more than 50% of U.S. quant mutual funds underperformed the market in 8 of those 10 years. I don’t care what kind of indexing propaganda you show me. I’m never playing Russian roulette with my money. I want to know the cash-based intrinsic values of the companies in my portfolio, and that's something worth paying for, regardless of the performance of active versus passive. I care more about what could have happened as a measure of risk than any measure of actual standard deviation. That’s why active management is so valuable. It should help you sleep at night.
Image Shown: If it were not for the massive amount of support that the US Congress, the Fed, and the Treasury provided capital markets, corporates, and the economy at-large during the initial phases of the COVID-19 pandemic, many companies, ETFs, ETNs, leveraged financial products, and other financial products would have “blown up” and investors would have swiftly learned the dangers of price-agnostic trading and investing activities.
Disclosure: Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, and IWM.
Why You MUST …from previous page
Image Source: Cigna Corporation – 2021 Investor Day Presentation Executive Summary: Health care giant Cigna Corporation has a stellar cash flow profile, pristine balance sheet, promising growth outlook, and remains committed to rewarding shareholders. The company initiated a quarterly dividend at the start of 2021 and intends to continue buying back a sizable amount of its stock going forward. Management recently issued favorable guidance that indicates Cigna’s growth story is expected to continue this year as the world emerges from the COVID- 19 pandemic. Cigna’s telehealth ambitions are quite intriguing as well. Recent updates at Cigna have placed the health care company on our radar. By Callum Turcan Cigna Corporation (CI) offers various health care products and services including health insurance plans, behavioral and mental health solutions, home delivery pharmacy services, group disability and life insurance plans, pharmacy benefit management (‘PBM’) services, specialty pharmacy services, vision and dental insurance plans, and more. In December 2018, Cigna completed its ~$67 billion cash-and- stock acquisition of Express Scripts which significant grew its exposure to the pharmacy, specialty pharmacy and PBM space. Cigna places a great emphasis on working with employers such as small- and medium-sized businesses, corporates, and federal government agencies to provide health care products and services to a larger group of people. The firm also offers individual and family health insurance plans. Recent updates from Cigna have caught our attention, especially the news that the company had initiated a quarterly common dividend of $1.00 per share (announced January 2021). On a forward- looking basis, shares of CI yield ~1.6% as of this writing. Cigna’s financials are stellar (pristine balance sheet, strong free cash flow generating abilities) and its growth outlook is quite bright. The health care giant is now on our radar.
Please see Cigna is an Intriguing …on next page
Cigna is an Intriguing Health Care Idea
Cigna is an Intriguing …from previous page Overview In the third quarter of 2020, Cigna rebranded some of its operations as ‘Evernorth’ which houses its Express Scripts, eviCore and Accredo operations (Evernorth provides benefit management, pharmacy and specialty pharmacy services). The company’s other major business operating segment, ‘U.S. Medical,’ provides health insurance products to enterprises and individuals. Last year, these two business operating segments generated close to $155 billion in revenue (~96% of its GAAP revenues) and over $9 billion in adjusted pre- tax segment-level operating income (~88% of its non-GAAP pre-tax adjusted income from operations before including expenses at its ‘corporate’ segment) and represent the backbone of Cigna’s business model. According to its 2020 Annual Report, Cigna noted that its “revenues from U.S. Federal Government agencies, under a number of contracts, represent[ed] 15% of our consolidated revenues in 2020.” Please note that Cigna is heavily exposed to the nature of the US health care landscape on multiple levels. At the end of 2020, Cigna had almost 176 million ‘customer relationships’ including pharmacy customers, health insurance customers, behavior care plan customers, dental insurance customers, Medicare Part D plan customers, overseas customers, and customers of its other offerings. While most of Cigna’s business is in the US, it does have a sizable international business (particularly in South Korea) that offers comprehensive and supplemental health, life, and accident insurance plans. Cigna’s data and analytics operations aim to improve the quality and delivery of health care products and services for its customers while seeking to discover efficiency gains. That was part of the justification for its acquisition of Express Scripts (Cigna noted that the combination would allow it to save money for its customers). Another core part of Cigna’s business involves its vast health care network that is built upon a serious of relationships and arrangements with primary care groups, pharmacies, hospital systems, specialist groups, and other health care entities. Financial Overview