Reports of the Best Dividend Stocks

This category contains listings of the most recently published stock analysis reports.

For the full list, see the alphabetical listing of stock reports.

Mondelez: 5 Years After Spinning-Off Kraft

What Makes Mondelez (MDLZ) a Good Business?

When I think of Mondelez, I think… yummy! I must admit I’m a bit biased; Oreo Cookie & Cream are my favorite cookies. Besides making delicious cookies, Mondelez is one of the world’s largest snack manufacturer. The company is mostly known for its cookies and chocolate brands representing 71% of its revenue.

Source: MDLZ fact sheet

The company is driving 70% of what they call their “power brand” as follows:

Source: MDLZ fact sheet

Revenue

Revenue Graph from Ycharts

Over the years, MDLZ has grown to a point beyond reason. In fact, Mondelez is the result of a separation of Kraft (formerly KFT) and what became Mondelez after the spin-off in 2012. Since then, Kraft has been bought by Warren Buffett and merged with Heinz to create Kraft Heinz (KHC). Are you lost? Imagine that in early 2017, rumors spread that KHC eyed Mondelez for a potential acquisition… When riches don’t know what to do with their time…

Over the past few years, MDLZ continued to sell their smaller brand in order to improve its focus around its Power Brands. During their latest quarter, management posted some solid numbers showing their strategy worked:

MDLZ Q3 2017 presentation

How MDLZ fares vs My 7 Principles of Investing

We all have our methods for analyzing a company. Over the years of trading, I’ve been through several stock research methodologies from various sources. This is how I came up with my 7 investing principles of dividend investing. Let’s take a closer look at them.

Principle #1: High Dividend Yield Doesn’t Equal High Returns

My first investment principle goes against many income-seeking investors’ rules: I try to avoid most companies with a dividend yield over 5%. Very few investments like this will be made in my case (you can read my case against high dividend yield here). The reason is simple: when a company pays a high dividend, it’s because the market thinks it’s a risky investment… or that the company has nothing else but a constant cash flow to offer its investors. However, high yield hardly comse with dividend growth and this is what I am seeking most.

Source: data from Ycharts.

As you can see, when there is a major spin-off, it is difficult to analyze what is left of the “new company”. The dividend kept increasing after the spin-off and so did the price. MDLZ currently rewards shareholders with a 2% yield.

MDLZ meets my 1st investing principles.

Principle #2: Focus on Dividend Growth

Speaking of which, my second investing principle relates to dividend growth as being the most important metric of all. It proves management’s trust in the company’s future and is also a good sign of a sound business model. Over time, a dividend payment cannot be increased if the company is unable to increase its earnings. Steady earnings can’t be derived from anything else but increasing revenue. Who doesn’t want to own a company that shows rising revenues and earnings?

Source: Ycharts

Over the past 5 years, MDLZ has increased its dividend payment. This makes it half-way to becoming a Dividend Achiever. The Dividend Achievers Index refers to all public companies that have successfully increased their dividend payments for at least ten consecutive years. At the time of writing this article, there were 265 companies that achieved this milestone. You can get the complete list of Dividend Achievers with comprehensive metrics here.

Mondelez hasn’t just increased its dividend, it offered a double-digit dividend growth (11.1%) over this period.

MDLZ meets my 2nd investing principle.

Principle #3: Find Sustainable Dividend Growth Stocks

Past dividend growth history is always interesting and tells you a lot about what happened with a company. As investors, we are more concerned about the future than the past. This is why it is important to find companies that will be able to sustain their dividend growth.

Source: data from Ycharts.

While shareholders have received a substantial raise in paycheck, the company’s dividend payout ratios are still well under control. I don’t expect a double-digit dividend growth rate for several years again, but a high single digit seems sustainable.

MDLZ meets my 3rd investing principle.

Principle #4: The Business Model Ensure Future Growth

I like MDLZ’s focus on strong brand while ignoring underperforming ones. I think that a company should always bet on its strengths to become the best in its field. This is exactly what MDLZ is doing. The company currently manages eight $1+ billion brands.

Source: Mondelez website

On top of their Power Brands, MDLZ continues to show positive results across emerging markets and with their eCommerce strategy.

