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12 Reasons to Stay Aggressive in 2024

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By Brian Nelson, CFA 1. The Fed has signaled that rate cuts could start with inflation at a 2 handle (2 point something) and not at exactly 2.0%. That means that the Fed may become anticipatory to prevent overshooting to the downside with inflation. We see this as positive for long-duration equities, particularly those whose free cash flow generation is robust in the out-years, inclusive of big cap tech and the stylistic area of large cap growth. 2. Unemployment is at structural lows of 3.7%. Employers are working hard to keep talent on board, and with each paycheck, employees are pumping more and more money into the stock market via retirement accounts. This tailwind remains a stiff one and will … Read more

A Note on Valuation — Low P/E Stocks with High Dividend Yields

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“But carrying low valuation parameters is far from synonymous with “underpriced.” It’s easy to be seduced by the former, but a stock with a low p/e ratio, for example, is likely to be a bargain only if its current earnings and recent earnings growth are indicative of the future. Just pursuing low valuation metrics can lead you to so-called “value traps”: things that look cheap on the numbers but aren’t, because they have operating weaknesses or because the sales and earnings creating those valuations can’t be replicated in the future.” – Howard Marks, Something of Value (2021) By Brian Nelson, CFA I was reminded of Howard Marks’ 2021 memo, “Something of Value,” after a few readers expressed interest in low … Read more

Use Both the Dividend Cushion Ratio (Probability of a Dividend Cut) and the Qualitative Dividend Ratings in Your Assessment of the Payout

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The Dividend Cushion ratio is one of the most powerful financial tools an income or dividend growth investor can use in conjunction with qualitative dividend analysis. The ratio is one-of-a-kind in that it is both free-cash-flow based and forward looking. Since its creation in 2012, the Dividend Cushion ratio has forewarned readers of approximately 50 dividend cuts. We estimate its efficacy at ~90%. By Brian Nelson, CFA Dividend investing has probably never been as popular as the past couple years. Remember, however, the dividend is capital appreciation that otherwise would have been achieved had the dividend not been paid. If you had a stock that was $10, and it paid a $1 dividend, you don’t have a $10 stock and … Read more

We Will Be Removing CubeSmart and Adding Altria to the High Yield Dividend Newsletter Portfolio

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By Brian Nelson, CFA Stock prices and returns are in part a function of a company’s net cash on the balance sheet and changes in future expectations of free cash flow. Stock prices and returns are not driven by the dividend payment, and as such, a myopic focus on the dividend, by itself, could be costing investors considerably, at least with respect to the average market return–as measured by the market-cap weighted S&P 500 (SPY). The free dividends fallacy hypothesized that a myopic focus on chasing dividends could be costing investors anywhere between 2%-4% in returns per annum. During the past 10 years, for example, high-yielding Dividend Aristocrats have trailed the return of the market-cap weighted S&P 500 by about … Read more

Philip Morris Raises Adjusted Diluted EPS Outlook

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By Brian Nelson, CFA On October 19, Philip Morris (PM) reported excellent third-quarter 2023 results that showed currency-neutral revenue advancing 16.4%, and non-GAAP adjusted diluted earnings per share beating the consensus forecast, increasing more than 20% to $1.67 per share. The company continues to benefit from strong pricing across its combustible tobacco portfolio, its integration of its purchase of Swedish Match, and the popularity of its nicotine pouch ZYN, where shipment volume in the U.S. increased ~66% from the year-ago period. In conjunction with its strong third-quarter report, Philip Morris raised its outlook for adjusted diluted EPS to the range of 10%-10.5% expansion, excluding currency. The firm’s latest dividend increase was ~2.4%, to $1.30 per share, and its payout now … Read more

ICYMI: Questions for Valuentum’s Brian Nelson

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Valuentum’s President Brian Nelson, CFA, answers your questions. Q: What Is Valuentum? A: In short, it is a strategy that combines the concepts of value and momentum within individual stocks. We measure value through the cash-based sources of intrinsic value – net cash on the balance sheet and future expected free cash flow. We measure momentum rather simply, generally via relative strength or other technical and momentum indicators. We like stocks with strong net cash positions on the balance sheet, ones that are generating tremendous free cash flow, and have strong secular growth prospects such that the prospect for expectations of free cash flow can continue to be ratcheted higher. Today, most Valuentum stocks are included in the stylistic area … Read more

Latest Report Updates Reveal Tremendous Dividend Strength at Walmart

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By Brian Nelson, CFA Our latest report updates showcased one very big observation, and that was the tremendous dividend strength of Walmart (WMT). The big box retailer’s Dividend Cushion ratio is rock-solid, and improved inventory management has worked wonders on operating cash flow this year, driving it to $18.2 billion during the six months ended July 31 from $9.24 billion in the same period a year ago, all the while organized retail theft remains a huge industry-wide problem. Though shares of Walmart are widely followed and are fairly valued on the basis of our discounted cash-flow process, we stand in awe of the company’s resurgence in free cash flow generation and believe that the firm offers a nice foundation to … Read more

Not Expecting Much From Consumer Staples Stocks

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By Brian Nelson, CFA Within the discounted cash-flow [DCF] modeling process (also known as enterprise valuation, or the free cash flow to the firm model), there are two primary sources of cash-based intrinsic value: net cash on the balance sheet and future expected enterprise free cash flows. The sum of net cash on the balance sheet and the present value of future enterprise free cash flows divided by weighted average diluted shares outstanding results in a fair value estimate per share, which then can be divided by earnings to arrive at a value-derived price-to-earnings (P/E) ratio. Only when this value-derived P/E ratio is compared to the price-observed P/E ratio—the latter calculated as price divided by estimated earnings–can a company then be … Read more

Philip Morris’ Cash-Flow Dividend Coverage Resilient, ZYN Performance Impressive

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By Brian Nelson, CFA On July 20, Philip Morris (PM) reported strong second-quarter 2023 results that showed 14.5% reported revenue growth and a non-GAAP earnings per share beat of $0.12. Adjusted operating income faced headwinds from global inflationary pressures, but still advanced 6.9% in the quarter. Adjusted diluted (currency-neutral) earnings per share growth came in at 16.9% in the period. For the full year, Philip Morris is targeting organic sales expansion of 7.5%-8.5% and adjusted diluted earnings per share in the range of $6.13-$6.22 per share on the year, reflecting a high-single-digit pace of expansion and a modest increase from prior expectations. Cigarette makers continue to transition to a smoke-free world, and Philip Morris is walking the line between combustible … Read more

Philip Morris’ First-Quarter 2023 Results Just Okay

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By Brian Nelson, CFA On April 20, Philip Morris International Inc. (PM) reported first-quarter 2023 results that were about in-line with expectations. On a pro forma basis, including Swedish Match, the company’s adjusted net revenue growth came in at 3.8%, excluding currency movements, thanks largely to smoke-free product sales expansion and strong pricing growth across its legacy combustible tobacco business. We’re not making any changes to our $105 per-share fair value estimate as a result of the quarterly performance. The cigarette maker noted that it continues to integrate Swedish Match successfully and that it continues to make progress toward its smoke-free goals. Smoke-free revenue was up 3.4 percentage points of total revenue on a year-over-year basis in the first quarter … Read more