Why I Have 28% Of My Retirement Portfolio Invested In These 3 High-Yield Blue Chips

Oct. 02, 2019 10:12 AM ETAbbVie Inc. (ABBV), AGN, BPYU, BPY, MO583 Comments101 Likes

Summary

  • My retirement portfolio goal is maximum safe long-term income, investing in quality companies bought at good to great prices, run by competent or excellent management teams I can trust.
  • AbbVie, Brookfield Property and Altria are my three biggest holdings, representing 28% of my retirement portfolio and life savings.
  • Each is a 9/11 quality blue chip with above average dividend safety, clear long-term growth strategy, and management I'm confident that can deliver on each company's long-term thesis.
  • ABBV, BPY/BPR and MO are 38%, 12% and 35% undervalued, respectively and likely capable of 13% to 26% CAGR long-term total returns.
  • Just make sure you're comfortable with the risk profiles of each company before buying them and size your position appropriately for your needs and to leave room to add more at potentially lower prices.
  • Looking for more stock ideas like this one? Get them exclusively at The Dividend Kings. Get started today »

(Source: imgflip)

Like many of you, my retirement portfolio is designed to allow me to live comfortably off safe and exponentially growing dividends over time. I own a total of 32 companies, which I buy each week based on the best opportunities the market presents me to fulfill one of three often overlapping portfolio goals.

  • high safe yield
  • fast dividend growth (double-digits over time)
  • deep discount to fair value (very strong long-term return potential)

Often what I buy will check two of those three boxes, and over time my portfolio has become concentrated in three of my highest conviction ideas.

  • 10.8% in dividend aristocrat AbbVie (NYSE:ABBV)
  • 9.1% in Brookfield Property Partners (NASDAQ:BPY), Brookfield Property REIT (BPR) is the equivalent stock but without a k-1 tax form
  • 8.3% in dividend king Altria (NYSE:MO)

Now I should point out that risk management is the most important factor in long-term investing success. 5% to 10% position caps tend to work for most people, and I'm not saying that I recommend anyone mirror my allocations precisely.

But let me walk you through the reasons that I don't just consider AbbVie, Brookfield Property, and Altria to be potentially great high-yield dividend growth stocks worth buying today but trust them enough to invest 28% of my life savings into these three blue chips.

AbbVie: Excellent Management Keeps Delivering Industry-Leading Safe Yield And Payout Growth

It's been a rough 16 months for AbbVie investors who had to endure a more than 40% plunge from the company's record highs. It should be pointed out that during the early 2018 peak the stock was trading at 19.4 times earnings, 25% historically overvalued compared to its historical 14.5 PE.

(Source: F.A.S.T Graphs, FactSet Research)

But it appears as if Wall Street has gotten its fill of pounding away on this high-yield dividend aristocrat, at least if the nearly 20% rally since mid-August is any indication.

AbbVie Might No Longer Be Wall Street's Favorite Whipping Boy

(Source: Ycharts)

All companies have two important profiles, a risk profile (what could go wrong with fundamentals) and a fundamental growth profile (earnings, cash flow and dividend growth over time).

For stable companies, these profiles don't change much over time and the only difference between severe bear markets and when a stock is in a bubble is which of these profiles Wall Street chooses to focus on.

The Double-Edged Sword That Is Humira

(Source: Statista)

AbbVie is a dividend aristocrat under the S&P's grandfather rule because it was spun out of dividend aristocrat Abbott Labs (ABT) in 2013. The reason Abbott did that was that it had a blockbuster immunology drug called Humira that was growing like a weed, BUT would be facing patent expirations beginning in 2018 in Europe, globally between 2019 and 2022, and then in the US in 2023.

As you can see, Humira's growth was indeed spectacular, peaking at $20 billion in 2018. But eventually, patent expirations mean that all blockbuster drugs see huge competition from biosimilars or generics, and so ABT decided to let AbbVie go it alone as a separate company.

(Source: F.A.S.T Graphs, FactSet Research)

Thanks to Humira's success, AbbVie since 2013 has become not just one of the fastest-growing pharmaceutical companies, but one of the fastest-growing dividend aristocrats. Even taking into account its recent 40% peak decline the stock has still outperformed the red hot S&P 500 during the longest bull market in American history, by 3% annually.