MDLZ Q3 2017 presentation

There is definitely a growing interest for the snack industry across the world. The middle class is growing in many emerging markets, leading to additional buying powers and the desire for treats like chocolate and cookies.

MDLZ still shows a strong business model and meets my 4th investing principle.

Principle #5: Buy When You Have Money in Hand – At The Right Valuation

I think the perfect timing to buy stocks is when you have money. Sleeping money is always a bad investment. However, it doesn’t mean that you should buy everything you see because you have some savings aside. There is valuation work to be done. In order to achieve this task, I will start by looking at how the stock market valued the stock over the past 10 years by looking at its PE ratio:

Source: data from Ycharts.

I must admit that the current 29 PE ratio is not something that makes me cheer. The 12 month forward PE makes more sense at 19.68. Still, we are probably not talking about a deal here.

Digging deeper into this stock valuation, I will use a double-stage dividend discount model. As a dividend growth investor, I’d rather see companies like big money-making machines and assess their value as such.

I’ve used a strong 8% dividend growth rate for the first 10 years. After all, management shows a clear commitment toward rewarding shareholders. Since the company can afford it, the generous increase makes sense.

Here are the details of my calculations:

Input Descriptions for 15-Cell Matrix INPUTS
Enter Recent Annual Dividend Payment: $0.88
Enter Expected Dividend Growth Rate Years 1-10: 8.00%
Enter Expected Terminal Dividend Growth Rate: 6.50%
Enter Discount Rate: 9.00%
Discount Rate (Horizontal)
Margin of Safety 8.00% 9.00% 10.00%
20% Premium $85.54 $51.07 $36.31
10% Premium $78.41 $46.81 $33.28
Intrinsic Value $71.28 $42.56 $30.25
10% Discount $64.15 $38.30 $27.23
20% Discount $57.02 $34.04 $24.20

Source: How to use the Dividend Discount Model

According to the DDM, MDLZ trades at a fair market value. Since the market has desperately been seeking for income over the past decade, I appreciate there is no deal for a company generating recurring revenues.

MDLZ meet my 5th investing principle

Principle #6: The Rationale Used to Buy is Also Used to Sell

I’ve found that one of the biggest investor struggles is to know when to buy and sell his holdings. I use a very simple, but very effective rule to overcome my emotions when it is the time to pull the trigger. My investment decisions are motivated by whether or not the company confirms my investment thesis. Once the reasons (my investment thesis) why I purchase shares of a company are not valid anymore, I sell and never look back.

Investment thesis

An investment in Mondelez is an investment in a leader in the food industry. What I like about MDLZ is its focus on its power brands. Those brands enjoy stronger pricing power leading to better margins. Mondelez also benefits from a steady growth from emerging markets and its online strategy. As the food industry is consolidating, MDLZ could also become an interesting acquisition for a larger company such as KHC or Unilever (UL).

Potential downsides

The price of commodities such as cocoa and sugar can fluctuate and give MDLZ headaches from time to time. As I previously mentioned, the snack business shows growth opportunities other players haven’t missed. Hershey (HSY), for example, is eyeing the snack business to diversify its operation away from the chocolate industry. This will incur additional pressure on margins.

MDLZ shows a solid investment thesis and meet my 6th investing principle.

Principle #7: Think Core, Think Growth

My investing strategy is divided into two segments: the core portfolio built with strong & stable stocks meeting all our requirements. The second part is called the “dividend growth stock addition” where I may ignore one of the metrics mentioned in principles #1 to #5 for a greater upside potential (e.g. riskier pick as well).

I see Mondelez as a healthy business with interesting growth vectors. However, keep in mind this is a company evolving in a mature market and don’t expect its business to surge from nowhere. MDLZ will be a “hold steady” stock in your portfolio rewarding you with an increasing dividend.

MDLZ is a core holding.

Final Thoughts on MDLZ – Buy, Hold or Sell?

Overall, I like MDLZ business model and growth perspective. I think it’s a good holding for any investors who wish to patiently wait and watch its paycheck growing year after year. As it is currently priced at a fair value, there are better opportunities in the stock market at the moment. I have done a Stock Card on Hershey (HSY) showing it is probably a better deal.

Disclaimer: I do not hold MDLZ in my DividendStocksRock portfolios.