Cigna’s financial performance held up quite well in the face of the COVID-19 pandemic, all things considered. In 2020, Cigna grew its GAAP revenues 4% year-over-year on the back of single-digit annual sales growth seen at both its ‘pharmacy revenues’ and ‘premiums’ line-items indicating its pharmacy and insurance businesses held up well last year. Cigna’s GAAP operating income climbed higher 1% year-over- year in 2020 as revenue growth was offset by rising operating expenses, though given the headwinds that faced the firm due to the pandemic, that is solid performance. Due to special items, namely a $4.2 billion divestment gain, Cigna’s GAAP net income surged higher by 66% year-over-year in 2020. We're impressed with Cigna’s cash flow generating abilities and the high-quality nature of its cash flow profile (relatively modest capital expenditure requirements to maintain a certain level of revenues). In 2020, Cigna generated $9.3 billion in free cash flow (up from $8.4 billion in 2019) which fully covered $4.0 billion in share repurchases made during this period. As noted previously, Cigna initiated a quarterly dividend program in January 2021 at $1.00 per share or $4.00 per share on an annualized basis. As of this writing, shares of CI yield ~1.7% on a forward-looking basis and we applaud management for putting shareholders first by initiating the dividend program. We are big fans of Cigna’s fortress-like balance sheet. Cigna had $34.8 billion in cash, cash equivalents, short-term investments, and long-term investments on hand versus $3.4 billion in short-term debt and $29.5 billion in long-term debt at the end of 2020. The company’s ~$1.9 billion net cash position at the end of last year is a tremendous source of support as it concerns Cigna’s forward-looking dividend coverage.
Guidance Looking ahead, Cigna expects to generate at least $165.0 billion in revenue this year (versus $160.4 billion in GAAP sales in 2020), indicating its growth story is expected to continue as the world emerges from the COVID-19 pandemic. The company’s non-GAAP adjusted income from operations per share is expected to hit at least $20.00 in 2021, up from $18.45 in 2020, and its 2021 guidance includes an expected $1.25 per share headwind from the COVID-19 pandemic and Cigna’s recent acquisition activity (which we will cover later in this article). Management expects Cigna will post at least $6.95 billion in non-GAAP adjusted income from operations (up from $6.8 billion in 2020) and at least $7.5 billion in cash flow from operations in 2021 (down versus 2020 levels, likely due to Cigna realizing quite favorable working capital movements last year). We appreciate Cigna expects to continue churning out gobs of cash flow going forward. As Cigna’s capital expenditures are forecasted to stay broadly flat this year versus 2020 levels at ~$1.0 billion, the firm apparently aims to generate around $6.5 billion in free cash flow in 2021 based on its annual guidance. Its dividend obligations are expected to total ~$1.4 billion in 2021, though the company also intends to keep buying back a meaningful amount of its stock as well going forward. The company forecasts that its weighted average shares outstanding will fall to 346 million – 349 million this year (down from ~368.4 million in 2020). Considering Cigna has a pristine balance sheet, high-quality cash flow profile, and its dividend obligations are relatively modest, its forward-looking payout coverage looks quite strong. However, a major acquisition or a fundamental change in the landscape of the US health care sector could change that picture in an instant. Additionally, Cigna’s share buyback plans will compete with its dividend obligations for capital going forward. On March 8, Cigna filed an 8-K SEC filing that noted the company was reaffirming its 2021 guidance ahead of its 2021 Investor Day event. During that event, Cigna put out long-term guidance highlighting its capital allocation prioritizes, expected growth rates, and other goals. From 2021 to 2025, Cigna expects to generate approximately $50.0 billion in cash flow from operations, which will enable the company to continue investing in the business while stepping up its share buybacks and covering its dividend obligations over the coming years. Additional M&A activity is also under consideration.
Image Shown: A snapshot of Cigna’s cash flow and capital allocation guidance through the middle of this decade. Image Source: Cigna – 2021 Investor Day Presentation
Cigna is an Intriguing …from previous page
Powerful demographic tailwinds (expected growth in the cohort aged 75+ in the US and elsewhere), synergies from its acquisition of Express Scripts, new partnerships with health care providers, insights from its enlarged business generated from its data and analytics operations and locating ways to grow its total addressable market (‘TAM’) underpin Cigna’s long-term growth outlook. Cigna expects its Evernorth segment’s adjusted revenues and earnings will both grow by mid-single-digits annually while its U.S. Medical segment’s adjusted revenues and earnings are expected to grow by high single-digits to low double-digits annually over the long haul. The company expects its ‘International Markets’ segment will also grow at a relatively brisk pace going forward.