That's where AbbVie's long-term growth/diversification plan comes into play. When it was initially spun off 95% of sales and virtually all earnings came from Humira, making AbbVie an impressive one-trick pony. But good management (AbbVie's is excellent) gets paid well to see risks coming and prepare for them, which is just what the company's been doing for six years.

Thanks to some smart acquisitions over the years ($21 billion for Pharmacyclics in 2016 gave it cancer blockbuster Imbruvica) AbbVie's Humira sales concentration has come down to 60% though about 70% of earnings are still derived from that one drug.

Now management, led by CEO Rick Gonazalez, is once more turning to strategic and needle-moving M&A via the $80 billion acquisition (including debt) of Allergan (NYSE:AGN). Now as I point out in the risk section, this deal is going to involve $60 billion in additional debt (about $96 billion in total) which carries a lot of execution risk.

However, it will mean on day one Humira concentration falls to 39%, drastically reducing single drug concentration risk that has bedeviled the stock for the past 16 months.

Though Moody's recently reaffirmed the company's stable Baa2 (BBB equivalent) rating, S&P downgraded the company's credit rating from A- to BBB+. It should be pointed out that BBB or higher is management's long-term goal and AbbVie is currently sitting at that rating.

(Source: S&P 2018 Global Default Report)

Credit ratings are designed to estimate the probability of a company defaulting on its bonds over several economic cycles. Over the past three decades, just 7.6% of BBB rated companies have defaulted.

At the post-acquisition conference call, CEO Rick Gonzalez, a 30 year veteran of AbbVie/Abbott explained that rapid deleveraging is a top priority.

We have committed to reducing debt by $15 billion to $18 billion by the end of 2021 with further deleveraging through 2023."

He also addressed the issue I and other income investors most care about, the safety of the dividend.

The transaction also provides enhanced cash flow to support a strong and growing dividend...We're absolutely committed to a growing dividend, and nothing has changed." - Rick Gonzalez (emphasis added)

Here is the cash flow Gonzalez is talking about.

(Source: merger presentation)

AbbVie is going to be the 3rd largest pharma company in the world by operating cash flow, with $18 billion in annual free cash flow factoring in around $1 billion in capex.

The dividend payout ratio will fall to 42% once the deal closes, down from 49% today, and ABBV's goal is a 50% FCF payout ratio. $2.5 billion in cost synergies are expected within three years and ABBV's track record on synergies is good.

Post-dividend retained free cash flow will be $10 billion to $10.5 billion per year, and possibly as much as $12.5 billion by 2022. This is why Moody's calls AbbVie's deleveraging plan "credible", specifically the $7.5 to $9 billion per year in debt repayments that are designed to lower net debt/EBITDA from 4.4 to 3.0 by the end of 2021 and then lower still through 2023.

New AbbVie's Non-Humira Sales Projections

(Source: merger presentation)

In exchange for the risky move to highly leverage the balance sheet, AbbVie is getting $30 billion in annual non-Humira revenue it expects to grow about 8.5% annually through 2023, nearly three times the industry growth rate.

However, AbbVie can't maintain some of the best long-term growth in the world of big pharma purely through M&A. It must also execute on its drug pipeline, which fortunately for it, is the 2nd best in the industry according to EvaluatePharma.

Part of our strategy back in 2013 was to basically build the pipeline that was capable of being able to continue to grow, knowing full well that our single-largest product HUMIRA would face biosimilar competition. It was just a question of when, not a question of if." - Rick Gonzalez, Morgan Stanley Healthcare Conference

The cornerstones of that pipeline are Skyrizi and Rinvoq, superior immunology drugs to Humira, which were just approved this year. Management expects these future blockbusters to generate between $10 billion and $11.5 billion in annual peak sales. ($5 billion for Skyrizi and $6.5 billion for Rinvoq).

At the Morgan Stanley Health Conference, management provided important updates to AbbVie's organic growth plans. Ongoing approvals for various indications for both drugs is going well, as are the rollouts of both drugs for their initial approvals. Ultimately AbbVie remains "absolutely comfortable" with its sales forecasts for $10+ billion in Skyrizi and Rinvoq revenue by 2025.

