Three simulated Dividend Growth Newsletter portfolio ideas reported second-quarter earnings July 26. Let’s take a look at the results.
By Kris Rosemann
Altria Tightens Bottom-Line Guidance Despite Double-Digit Smokeable Volume Declines
Simulated newsletter portfolio idea Altria’s (MO) top line continues to contract alongside industry-wide volume declines, but its second quarter report, released July 26, revealed its domestic cigarettes market share also took a hit, falling 70 basis points from the year-ago period to 50.2%. Net revenue fell 5.4% as domestic cigarette shipment volume declined 10.8% on a year-over-year basis due to the aforementioned industry decline, trade inventory movements, and retail share losses. Adjusted operating companies income (OCI) in its smokeables segment fell 2.8% as volume declines were partially offset by higher pricing and lower promotional investments, and segment adjusted OCI margins expanded by 110 basis points. Adjusted diluted earnings per share leapt 18.8% from the second quarter of 2017, but the increase was due to a lower tax bill and fewer shares outstanding.
Altria’s net income growth in the first half of 2018 helped cash flow from operations nearly double from the year-ago period to $3.85 billion, and free cash flow generation more than doubled in the half to nearly $3.8 billion, which was more than enough in covering cash dividends paid in the period of just under $2.6 billion. The company holds a net debt position of ~$12.5 billion as of the end of the second quarter, but its ~10.1% stake in AB InBev, which had a carrying value of $18.2 billion as of its most recent 10-Q filing, provides a higher degree of financial flexibility than its net debt position suggests. Altria’s Dividend Cushion ratio is just above parity at last check, but the additional financial flexibility that comes with its stake in the global beer giant is not reflected in that figure.
Despite the ongoing cigarette volume challenges, management raised the lower end of its adjusted diluted earnings per share guidance for 2018. It now expects the measure to be in a range of $3.94-$4.03, good for 16%-19% growth over 2017, compared to $3.90-$4.03 previously. The company continues to be optimistic regarding its new product generation, but increased investments in this area will likely continue to impact margin performance. Nu Mark e-vapor volume advanced 16% in the quarter, but significant regulatory overhang is likely to remain over innovative tobacco products as they begin to be brought to market.
We’re sticking with our fair value estimate of $67 per share for the time being, and we continue to like Altria as a dividend growth idea. The company’s pricing power is second to none, and we think a large number of investors may be overlooking its stake in AB InBev. Shares are trading at 14.1 times the midpoint of management’s 2018 adjusted diluted earnings per share guidance, and its dividend yield is ~5% as of this writing.
Intel Hikes Guidance on “Broad Based Business Strength;” Shares Drop on 10-nm Delay
Simulated newsletter portfolio idea (and top-weighted Dividend Growth Newsletter portfolio idea) Intel (INTC) reported its second quarter results July 26, and the company turned in top-line growth of 15% from the year-ago period to a company record $17 billion for the second quarter, but shares took a hit following the release as Data Center sales missed analyst estimates. We’re not overreacting to a quarterly miss of analyst expectations as Data Center sales advanced 27% on a year-over-year basis, and Intel hiked its full-year guidance following the quarter as management believes it is in-line to deliver its third consecutive year of record results.
Intel’s data-centric businesses (Data Center, Internet of Things, Non-Volatile Memory Solutions, and Programmable Solutions) revenue advanced 26% from the year-ago period as its Data Center business led the way thanks to strong demand from cloud and communications service providers as a result of increased investments to meet the rapidly-growing demand for data and data-intensive workloads. Its PC-centric business grew revenue by 6% on a year-over-year basis due in part to strength in gaming and commercial demand.
Non-GAAP operating margin at Intel in the second quarter expanded by an impressive five percentage points to 33% as a result of R&D optimization and marketing savings helping to fund data-centric investments. The company’s ability to achieve disciplined spending while still investing for growth should not be overlooked, and this robust margin expansion, along with a lower tax rate and a lower share count (it repurchased ~$3.9 billion worth of shares in the second quarter alone), helped drive a 44% year-over-year jump in non-GAAP earnings per share.
Perhaps Intel’s most attractive quality, and one that makes it one of our top dividend growth picks, is its free cash flow generating capacity. Cash flow from operations leapt 57% from the second quarter of 2017, which drove a 48% increase in free cash flow to nearly $2.9 billion despite a 63% jump in capital spending. Cash dividends paid in the quarter came in at $1.4 billion, less than half of free cash flow generated. The company’s net debt position sat at $15.9 billion at the end of the second quarter, and its Dividend Cushion ratio is a strong 2.6 at last check. Shares yield ~2.5% as of this writing.
However, another delay in Intel’s 10-nm chip program have industry observers worried about the company’s competitive position as rivals such as Taiwan Semiconductor (TSM), Advanced Micro Devices (AMD), Nvidia (NVDA), and Xilinx (XLNX) continue to progress in their own right. In its second quarter earnings conference call, Intel noted that its 10-nm chip program will be ready for launch in the second half of 2019, which is a year later than initially planned. Advanced Micro Devices has new 7-nm technology that it expects to be ready for material volume growth in early 2019, and Taiwan Semiconductor is reportedly in the process of growing its 7-nm chip volume. Monitoring developments related to this competition is a must for investors as Intel works to maintain its historic dominance in the area and protect its position in cash-rich servers for data center and enterprises.
Juxtaposing the share price slide and negative implications of the 10-nm chip delay were Intel’s notable 2018 guidance raises following the second quarter, but the impact of the 10-nm delay may not be known until 2019. It raised its revenue guidance range by $2 billion to $68.5-$70.5 billion, and non-GAAP operating margin guidance was increased by one percentage point to 32%. Non-GAAP earnings per share guidance was raised by $0.30 to ~$4.15, and gross capital spending (includes ~$2 billion in customer pre-payments) and free cash flow guidance were both raised by $0.5 billion to ~$15 billion. We continue to like shares of Intel, and our fair value estimate is currently $56 per share. Shares are currently changing hands at ~11.5 times management’s 2018 non-GAAP earnings per share guidance.
Digital Realty Raises FFO Guidance on Robust Data Center Demand Growth
Digital Realty Trust’s (DLR) second quarter report, released July 26, supported recent trends of robust end market growth as the REIT raised its full-year funds from operations (FFO) guidance. Its debt levels are elevated, similar to its REIT peers, as it ended the second quarter with a net debt-to-adjusted EBITDA ratio of 5.2x, down from 5.3x one quarter earlier, and it remains on the hunt for new acquisitions, “Digital Realty Remains Acquisitive, Well-Positioned.”
Revenue in the second quarter at Digital Realty jumped 33% on a year-over-year basis as data center demand has picked up in a meaningful way in 2018 with activity across all of the REIT’s regions served. Adjusted EBITDA advanced 39% from the year-ago period to $458 million, and FFO climbed to $1.64 per share in the period compared to $1.44 in the year-ago period. The REIT continues to expect 2018 total revenue to be $3.0-$3.2 billion, up from ~$2.5 billion in 2017, and FFO per share guidance has been raised to a range of $6.55-$6.65 from previous guidance of $6.50-$6.60.
We continue to like Digital Realty as a source of income, though like other REITs its income is dependent on access to the capital markets. It remains well positioned to continue capitalizing on robust data center demand growth for the years ahead, and management continues to actively seek attractive investment opportunities to expand its reach. Shares yield ~3.5% as of this writing.
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Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.