Image Shown: Cigna’s targeted long-term growth rates are respectable. Image Source: Cigna – 2021 Investor Day Presentation Part of Cigna’s growth strategy rests on the firm building out its domestic individual and family health insurance business. That strategy involves Cigna expanding this business into new states over the next few years.
Image Shown: Cigna aims to grow its domestic individual and family health insurance business by expanding into new states over the coming years. Image Source: Cigna – 2021 Investor Day Presentation
Telehealth Upside In late February, Cigna announced that Evernorth would acquire telehealth platform company MDLIVE and that the deal would close in the second quarter of 2021. According to commentary given during its 2021 Investor Day Event, Cigna expects telehealth visits to generate on average $425 in savings per virtual visit, offering a way to wring out costs from the US health care system. The telehealth market is vast and growing quickly as the COVID-19 pandemic accelerated demand for such offerings due to the desire for households to socially distance and the immense strain the public health crisis has placed on the health care systems of virtually every country worldwide.
Image Shown: The TAM of the telehealth industry is vast and growing at a rapid pace, supported by a sharp increase in adoption of the technology of late. Image Source: Cigna –2021 Investor Day Presentation Cigna held its fourth quarter of 2020 earnings call in early February (before the MDLIVE acquisition was announced) and during that call management was asked a question from an analyst regarding the firm’s view on how telehealth operations could fit in with Cigna’s operations, if digital monitoring of high-risk patients would be part of this strategy, and how Cigna could potentially roll out such offerings. Management had this to say in response to the question during the earnings call:
“…[W]e see significant opportunity to deliver more value, more choice, more simplicity, with appropriate coordination back to customers and patients through effective use of virtual programs. This is well beyond telemedicine, it's well beyond Urgent Care triaging. There's longitudinal nature that is attached to that, it is aided by remote monitoring, it is aided by a coordinated system to make that longitudinal delivery work. We see this transcending from healthcare through behavioral health to coordinated health care and behavioral health services from that standpoint, and we see it as a significant opportunity. I'd also note that, we've been mindful in terms of the positioning of the corporation whereby we see that as not only a significant opportunity in the market, but for us, because we've sought not be positioned in, we'll call it bricks and mortar delivery or fixed delivery infrastructure but having the flexibility of the variable delivery infrastructure that is aided for clients.” --- David Cordani, CEO of Cigna
We are intrigued by Cigna’s upside on the telehealth front. Teladoc Health Inc (TDOC) experienced surging demand for its telehealth offerings last year, its GAAP revenues roughly doubles in 2020 versus 2019 levels. In our view, there is an immense opportunity that benefits all parties given that telehealth offerings, if utilized properly, can (for instance) free up time for doctors while providing greater convenience for patients and potentially enabling sizable cost savings and efficiency gains in the process (all without sacrificing the quality of the delivery of health care services). Concluding Thoughts Cigna’s growth outlook is promising, its balance sheet its pristine, its cash flow profile is stellar, and its guidance is quite favorable. The company’s pending acquisition of MDLIVE is a good fit, in our view, and should help further expand Cigna’s TAM alongside its other initiatives. Recent updates from Cigna, with an eye towards the firm initiating a dividend program and its promising growth outlook, has put the health care giant on our radar.
Image Shown: Shares of Cigna are on a sharp upward trajectory of late, aided by investors warming up to the name after the company initiated a quarterly dividend at the start of 2021.
Disclosure: Callum Turcan does not own shares in any of the securities mentioned above.