 

Duke Energy – Just Another Strong Utility

What Makes Duke Energy (DUK) a Good Business?

Duke Energy is the 7th largest electric power company in the United States.  It provides electric services to 7.5 million retail clients across the Carolinas, the Midwest, and Florida, and natural gas distribution services to 1.6 million clients in Ohio and Kentucky.

Source: DUK fact sheet

The company once had international operations but sold them in 2016. Going forward, DUK plans to focus on generating cleaner energy and building natural gas infrastructure. DUK doesn’t only mention the word “cleaner” for fun; it has retired 40 older coal units, reducing their carbon dioxide emissions by 29% since 2005.

Revenue

Revenue Graph from Ycharts

Besides selling their international assets in 2016, DUK spent $6.7 billion to acquire Piedmont Natural Gas. This transaction should help DUK generate additional synergy as Piedmont was active in Duke’s territories. A 4-6% revenue growth is expected going forward (DUK Q3 presentation).

How DUK fares vs My 7 Principles of Investing

We all have our methods for analyzing a company. Over my years of trading, I’ve used several stock research methodologies from various sources. This is how I came up with my 7 investing principles of dividend investing. Let’s take a closer look at them.

Principle #1: High Dividend Yield Doesn’t Equal High Returns

My first investment principle goes against many income-seeking investors’ rule: I try to avoid most companies with a dividend yield over 5%. Very few investments like this will be made in my case (you can read my case against high dividend yield here). The reason is simple; when a company pays a high dividend, it’s because the market thinks it’s a risky investment… or that the company has nothing besides a constant cash flow to offer its investors. However, high yields hardly come with dividend growth and this is what I am seeking most.

Source: data from Ycharts.

After the 2008 crisis, we can clearly see 3 trends:

#1 The dividends kept increasing year after year

#2 DUK stock prices followed a similar trend

#3 DUK dividend yield has slowly reduced down to 3.79%

Duke offers an interesting yield for income seekers while not making unsustainable promises.

DUK meets my 1st investing principles.

Principle#2: Focus on Dividend Growth

Speaking of this, my second investing principle relates to dividend growth as being the most important metric of all. It proves management’s trust in the company’s future and is also a good sign of a sound business model. Over time, a dividend payment cannot be increased if the company is unable to increase its earnings. Steady earnings can’t be derived from anything but increasing revenue. Who doesn’t want to own a company that shows rising revenues and earnings?

Source: Ycharts

When you look at DUK’s dividend growth in dollars, it looks quite impressive. However, when you put the same graph into a percentage (%) progression, you realize that DUK is offering a steady, but small dividend growth rate. Nonetheless, Duke has successfully increased its payouts for 10 consecutive years. This make it part of the elite Dividend Achievers list. The Dividend Achievers Index refers to all public companies that have successfully increased their dividend payments for at least ten consecutive years. At the time this article was written, there were 265 companies that have achieved this milestone. You can get the complete list of Dividend Achievers with comprehensive metrics here.

DUK meets my 2nd investing principle.

Principle #3: Find Sustainable Dividend Growth Stocks

Past dividend growth history is always interesting and tells you a lot about what has happened with a company. As investors, we are more concerned about the future than the past. This is why it is important to find companies that will be able to sustain their dividend growth.

Source: data from Ycharts.

When you look at both the payout and the cash payout ratio, you understand why the company can’t afford to increase its dividend in a more substantial manner. However, using those metrics is not the best way to determine if a utility can or cannot sustain its dividend. You can use the FFO (and in the best word, AFFO) to see if the company generates enough money to pay its distribution:

Source: Ycharts

The company is well positioned to continue paying its dividend and offer a modest increase year after year. The board committed to increase its payout by 4-6% during their latest presentation.

DUK meets my 3rd investing principle.

Principle #4: The Business Model Ensure Future Growth

I like DUK’s focus on what they know best (electricity and natural gas) and the fact that it is the 7th largest utility company in the U.S. I also like its interest in generating cleaner energy and the fact management has allocated an important budget to do it.

Duke shows an impressive $42 billion budget for expenditures for the coming years (2017-2021). Its program focuses on grid modernization, transitioning to a cleaner generation profile, natural gas infrastructure investments and environmental remediation. While this is good news, we are talking about some serious money being invested in the upcoming years.