In 2020 Skyrizi and Rinvoq sales are expected to be at least $1 billion and AbbVies $10+ billion long-term sales forecast on those two blockbusters is already risk-adjusted, meaning takes into account the probability of drug trial failures.

Analysts are coming around to AbbVie's strategy, including the Allergan acquisition, which is expected to drive about 8.5% sales growth through 2023, which is the year nine Humira biosimilars arrive in the US.

Citigroup's Andrew Baum even upgraded AbbVie to a buy from a sell, with a 12-month price target of $90, citing the AGN acquisition as setting a solid earnings floor under the stock. Citi is hardly the only analysts turning more bullish on management's long-term growth efforts.

Prior to the Allergan acquisition announcement the long-term consensus growth rate on AbbVie, according to FactSet Research, was about 4% CAGR through 2024. Now that's risen to 6%, which includes 2023 when Humira biosimilar competition is likely to make for a weak growth year.

Helping AbbVie's growth trajectory is the fact that it's buying Allergan at a great price, meaning a large immediate boost to earnings.

The transaction delivers immediate robust financial benefits with EPS accretion of 10% in the first full year of combination increasing to above 20% at peak. This is inclusive of more than $2 billion in annual pre-tax synergies and cost savings which is expected in the third year post-closing." - Rick Gonzalez (emphasis added)

The bottom line is that I have not ever lost a wink of sleep with AbbVie as my top holding. That's because while the market was obsessed with what might go wrong that could hurt earnings growth, I was watching one of the best management teams in the industry execute on its long-term plan.

That plan calls for adapting and overcoming the biosimilar threat to Humira, to drive 12% EPS growth in 2019 (upgraded from 10% guidance, then 11%) and now likely 16% or so growth in 2020 courtesy of the Allergan purchase.

As Buffett said:

You're neither right nor wrong because other people agree with you. You're right because your facts are right and your reasoning is right – that's the only thing that makes you right." - Warren Buffett

The only thing that will determine whether my investment in AbbVie pays off handsomely over time is management delivering strong earnings, cash flow, and dividend growth. Thus far, quarter after quarter, AbbVie's top-notch executives keep delivering strong growth in the fundamentals, not because nothing goes wrong, but despite something always going wrong.

This is why Gonzalez and company have my trust, and AbbVie represents 10.8% of my retirement portfolio.

Brookfield Property: The World's Best Global Real Estate Managers

What I care most about when considering an investment is quality income-producing assets run by competent to great management that generates rising cash flow that supports a safe dividend.

Brookfield Property Partners is what I own because when I made my investments Brookfield Property REIT didn't exist.

(Source: investor presentation)

BPY is an LP which uses a K-1 tax form, meaning its distributions are tax-deferred until you sell. Brookfield Property REIT is a REIT subsidiary of BPY but was created during the GGP acquisition so that REIT investors who prefer 1099 issuing and non-qualified dividend-paying REITs could still invest.

This is apparently the new strategy that Brookfield is pursuing, recently announcing that Brookfield Infrastructure Partners (BIP) would also be creating a spin-off subsidiary called Brookfield Infrastructure Canada (BIPC) that would have the same effective economic rights as BIP, but be a 1099 issuing, dividend-paying corporation.

The class A shares will be structured with the intention of being economically equivalent to units of BIP, including identical distributions. The class A shares are intended to allow investors the ability to own the equivalent economic exposure to BIP, including identical distributions, through a traditional corporate structure." - Brookfield press release

This is exactly how Brookfield describes BPR in relation to BPY.

Brookfield Property REIT is a subsidiary of BPY, intended to offer investors economic equivalence to BPY units but in the form of a U.S. REIT security. Dividends on BPR shares are identical in amount and timing to distributions paid out for BPY units, and BPR shares are exchangeable on a 1:1 basis for BPY units or their cash equivalence." - Brookfield Property (emphasis added)

In effect, the only real difference between BPY and BPR is how they are taxed. The payouts are the same and grow at the same rate.

Brookfield's goal is to grow those dividends 5% to 8% per year, which is in-line with its historical growth rate.(Source: investor presentation)

Over the coming years, Brookfield expects to slightly accelerate FFO/share growth to 7% to 9%, keeping the dividend growth in the same range, in order to achieve its 12% to 15% CAGR total return goal. In the valuation section, I show why this is a very attainable goal from current valuations.