Honeywell Reaffirms Outlook, Dividend Looks Great
Image Source: Honeywell-J.P. Morgan Industrials Conference Presentation By Brian Nelson, CFA On Monday, March 15, Honeywell International (HON) reminded us why it is one of our favorite industrial ideas. The firm presented at J.P. Morgan’s Industrial Conference, and we liked what management had to say. Here’s our thoughts on the industrials giant November 27 and the view we still hold today:
With GE’s (GE) fall from grace years ago, Honeywell has taken the reigns as one of Valuentum’s top industrial ideas. Though Honeywell’s valuation is not attractive as we’d like it to be at the moment, we recently raised our fair value significantly to north of $200 per share. With respect to this idea, we’d like to add some more industrials exposure to the Dividend Growth Newsletter portfolio to take advantage of what could become a very strong global economic rebound in 2021.
Industrials equities, as measured by the Industrials Select Sector SPDR ETF (XLI) have outpaced the broader market year-to-date in 2021. Energy equities, as measured by the Energy Select Sector SPDR ETF (XLE), have also soared thus far this year, along with financials, as measured by the Financials Select Sector SPDR ETF (XLF). Our move to rotate into the areas of energy and financials in early January in the Best Ideas Newsletter portfolio has served members well. That said, we could have been more aggressive knowing that we would see some strength in the most beaten-down areas of financials and industrial/energy, but it’s very hard to pass up (or trade in and out of) some of the strongest entities on the marketplace that we already include in the newsletter portfolios, namely many of the net-cash-rich, competitively advantaged and free-cash-flow powerhouses found within big cap tech. For example, we think companies such as Apple (AAPL) and Microsoft (MSFT) will be the dividend growth companies of this decade, and we can’t take our eye off the bigger picture. In the longer run, we still think big cap tech is the place to be in light of secular growth trends and higher-return business (asset light) models, but there are opportunities within other sectors as well. Specifically, for dividend growth investors that are seeking long-term exposure to the industrials sector, it’s hard to find a better idea than Honeywell, in our view. The company’s ‘Key Messages’ at the J.P Morgan Conference are provided in the image below, including its emphasis on capital deployment toward dividends and growth in them (Honeywell has raised the payout eleven times in the past ten years).
Please see Honeywell Reaffirms …on next page
Image Source: Honeywell – J.P. Morgan Industrials Conference Presentation Looking ahead to full-year 2021, Honeywell's management reaffirmed its previously issued guidance, calling for sales to be in the range of $33.4-$34.4 billion with organic growth of 1%-4%. Segment margins for the year are targeted at 20.7%-21.1%, up 30-70 basis points on a year-over-year basis, and earnings per share is anticipated to be between $7.60-$8.00, up 7%-13% on an adjusted basis. When it reported fourth-quarter results January 29, the company released a target range of $5.1-$5.5 billion in free cash flow for 2021. To put that range in perspective, it paid out just $2.6 billion in cash dividends during 2020, revealing very nice coverage of the dividend with expected free cash flow. The company’s Dividend Cushion ration of 2.3 is robust, and while we’d prefer the company to have a net cash position, long-term investment-grade credit ratings of A, A, and A2 at S&P, Fitch, and Moody’s, respectively, speak to tremendous financial health.
Image Source: Honeywell’s 2020 10-K.
Concluding Thoughts 2021 will be a solid year for Honeywell, but we expect 2022 and 2023 to be even brighter, as some of the company’s revenue initiatives bear fruit in a much healthier industrial marketplace buoyed by greater infrastructure spending. The cost cuts put in place during COVID-19 should help with margin improvement as economic conditions pick up, putting the firm in a position to surprise to the upside. We expect continued dividend growth. Honeywell yields ~1.7% at the time of this writing.
Disclosure: Brian Nelson owns shares in SPY, SCHG, QQQ, and IWM.