DUK still shows a strong business model and meets my 4th investing principle.

Principle #5: Buy When You Have Money in Hand – At the Right Valuation

I think the perfect time to buy stocks is when you have money. Sleeping money is always a bad investment. However, it doesn’t mean that you should buy everything you see because you need to have some savings set aside. There is a valuation work to be done. In order to achieve this, I will start by looking at how the stock market valued the stock over the past 10 years by looking at its PE ratio:

Source: data from Ycharts.

Well… a 30 PE ratio isn’t exactly what I’m looking for when I look at a utility. The 12-month forward PE makes more sense closer to 20. It even looks like a deal when I compare DUK forward PE with WEC Energy Group (WEC) and Xcel (XEL).

Digging deeper into this stock valuation, I will use a double-stage dividend discount model. As a dividend growth investor, I would rather see companies as big money making machines and assess their value as such.

Here are the details of my calculations:

Input Descriptions for 15-Cell Matrix INPUTS
Enter Recent Annual Dividend Payment: $3.56
Enter Expected Dividend Growth Rate Years 1-10: 5.00%
Enter Expected Terminal Dividend Growth Rate: 5.00%
Enter Discount Rate: 9.00%
Discount Rate (Horizontal)
Margin of Safety 8.00% 9.00% 10.00%
20% Premium $149.52 $112.14 $89.71
10% Premium $137.06 $102.80 $82.24
Intrinsic Value $124.60 $93.45 $74.76
10% Discount $112.14 $84.11 $67.28
20% Discount $99.68 $74.76 $59.81

Source: how to use the Dividend Discount Model

When I look at the DDM, I can tell DUK is trading close to its fair value. I will not shock anyone by saying there is no deal here. However, you are not overpaying for a solid income source either.

DUK meet my 5th investing principle

Principle #6: The Rationale Used to Buy is Also Used to Sell

I’ve found that one of the biggest investor struggles is knowing when to buy and sell their holdings. I use a very simple, but very effective rule to overcome my emotions when it is the time to pull the trigger. My investment decisions are motivated by the fact that the company confirms or does not confirm my investment thesis. Once the reasons (my investment thesis) why I purchase shares of a company are not valid anymore, I sell and never look back.

Investment thesis

An investment in a utility stock is usually made on the classic thought of buying a sustainable source of income. This is exactly what is happening with DUK. The company shows a strong business model and a focus on stable revenue sources. You can expect your dividend to growth to be like clockwork. Best of all, your yearly paycheck increase will beat inflation year after year. DUK is a perfect match for any retirement or conservative portfolio.

DUK shows a solid investment thesis and meet my 6th investing principle.

Principle #7: Think Core, Think Growth

My investing strategy is divided into two segments: the core portfolio built with strong & stable stocks meeting all our requirements, and the second part called the “dividend growth stock addition” where I may ignore one of the metrics mentioned in principles #1 to #5 for a greater upside potential (e.g. riskier pick as well).

You will rarely see a utility stock being part of a growth portfolio, right? Duke will focus on strengthening its position in its territory and providing cleaner energy. Don’t expect the company to grow through acquisitions in the upcoming year, management has already a full plate here. Therefore, expect DUK to grow steadily and reward you with a stable dividend check each quarter.

DUK is a core holding.

Final Thoughts on DUK – Buy, Hold or Sell?

I’m not overly excited by DUK, but I think it’s a good fit for many income-seeking investors. The business is solid, the dividend payment is sustainable and this situation will remain stable for several years. I personally prefer NextEra (NEE) or WEC Energy Group (WEC), but DUK is definitely a good stock to hold if you are looking for a steady payout.

Disclaimer: I do not hold DUK in my DividendStocksRock portfolios.

 

Invesco: when performance matters

What Makes Invesco (IVZ) a Good Business?

As we are riding a never-ending bull market, Invesco continues to perform like there is no tomorrow. At the end of September 2017, 64%, 67% and 75% of Invesco’s actively managed portfolios were beating their peers on 1, 3 and 5 years basis. In other words, when investors look for performance, they look at Invesco.