(Source: investor presentation)

The reason for not growing the dividend faster is because Brookfield Property is working towards lowering its payout ratio to a point where even without realized gains on its investment portfolio, the dividend will be sufficiently covered and it can retain sufficient cash flow to fund organic growth investments.

(Source: Investor presentation)

Thanks to the large amount of stock issued to buy GGP, FFO/unit declined in the past year meaning that purely on operating cash flow (property rents) the payout ratio over the past 12 months was 91%.

Thanks to profits on investment asset sales, the effective payout ratio was a far safer 67%. Management's goal is to hit an 80% FFO payout ratio, which will ensure the dividend's safety even if it's unable to realize profits on its LP portfolio.

That investment portfolio is the big difference between Brookfield Property and most REITs.

(Source: investor presentation)

85% of the REIT's assets are owned in the core portfolio of premier office buildings located in major financial centers, as well as 123 class A US malls. These are the properties that drive stable rent that funds the dividend.

15% of the assets are in the form of LP investments in which BPY participates in Brookfield Asset Management's (BAM) private equity real estate investments.

(Source: investor presentation)

Brookfield is a Buffett style value investor, which isn't surprising since BAM's CEO Bruce Flatt, got his start at the company making deep value real estate deals by purchasing top-quality properties for pennies on the dollar at bankruptcy sales.

(Source: investor presentation)

Brookfield's track record on profitable real estate investments is among the best in the world, with expected returns outpacing even its lofty 20% annualized return targets.

Now I know what you might be thinking. "Those are PROJECTED returns and maybe Brookfield will fail to achieve them." Indeed that's possible, but given the company's track record on returns generated on closed deals, I'm inclined to believe Brookfield's return estimates.

Consider

  • Simply Self Storage investment returned 46% CAGR on investment in 2.5 years
  • Brookfield sold a 1 million square foot office complex in California in Q2 for a $130 million profit, realizing four times its initial investment and generating annualized returns on investment of 30%, 50% above its 20% LP investment target.

Ok, those are some nice gains, but what if that's cherry-picking?

Brookfield Property Realized Gains Per Unit

(Source: investor presentation)

BPY, which owns the LP assets that BPR investors benefit from (since the payouts are identical and grow at the same rate), has been steadily seeing larger realized gains per unit over time.

(Source: investor presentation)

That's from $47 billion in asset sales since its IPO that averaged 4% above book value. Why does that matter? Because one popular way REITs are valued is on NAV/share or book value (net assets minus liabilities) per share.

(Source: earnings supplement)

Management estimates that its book value per share (for BPY) is $29. Since BPY and BPR are economically equivalent that means BPR's book value per share is also about $29.

But remember that Brookfield isn't cooking its books and claiming its properties are worth more than other people will pay for them. Since BPY's IPO real investors, risking real money paid 4% MORE for its properties than Brookfield estimate they were worth. This means that BPR's book value might be about $30 today, allowing you to effectively buy $1 in high-quality income-producing assets for $0.67.

How much does Brookfield expect BPR/BPY to benefit from the LP investment (investing in private equity BAM led deals?)

  • $5.8 billion in gains and cash flow through 2022
  • $11 billion through 2032

Those realized gains and cash flow, when combined with retained cash flow and Brookfield's famous safe use of no-recourse self-amortizing asset-level debt (basically commercial mortgages) is how it plans to drive strong organic FFO/share growth that will deliver generous, safe and rising dividends over time.

The REIT's BBB credit rating from S&P and 4.5% fixed-rate average borrowing cost (3.9% at the corporate level), indicates that bond investors are not worried about the high debt load, which is non-recourse and thus has zero claims on highly diversified global cash flow. In fact, in Q2 Brookfield Property did the following

  • office property units issued $1.1 billion of fixed-rate mortgages, with an average term to maturity of nine years and an average interest rate of 4.28%
  • retail property unit issued $1.4 billion of fixed-rate mortgages, with an average term to maturity 10-years at an average rate of 4.32%

Basically, Brookfield's balance sheet is strong enough to refinance the floating rate debt used to buy GGP, thus making for safer, longer-duration and lower interest debt that boosts long-term profitability.