Honeywell Reaffirms …from previous page
Dividend Growth Portfolio Idea Dick’s Sporting Goods Raises Dividend 16%
Image Source: Mike Mozart. Dick's Sporting Goods put up its best same-store-sales growth rate in history during 2020. We continue to like shares of the sporting goods retailer in the Dividend Growth Newsletter portfolio. By Brian Nelson, CFA Kudos to one of the latest additions to the Dividend Growth Newsletter portfolio, Dick’s Sporting Goods (DKS). The company announced March 9 concurrent with its fourth-quarter 2020 press release that it increased its quarterly payout 16%, to $0.3625 per share, or $1.45 per share on an annualized basis, good enough for a nice ~1.9% forward expected dividend yield. With a Dividend Cushion ratio of 3.2 at its last update, we expect future dividend growth to be robust at Dick’s Sporting Goods for years to come. The company’s shares aren’t too pricey either, and we point to $80 as the high end of our fair value estimate range (the stock is trading hands at $70 at the time of this writing). Though COVID-19 presented many challenges, Dick’s Sporting Goods had a very strong 2020. For the full-year, net sales leapt 9.5% thanks to its best same-store sales performance ever of 9.9% (the full- year to net sales growth mark was weighed down by some temporary store closings). The big driver, of course, was e-commerce where sales doubled, with roughly 30% of total sales of the sporting goods retailer coming from digital channels. 2020 earnings per share advanced 71% and 66%, respectively, on a GAAP and non-GAAP basis. Dick’s Sporting Goods will start to bump into difficult year-over-year comps given the outstanding year it had in 2020, but we’re taking more of a long-term view on this dividend growth prospect. For 2021, net sales are expected to advance ~1.6% at the midpoint of its guidance range (with consolidated same- store sales targeted in the range of -2% to 2%). Earnings per share on a GAAP and non-GAAP basis are targeted in the range of $3.81-$4.55 and $4.40-$5.20, respectively. The measures aren’t as robust as the $5.72 and $6.12 per-share marks it achieved during 2020, respectively.
Please see Dividend Growth Portfolio …on next page
Still, the midpoint of the 2021 bottom-line targets suggests an increase of 25% and 30% relative to pre- COVID normalized numbers in 2019, respectively, and Dick’s Sporting Goods' omnichannel capabilities position it well for the long run. Secular trends toward healthier living and active lifestyles coupled with favorable shifts in consumer demand, particularly in the areas of golf and home fitness, should continue to offer tailwinds to its business. In the fourth-quarter press release, management noted that its business has “so much momentum, and (it has) been pleased with (its) start to the year.” We continue to like Dick’s Sporting Goods as an idea in the simulated Dividend Growth Newsletter portfolio and point to its tremendous free cash flow generation in fiscal 2020 as just one of the reasons why. It hauled in $1.55 billion in cash flow from operations, up from $404.6 million in the year-ago period, while spending $224.1 million in capital spending (capital expenditures were $217.5 million in 2019). Traditional free cash flow generation of $1.33 billion in 2020 surged from the $187.2 million it pulled in during 2019. Dick's Sporting Goods paid out $107.4 million in dividends to stockholders in 2020. The company’s balance sheet is healthy, too, with ~$1.7 billion in cash and cash equivalents on the books relative to ~$418.5 million in convertible senior notes due 2025 and $2.3 billion in long-term operating lease liabilities (it also holds ~$472.7 million in short-term operating lease liabilities). In light of Dick’s Sporting Goods’ strong free cash flow generation and healthy cash position on the books, we think its balance sheet is strong. Total inventory fell 11.3% from last year’s mark, revealing the company’s product selection is moving off the shelves nicely. Concluding Thoughts Dick’s Sporting Goods showcased the strength of its business model during 2020, and while it may not be able to duplicate the results in 2021, we think the future is bright. Free cash flow generation trends are solid, its balance sheet is healthy, and dividend coverage is sound. As more and more consumers choose healthier lifestyles, Dick’s Sporting Goods remains in a sweet spot to capture continued demand. With a solid ~1.9% dividend yield, the company remains a holding in the simulated Dividend Growth Newsletter portfolio. We expect continued strong dividend growth for years to come.
Image Shown: Shares of Dick’s Sporting Goods are on a nice upward climb over the past year.
Dividend Growth Portfolio …from previous page
Image Source: Realty Income By Brian Nelson, CFA On Monday, February 22, Realty Income (O) reported solid fourth quarter results that beat expectations. For the quarter ending December 31, 2020, net income per share came in at $0.33, adjusted funds from operations per share was $0.84, and the REIT collected 93.6% of contractual rent, a decent percentage given that the troubled theater industry comprises ~5.6% of its annualized contractual rent. Regal Cinemas and AMC Entertainment (AMC) are top-10 customers. Though Realty Income continues to face headwinds from its non-investment grade client tenant portfolio, the REIT continues to invest for the future, with over $1 billion allocated to properties and properties under development or expansion in the period. As with many of its REIT peers, Realty Income remains capital-market dependent, issuing hundreds of millions in senior unsecured notes and selling $655 million in stock during the period. Management had the following to say about full-year 2020 and its outlook for 2021:
Throughout 2020, we maintained a strong financial position and enhanced our financial flexibility, as we established a $1.0 billion commercial paper program and completed our debut public offering of Sterling-denominated senior unsecured notes. In total, we issued approximately $4.1 billion of long-term and permanent capital, which included record-low USD coupon rates in the REIT sector for the 5-year and 12-year unsecured notes issued in December 2020. Based on the strength of our financial position and investment pipeline, we project 2021 acquisition volume of over $3.25 billion, translating into 2021 AFFO per share guidance of $3.44 to $3.49.
