Image shown: Performance of the S&P 500 SPDR (SPY) since the beginning of 2017.
There aren’t two other companies within the Dividend Growth Newsletter portfolio that may be more controversial positions than Apple and Hanesbrands — one is on the cutting edge of technology and the other makes T-shirts and underwear, a very interesting dichotomy.
By Brian Nelson, CFA
The stock market continues to roar ahead, and the latest rally is starting to set some new records.
According to Charlie Bilello at Pension Partners, the S&P 500 (SPY) currently has the fourth-longest streak in history without a 5% drawdown, at 275 consecutive trading days. That’s incredibly low volatility. The S&P 500 now also has had 9 consecutive months where it has advanced – that’s the 8th longest streak in the history of the index, according to Pension Partners. The longest streak at 12 months ended in March 1936, the second-longest in May 1950, and the third-longest in July 1954, so we’re approaching records that have been in place for decades. According to FactSet, “the current economic expansion is now the third-longest in post-war history (96 months).” They say that records are made to be broken, but the stock market rally is certainly getting long in the tooth with the average S&P 500 company now trading at ~17.7 forward earnings, well above long-term historical norms of ~14, the current 10-year average. Needless to say, we continue to be very cautious, and you can probably tell by our writings.
That said, however, we continue to be pleased with the performance of ideas within the Dividend Growth Newsletter portfolio. Boeing (BA) has been a huge winner, having been added in just the past few months–in fact, the aerospace giant has been the best performer in the Dow Jones Industrial Average (DIA) so far in 2017–and while Altria (MO) has faced some selling pressure recently given the FDA’s renewed focus on nicotine, the tobacco giant’s share-price run has been phenomenal in recent years. Throughout the August edition of the Dividend Growth Newsletter portfolio, we cover a lot of earnings reports and walk through a deep dive in one of our favorites in the healthcare space, among other topics, but there are two earnings reports, released after the close August 1, that are worth your attention in the introduction.
The first, of course, is Apple (AAPL). We continue to believe shares are cheap, and the company’s fundamental performance during its fiscal third quarter, the calendar second quarter, only serves to reinforce our view. The iPhone giant put up revenue growth of 7% and earnings-per-share expansion of 17% and noted that services revenue hit an all-time quarterly record in the period. Its second quarter marked the third consecutive quarter of accelerating growth, and Apple noted that it “reported unit and revenue growth in all of (its) product categories” during the period. Incredibly, the Cupertino-based company ended the June quarter with $260+ billion in total cash and marketable securities–that’s more than one quarter of one trillion dollars. On a net cash basis, the measure stands at $165+ billion. Our fair value estimate of Apple stands at $180+ per share, and we maintain our view that its dividend is rock-solid.
The second is Hanesbrands (HBI). The company has been a more controversial one because of its share-price activity following its addition to the newsletter portfolio. In its second-quarter report, released August 1, Hanesbrands had a number of positive things to say about a return to organic growth and reaffirmed its full-year 2017 guidance, the most important of which being net cash from operations: “For 2017, the company expects net sales of $6.45 billion to $6.55 billion, GAAP operating profit of $845 million to $895 million, adjusted operating profit excluding actions of $935 million to $975 million, GAAP EPS for continuing operations of $1.70 to $1.82, adjusted EPS for continuing operations excluding actions of $1.93 to $2.03, and record net cash from operations of $625 million to $725 million.” Capital spending of $90-$100 million for the year means Hanesbrands will likely generate as much as $525-$625 million in free cash flow in 2017 alone, implying a very nice 6%-7% free cash flow yield (its market capitalization is just north of $8 billion). On a non-GAAP basis, Hanesbrands is trading at ~12 times current-year earnings, a rare bargain in today’s “frothy” environment.
The market today is a challenging one. Valuations are generally far from attractive by almost all measures, and the systemic risk caused by the proliferation of indexing, exacerbated by quantitative algorithms, is only making matters more complicated. The US economy and the banking system, however, is on firm ground, and while the stock market seems to be getting far ahead of underlying fundamentals, the backdrop remains very healthy, as it has been for some time. I hope you enjoy the August edition of the Dividend Growth Newsletter. We’re available for any questions.
<The August edition of the Dividend Growth Newsletter was released August 1, 2017.>