What does all this mean for conservative income investors who just want a safe 6.5% yielding dividend that grows 5% to 8% over time?

It means $6.2 billion in current liquidity that is second only in size to Simon Property's (SPG) $6.8 billion mountain of low-cost dry powder to put to work in profitable growth projects. Those are the projects that will deliver 7% to 9% long-term FFO/share growth that allows for an increasingly safer and rapidly growing dividend (most REITs grow dividends 3% to 4% per year not 5% to 8%).

How big is Brookfield's growth backlog? $6.6 billion worth of offices and apartments it's planning to build/improve over the next four years.

(Source: investor presentation)

That's at an average projected 7% cash yield on investment, vs a 4.5% (and falling) cash cost of capital. In other words, these are highly profitable projects that will be highly accretive to FFO/share growth.

BPR/BPY also has $1.6 billion in retail development projects underway, to improve its already best in class Malls (it owns 8% of all Class A malls in America).

(Source: investor presentation)

Lest you think Brookfield is mad to be investing almost $2 billion into US malls, CEO Brian Kingston explains that this is not really about retail at all, but about diversifying into various real estate industries.

Almost all of the development programs include a residential component with others featuring hotels, office, medical office as well as entertainment and food offerings." - Brian Kingston Q2 conference call

Basically Brookfield Property has an $8.2 billion growth pipeline that towers above anyone else in the sector (SPG is #2 with $5 billion in planned developments).

The bottom line on Brookfield Property is your getting a safe 6.5% yield growing at 5% to 8% per year backed up by some of the best real estate in the world, managed by some of the best real estate investors/operators in the world.

When it comes to hard assets, i.e. real estate, utilities, infrastructure, and renewable energy, I have extreme confidence in Brookfield, which is why I eventually plan to have my retirement portfolio chock full of its LPs and parent company

Altria: A Recession-Resistant 8.2% Yield That Grows Like Clockwork No Matter What The Market Does

I own Altria for the same reason anyone has ever owned this high-yield recession-resistant dividend king.

(Source: F.A.S.T Graphs, FactSet Research)

A potent combination of sky-high safe yield, that grows at 7% to 9% over time, in all economic and market conditions, and that over the past 20 years had outperformed the market 14.5% CAGR to the S&P 500's 4.8%.

Or to put another way, Altria, despite a massive multi-year bear market (that began when it was 33% overvalued) has still tripled the market over the past two decades.

That's courtesy of this dividend king doing what it's always done, proving the bears wrong. Since 2000 Altria has posted just a single negative growth year (-2% in 2002). Over that 20 year period, MO has grown adjusted EPS (dividend payout ratio is 80% of adjusted EPS) despite

  • 1998 $206 billion Master Settlement that many bears thought would bankrupt the industry
  • virtually all smoking being banned from US businesses in the 2000s
  • by 2014 smoking was banned in virtually all US parks
  • never-ending war on tobacco from the FDA with threats to reduce nicotine to non-addictive levels, or ban menthol (BTI says it would likely take 8 years to do that)
  • The rise of vaping, which has accelerated MO's cigarette volume declines by 0.5% per management

Of course, this brings up the elephant in the room, Juul, which Altria bought 35% of for $12.8 billion in December 2018, and which has been under siege during the "vapocalypse" of 2019.

Altria tried its hand at vaping via its Mark Ten brand which never got above 10% market share according to Nielsen. Juul, the king of US vaping, has between 44% and 70% market share, depending on what sources you read (MO says 44%, Nielsen estimates 70%).

However, the $36.5 billion valuation Altria paid for Juul, now looks to be rather ill-timed and overvalued, to say the least. This potentially sets up Altria for a major write-down on Juul should the worst-case US vaping ban scenario occur.

FDA Commissioner Ned Sharpless recently testified before Congress the FDA has no plan to permanently ban flavored e-cigarettes or e-liquids but will potentially remove them from the market within a year. This is only for as long as it takes to verify their safety and ensure they aren't marketed to kids.

But plenty of politicians want to totally ban vaping as several states have done on a temporary basis (as has San Francisco). So what about the doomsday scenario of a total US vaping ban? Here's how "devastating" that would be to my Altria long-term thesis, which is a safe 8% yield growing 4% to 9% over time.