We include Realty Income, “The Monthly Dividend Company,” in Dividend Growth Newletter portfolio, and the company’s long-term dividend growth track record has been fantastic, posting 90+ consecutive quarterly dividend increases. Though the REIT is capital-market dependent, its investment-grade corporate debt ratings (A3/A-) support its ability to tap the debt and equity markets when needed, as it has been doing during this COVID-19 crisis. Shares of Realty Income yield ~4.4% at the time of this writing.
Realty Income’s Dividend Track Record Unfazed by Its Weakened Theater Exposure
About the Valuentum Dividend Cushion™ Ratio By Valuentum Analysts
History has revealed that the best performing stocks during the previous decades have been those that shelled out ever-increasing cash to shareholders in the form of dividends. In a recent study by Ned Davis Research, S&P 500 stocks that initiated dividends or grew them over time registered roughly a 9.6% annualized return since 1972 (through 2010), while stocks that did not pay out dividends or cut them performed poorly over the same time period.
Such analysis is difficult to ignore, and we believe investors may be well-rewarded in future periods by finding the best dividend-growth stocks out there. As such, we've developed a rigorous dividend investment methodology that uncovers firms that not only have the strongest dividends but also ones that are poised to grow them long into the future.
How did we do this? Well, first of all, we scoured our stock universe for firms that have cut their dividends in the past to uncover the major drivers behind the dividend cut. This is what we found out: The major reasons why firms cut their dividend had to do with preserving cash in the midst of a secular or cyclical downturn in demand for their products/services or when faced with excessive leverage (how much debt they held on their respective balance sheets) during tightening credit markets.
The Importance of Forward-Looking Dividend Analysis
Informed with this knowledge, we developed the forward-looking Valuentum Dividend Cushion™, which is a ratio that gauges the safety of a dividend over time.
Most dividend analysis that we’ve seen out there is backward-looking – meaning it rests on what the firm has done in the past. Although analyzing historical trends is important, we think assessing what may happen in the future is even more important. The S&P 500 Dividend Aristocrat list, or a grouping of firms that have raised their dividends for the past 25 years, is a great example of why backward-looking analysis can be painful. One only has to look over the past few years to see the removal of well-known names from the Dividend Aristocrat List (including General Electric and Pfizer) to understand that backward-looking analysis is only part of the story. After all, you’re investing for the future, so the future is what you should care about more.
We want to find stocks that will increase their dividends for 25 years into the future, not use a rear-view mirror to build a portfolio of names that may already be past their prime dividend growth years. The Valuentum Dividend Cushion™ ratio measures just how safe the dividend is in the future. It considers the firm’s net cash on its balance sheet (cash and cash equivalents less debt) and adds that to its forecasted future free cash flows (cash from operations less capital expenditures) and divides that sum by the firm’s future expected dividend payments. At its core, it tells investors whether the firm has enough cash to pay out its dividends in the future, while considering its debt load. If a firm has a Valuentum Dividend Cushion™ above 1, it can cover its dividend on the basis of our estimates, but if it falls below 1, trouble may be on the horizon.
In the study, the Valuentum Dividend Cushion™ process caught every dividend cut made by a non-financial, operating firm that we have in our database, except for one (Marriott). But interestingly, the Valuentum Dividend Cushion™ indicated that Marriott should have never cut its dividend, and sure enough, two years after the firm did so, it raised it to levels that were higher than before the cut.