Source: IVZ Q3 2017 presentation

The company has been proven resilient after the sale of Atlantic Trust in 2013 and the departure of their all-star portfolio manager Neil Woodford in 2014. Those two events affected the most important metric for any investment firm: assets under management. Despite these two events, IVZ shows a positive AUM growth of 1.9% annualized rate over the past 5 years. Let’s take a deeper look at this strong investing firm.

Revenue

Revenue Graph from Ycharts

As mentioned in my introduction, IVZ shows a strong performance model that enabled it to keep its AUM growing. Revenue are now back to growth territories and the recent acquisitions in the ETFs business will definitely push IVZ to higher level.

What I like about IVZ AUM is that we are not only talking about assets being lifted-up by strong market performance. The company recorded long-term net inflows of $6.3 billion in their latest quarter.

How IVZ fares vs My 7 Principles of Investing

We all have our methods for analyzing a company. Over the years of trading, I’ve been through several stock research methodologies from various sources. This is how I came up with my 7 investing principles of dividend investing. Let’s take a closer look at them.

Principle #1: High Dividend Yield Doesn’t Equal High Returns

My first investment principle goes against many incomes seeking investors’ rule: I try to avoid most companies with a dividend yield over 5%.  Few investments like this will be made in my case (you can read my case against high dividend yield here). The reason is simple; when a company pays a high dividend, it’s because the market thinks it’s a risky investment… or that the company has nothing else but a constant cash flow to offer its investors. However, high yield hardly come with dividend growth and this is what I am seeking most.

Source: data from Ycharts.

As its dividend keeps increasing, IVZ yield is relatively stable. After offering a low yield of 2.50% for a few years, the company is now even more generous at 3%+. Keep in mind that IVZ stock price surged by almost 30% since the beginning of the year (as at November 6th).

IVZ meets my 1st investing principles.

Principle#2: Focus on Dividend Growth

Speaking of which, my second investing principle relates to dividend growth as being the most important metric of all. It proves management’s trust in the company’s future and is also a good sign of a sound business model. Over time, a dividend payment cannot be increased if the company is unable to increase its earnings. Steady earnings can’t be derived from anything else but increasing revenue. Who doesn’t want to own a company that shows rising revenues and earnings?

Source: Ycharts

This year, management announced a 3.6% dividend increase. This is not a phenomenal growth, but it is its 8th consecutive years with an increase. This makes it only 2 years apart of appearing on the elite Dividend Achievers list. The Dividend Achievers Index refers to all public companies that have successfully increased their dividend payments for at least ten consecutive years. At the time of writing this article, there were 265 companies that achieved this milestone. You can get the complete list of Dividend Achievers with comprehensive metrics here.

IVZ meets my 2nd investing principle.

Principle #3: Find Sustainable Dividend Growth Stocks

Past dividend growth history is always interesting and tells you a lot about what happened with a company. As investors, we are more concerned about the future than the past. This is why it is important to find companies that will sustain their dividend growth.

Source: data from Ycharts.

When you look at IVZ payout ratio, everything looks great. At 50%, we can predict many years of dividend growth. However, I understood management’s decision of going with a mediocre increase when I took a deeper look at the cash payout ratio. IVZ maintains little room to pay their dividend with their cash in hand. This is not a problematic situation just yet, but you can expect there won’t be a dividend raise if the market falls (and IVZ revenues and earnings follow).

IVZ meets my 3rd investing principle, but proceed with caution.

Principle #4: The Business Model Ensure Future Growth

Invesco’s business model is mainly from experience and performance. In a world where beating your neighbor is more important than anything, IVZ is doing a marvelous job. IVZ has built a strong brand and its name is synonym of trust and performance. This unique advantage will help the company going through any type of storms coming ahead.

Management is also well aware of the current state in the investing world; the seek for ETFs and other passive products is on. For this reason, IVZ recently acquired ETFs operations from Source and Guggenheim. IVZ is a little bit late in the game compared to my favorite pick in this field, BlackRock (BLK), but will definitely create a growth vector out of the ETF business.

IVZ still shows a strong business model and meets my 4th investing principle.

