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Let's take a look at the William Wrigley Jr Company (WWY). Of course, this stock is an S&P 500 Dividend Aristocrat

Company Profile:

From Yahoo Finance

Wm. Wrigley Jr. Company, together with its subsidiaries, engages in the manufacture and marketing of chewing gums, mints, candies, and other confectionery products in the United States and internationally. The company offers its products in approximately 180 countries under Wrigley’s Spearmint, Juicy Fruit, Altoids, Doublemint, Life Savers, Big Red, Boomer, Pim Pom, Winterfresh, Extra, Freedent, Hubba Bubba, Orbit, Excel, Creme Savers, Eclipse, Airwaves, Alpine, Solano, Sugus, Cool Air, and P.K. brand names.

WWY has a market capitalization of $15.65B.

Company Fundamentals:

The Wrigley Jr Company has delivered an excellent return on invested capital over the last 1o years. For the first six years, it was consistently in the 27%-28% range. Since then, the ROIC has been trickling down, and currently sits at 17%. The 5 year average ROIC is 19.7%.

The return on equity is much more consistent. The 10 year average is 25.83%. The 5 year average is 24.20%. No real drop off is exhibited as shown with the ROIC. Long term debt makes up 35.9% of capital.

The equity growth rate has been fairly bumpy along the way. There were some very sub par years with less than 3% growth, and 3 consecutive years of 19% growth. Overall, the average is a respectable 11.64%. Over 5 years, it is a more impressive 13.82%. However, the last 2 years have seen the equity growth rate trail off to 2.54%, and 8.46% respectively.

Its earnings per share growth rate has been much more stable at 9.43% over the 10 year period. The 5 year average is 9.76%. However, last year’s growth rate was a disappointing 3.40%.

Its sales growth rates have been very steady over the last 5 years at 14.38%.

Dividend Fundamentals:

WWY currently yields a respectable 2.07%. This is slightly lower than the dividend yield on the DJIA of 2.26%.

The dividend growth rate has been excellent over the last 2 years at 16.22%, and 22.79%, respectively. And, even over the 5 year period, the growth rate is 11.45%. This is a decent dividend growth.

The dividend payout ratio has consistently been in the 50% range over the 10 year period. It is nice to see that cash flow growth rates have in fact exceeded the dividend growth rate! The 5 year cash flow growth rate is 12.87% (as compared to the 11.45% dividend growth rate).

Valuation Models:

The 5 year average high dividend yield is 1.87%. The 10 year average dividend yield is a higher 1.94%. That means that today’s dividend yield of 2.07% will mean that the stock is available at a discount. However, looking at 2006, the high dividend yield for that year was 2.46%. In any case, if we demand the 10 year high dividend yield, then the model price is $59.78. This valuation method shows WWY trading at a discount of 6.07%.

The Graham number comes to $20.14. Ouch. That shows the stock trading at a premium of 178.82%!

For the present value method, the following inputs were used:

  • A future EPS growth rate of 10.50%. This was derived from the analysts’ forecasts. My own estimate of future EPS growth rate was 11.64%. However, I decided to use the more conservative of the growth rates.
  • A future P/E of 21. Although the historically low P/E is 26.87, as a rule of thumb, investors are typically only willing to pay twice the expected EPS growth rate. In this case, that would be 2 times 10.50 which gives 21.
  • A dividend yield of 1.94%.
  • A future dividend growth rate of 11.64%. Is this sustainable? WWY definitely grows their cash flow enough to pay for this level of dividend growth rate.
  • With these inputs, the model price is $39.47. Once again, this method shows a premium of 42.26%.

    See my calculations here.

    Conclusion:

    This stock is a tough one to call. All I can think of is the word ‘average.’ Nothing spectacular jumps out at me. Just average. Is it a contender to enter into our portfolio of superior dividend yielding stocks? No. It is average. And we are looking for better.

    WWY 1-yr chart:

    WWY 1-yr chart

    Source: William Wrigley Jr Company: A Tough Stock to Call