Morningstar has crunched the numbers of this worst-case scenario, which the head of the FDA says is not likely to happen barring severe intervention by Congress and the Administration.

According to Morningstar's September 23rd note

"The following analysis assumes:

  • 66% of the U.S. vaping market by value is nontobacco liquids.
  • None of this volume elimination migrates to other categories in the portfolio.
  • A ban occurs on June 30, 2020.
  • International markets are unaffected by the events in the U.S." - Morningstar

Note that Morningstar is estimating the same timeline as Sharpless but that all vaping customers are lost (potentially to the black market) but none will return to smoking cigarettes (many industry experts disagree with this).

What is the bottom line for Altria?

We estimate that a vaping ban would lower Altria’s earnings per share by $0.03 in 2020, or less than 1%, but the impact would magnify to around $0.17, or 4%, by 2023. Altria would almost certainly be forced to take an impairment charge on its $12 billion investment in Juul, probably about $5 billion." - Morningstar (emphasis added)

In other words, the worst-case scenario for Altria, in the event that the US totally bans vaping, is that it might have to writedown $5 billion or 40% of the Juul investment and its growth will come in 4% lower over the next four years or about 1% slower growth per year.

What are the growth estimates for Altria?

  • Morningstar (slowest I've seen) 4% to 6% CAGR
  • Management guidance: 7% to 9%
  • analyst consensus (per Factset): 6.6% (down from 8% before the vapocalypse began)
  • analyst consensus (per Reuters): 6.6% CAGR

Now it's likely true that the uncertainty surrounding Juul's valuation is what caused the Altria/Philip Morris merger to fall apart. That's potentially a temporary setback given how beneficial such a deal would be to investors in both companies (they may try again later once vaping regulations are in place and uncertainty lifts).

But let's not forget that the day the merger was called off Altria management also made some very important announcements.

  • volume decline guidance re-affirmed (core business thesis remains intact)
  • 2019 EPS growth mid-range guidance raised from 5% to 6% (5% to 7% EPS growth in 2019)
  • Juul CEO replaced with K.C. Crosthwaite, an Altria executive with far more experience dealing with regulators

Altria's fundamentals this year are now set to grow very near its long-term growth guidance, likely due to the recent $1 billion buyback authorization being put to good use, repurchasing shares at their lowest valuation in a decade.

We'll have to see what happens at the next earnings announcement, where Altria might partially write-down some of Juul (20% to 30% might be appropriate given slower growth it will be facing in the US over the next year at least).

But remember that the thesis around Altria has always been based on its ability to grow its cash flow and thus support a safe, generous and rising dividend.

Juul is an equity stake contributing nothing to cash flow and so even a 100% writedown of Juul would have no effect on the company's core thesis.

The stock price might dive, sure. That's why I am holding off on further purchases to leave room under my 12% risk cap on Altria, should it crash some more so I can fill out my position at lower prices.

But even if Altria does end up achieving slower growth than previously expected, even half as fast as it has historically, I'll now explain why it's still possibly a great long-term investment, that could more than double your investment over the next five years.

Valuation/Total Return Potentials: All 3 High-Yield Blue Chips Are Still Good Buys Today

The way I value companies is by applying the consensus estimates for any given year to the average multiple (EBITDA, FFO, EBIT, EV/EBITDA, yield, PE, etc) real investors risking real money paid for a stock during periods of similar fundamentals and growth rates. The average of these historical fair values is my reasonable estimate for what a company is worth based purely on the market's historically determined fair value.

Company Yield Current Price 2019 Fair Value 2020 Fair Value Discount To 2019 Fair Value

5-Year CAGR Total Return Estimate (F.A.S.T Graphs)

AbbVie 5.7% $75 $121 $130 38% 14% to 24%
Brookfield Property 6.6% $20 $23 $24 12% 13% to 17%
Altria 8.2% $41 $63 $68 35% 17% to 26%

(Source: F.A.S.T Graphs, Factset Research, analyst consensus, management guidance, Gordon Dividend Growth Model)

You'll note that I don't use BPY/BPR's $29 book value, or the $30 it's likely actually worth. The stock hasn't typically traded based on book value so I just use its historical multiples to estimate it's worth $23 in 2019 and $24 next year.