Principle #5: Buy When You Have Money in Hand – At The Right Valuation

I think the perfect timing to buy stocks is when you have money. Sleeping money is always a bad investment. However, it doesn’t mean that you should buy everything you see because you have some savings aside. There is a valuation work to be done. To achieve this task, I will start by looking at how the stock market valued the stock over the past 10 years by looking at its PE ratio:

Source: data from Ycharts.

When I look at companies trading under an 18 PE ratio these days, I can’t restrain my smile. But as you can see, lower PE ration in the financial industry is only normal. In fact, when you look at its peer, IVZ isn’t cheap either:

Source: Ycharts

Digging deeper into this stock valuation, I will use a double stage dividend discount model. As a dividend growth investor, I rather see companies like big money making machine and assess their value as such.

Input Descriptions for 15-Cell Matrix INPUTS
Enter Recent Annual Dividend Payment: $1.16
Enter Expected Dividend Growth Rate Years 1-10: 6.00%
Enter Expected Terminal Dividend Growth Rate: 6.50%
Enter Discount Rate: 10.00%

Here are the details of my calculations:

Discount Rate (Horizontal)
Margin of Safety 9.00% 10.00% 11.00%
20% Premium $56.84 $40.66 $31.68
10% Premium $52.10 $37.28 $29.04
Intrinsic Value $47.36 $33.89 $26.40
10% Discount $42.63 $30.50 $23.76
20% Discount $37.89 $27.11 $21.12

Source: how to use the Dividend Discount Model

I’ve used a stronger dividend growth rate than their previous announcement because I believe the market will remain bullish for a while. IVZ is a strong company in the investing world and it will continue to perform well. Therefore, I expect IVZ to post growing revenues and earnings in the future. Their recent move in the ETFs world will also support my thesis. Still, IVZ seems fully valued and even a little expensive at this time.

IVZ doesn’t  meet my 5th investing principle with a potential downside of 6%.

Principle #6: The Rationale Used to Buy is Also Used to Sell

I’ve found that one of the biggest investor struggles is to know when to buy and sell his holdings. I use a very simple, but very effective rule to overcome my emotions when it is the time to pull the trigger. My investment decisions are motivated by the fact that the company confirms or not my investment thesis. Once the reasons (my investment thesis) why I purchase shares of a company  are not valid anymore, I sell and never look back.

Investment thesis

Clients investing with IVZ (not their shareholder, but their clients), do it because Invesco’s portfolio managers have shown they can beat their peer over the long haul. Any downturn in the stock market will reinforce this position as people want to hang out with winners.

I like the way management uses its cash. The company generates over $1 billion in cash flow, but will use most of it to finance its ETFs purchases instead of going overly generous with shareholders (through dividend raise or stock repurchase). I like when management thinks about their business growth first.

A word of caution around Invesco is necessary. While the firm has well performed in the past, this gives no indication it will continue to do so in the future. Also, a shift in regulations forces brokers and advisors to look more carefully at fees and performance. As BlackRock benefits from these regulations changes due to their ETF products, Invesco may lose clients if their performance does not justify their higher fees.

IVZ shows a solid investment thesis and meet my 6th investing principle.

Principle #7: Think Core, Think Growth

My investing strategy is divided into two segments: the core portfolio built with strong & stable stocks meeting all our requirements. The second part is called the “dividend growth stock addition” where I may ignore one of the metrics mentioned in principles #1 to #5 for a greater upside potential (e.g. riskier pick as well).

I tend to classify companies like BlackRock in both categories. There is an important need on the financial markets for ETF products and being a leader in this field gives additional growth perspectives. On the other side, institutional clients don’t tend to switch asset managers lightly. This situation enables investment firms to count on recurring revenues.

Invesco is a little bit late in the ETF game and I think it doesn’t show enough growth vectors to be classified in this part of a portfolio. However, IVZ shows a robust business model and good dividend history.

IVZ is a core holding.

Final Thoughts on IVZ – Buy, Hold or Sell?

While Invesco has been on the roll this year, this is not my favorite investment firms paying a dividend. To be honest, I prefer BlackRock for its leadership position and Lazard for its recession-proof business model linked to its M&A’s and restructuring advisory division. Invesco is a robust company in the financial sector, but I will keep my other positions instead.

Disclaimer: I do not hold IVZ in my DividendStocksRock portfolios.