Here are the results of the study (a Valuentum Dividend Cushion™ below 1 indicates the dividend may be in trouble). The Valuentum Dividend Cushion™ ratio shown in the table below is the measure in the year before the firm cut its dividend, so it represents a predictive indicator. The measure continues to do well by members in walk-forward analysis (beyond the limitations of a back-tested academic study).
Please see About the Valuentum Dividend Cushion…on next page
About the Valuentum Dividend Cushion…from previous page
The following link, for example, provides more information of the Dividend Cushion ratio tested in a robust out-of-sample walk-forward study across our coverage universe from its inception in 2012 through 2017:
Our Dividend Growth Methodology Is Rocking! http://www.valuentum.com/articles/20130528
At the very least, using the Valuentum Dividend Cushion can help you avoid firms that are at risk of cutting their dividends in the future. And we are the only firm out there that does this type of in-depth analysis for you. We provide the Valuentum Dividend Cushion ratio in the dividend reports and monthly Dividend Growth Newsletter, and we also scale the safety of a firm’s dividend based on this measure in simple terms: Excellent, Good, Poor, Very Poor.
Here’s a glimpse of the Valuentum Dividend Cushion ratio (as of November 2017) for a sample set of firms in our coverage universe. Please note that the current score on these and hundreds more are available with a membership to our website:
Understanding Dividend Growth
It takes time to accumulate wealth through dividends, so dividend growth investing requires a long-term perspective. We assess the long-term future growth potential of a firm’s dividend, and we don’t take management’s word for it. Instead, we dive into the financial statements and make our own forecasts of the future to see if what management is saying is actually achievable. We use the Valuentum Dividend Cushion™ as a way to judge the capacity for management to raise its dividend – how much cushion it has – and we couple that assessment with the firm’s dividend track record, or management’s willingness to raise the dividend.
In many cases, we may have a different view of a firm’s dividend growth potential than what may be widely held in the investment community. That’s fine by us, as our dividend-growth investment horizon is often longer than others'. We want to make sure that the firm has the capacity and willingness to increase the dividend years into the future and will not be weighed down by an excessive debt load or cyclical or secular problems in fundamental demand for their products/services. We scale our dividend- growth assessment in an easily interpreted fashion: Excellent, Good, Poor, Very Poor.
What Are the Dividend Ideas We Seek to Deliver to You in Our Newsletter?
First of all, we’re looking for stocks with dividend yields that are greater than the average of the S&P 500, or about 2% (but preferably north of 3%). This excludes many names, but we think such a cutoff eliminates firms whose dividend streams aren’t yet large enough to generate sufficient income. Second, we’re looking for firms that register an 'EXCELLENT' or 'GOOD' rating on our scale for both safety and future potential growth. And third, we’re looking for firms that have a relatively lower risk of capital loss, as measured by our estimate of the company’s fair value.
The Valuentum Dividend Cushion™ ratio has an excellent track record of predicting dividend cuts. For more information, please select the following link (login required):
http://www.valuentum.com/articles/20130528
Valuentum Dividend Growth Newsletter: Volume 10, Issue 4
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personalized advice for newsletter clients. The Advisor has discretion to make trades in its clients’ accounts without receiving prior authorization in each instance. Valuentum’s customers also acknowledge that in
managing the Advisors’ clients’ assets, Advisor may purchase or sell securities in which Valuentum has an opposite opinion on, and Advisor, its members, officers, directors, or employees, directly or indirectly, have or
may acquire a position or interest that contradicts that of Valuentum’s opinion. Due to the fiduciary relationship between Advisor and its clients, Valuentum’s customers will not receive alerts of trades done by Advisor,
and trades done by Valuentum’s customers based on opinions of Valuentum might lag trades done by Advisor’s clients.
Advisor or its affiliated persons may obtain material, nonpublic or other confidential information that, if disclosed, might affect an investor’s decision to buy, sell or hold a security. Under applicable law, Advisor or
Valuentum and their affiliated persons cannot improperly disclose or use this information for their personal benefit or for the benefit of any person, including clients of Advisor or customers of Valuentum. If Advisor or
any affiliated person obtains nonpublic or other confidential information about any issuer, Valuentum will have no obligation to disclose the information to customers of it, clients of Advisor or use it for their benefit.
Amended October 28, 2020

Documents

Dividend Growth Ideas: AAPL, CSCO, DKS, DLR, HD, HON, IDV