BPY/BPR thus doesn't appear very undervalued, but for a quality blue chip like this, that margin of safety is good enough to earn it a "good buy" due to both the 6.6% yield and realistic 15% long-term return potential.

AbbVie remains the most undervalued of these three stocks, despite a nearly 20% rally over the past six weeks.

(Source: F.A.S.T Graphs, Factset Research)

How undervalued? Rather than use the historical 14.5 average PE, which is already below the 15.0 rule of thumb Chuck Carnevale and Ben Graham used for "reasonable" investments, let's use a much lower 12.0 PE.

Then let's apply not the consensus 6% growth rate, but the lower end of my 5% to 10% growth range on AbbVie. Thanks to that nearly 6% yield even such a low future PE and modest growth results in 14% CAGR long-term total returns that could double your money in five years.

(Source: F.A.S.T Graphs, FactSet Research)

Here's a more realistic expectation, using 6% consensus growth and the historical 14.5 PE, resulting in long-term total return potential of 19% CAGR.

The best realistic case scenario is that management puts together enough accretive M&A deals to hit 10% long-term growth, which applying the historical 14.5 PE would allow for up to 24% CAGR long-term total returns.

But even if AbbVie delivers just 5% growth, less than analysts expect, and less than half its historical norm, then even a low 12.0 PE would still deliver 14% long-term returns that should at least double the 5% to 8% CAGR total returns most asset managers expect from the S&P 500 in the coming five years.

(Source: F.A.S.T Graphs, FactSet Research)

Here's Brookfield Property's historical 2.8 P/EBITDA combined with 6% long-term cash flow growth. That's 1% below management's guidance, and Brookfield has an excellent track record of hitting its guidance over time.

But even applying this slow growth rate to a very low EBITDA multiple (created by the complex corporate structure which results in a perpetually low multiple) BPY/BPR is likely capable of at least 13% CAGR long-term total returns.

(Source: F.A.S.T Graphs, FactSet Research)

If Brookfield hits the high-end of its growth guidance, 9%, then 17% annualized total returns are possible.

What about Altria? The new favorite whipping boy of Wall Street? Here's how ridiculously undervalued this dividend king is today.

(Source: F.A.S.T Graphs, FactSet Research)

If Altria can only grow at 4% over time, half its historical growth rate, then applying Chuck Carnevale's rule of thumb 15 PE for slow-growing companies still gets you 17% long-term total returns, courtesy of Altria trading at 9 times next year's earnings and sporting a safe 8.2% yield.

(Source: F.A.S.T Graphs, FactSet Research)

If analysts are right and the company grows at 6.6% over time and the market values it at its historical 16.4 PE then 22% returns could be in the cards. If management exceeds expectations by hitting the high end of its long-term guidance of 9%, then 26% CAGR total returns are possible, more than tripling your investment over the next five years.

This is why I like to combine high-yield blue chips with sharp discounts to fair value. Not just do you get a high margin of safety, but over the long-term, as long as management delivers on fundamental growth, you can also achieve truly sensational market-beating returns as well.

  • AbbVie 38% undervalued is a very strong buy
  • Brookfield Property 12% undervalued is a good buy
  • Altria 35% undervalued is a very strong buy

But before you get too excited about any of these high-yield blue chips, you need to understand their risk profiles to know whether or not they are right for your portfolio, and how large of a position is appropriate for your needs.

Risks To Keep In Mind

Every company has its own risk profile, including industry-specific risks that can result in nasty short-term price crashes.

Healthcare, in general, has a complex risk profile, but especially so for pharma companies.

  • drug trial failures (Rova-T failure is what kicked off the AbbVie bear market from its overvalued levels)
  • litigation (everyone and their mother is apparently suing over the opioid epidemic, whether it makes sense or not)
  • healthcare regulatory reform (politicians have been promising to slash drug costs for 50 years)
  • scary headlines pertaining to the above risks (even if the probability of single-payer healthcare is very low, the market might price it as if it's a virtual certainty at times)

Let's also not forget that pharma is an M&A heavy industry, and good M&A is tough to pull off well. When the Allergan deal was announced AbbVie plunged 17% that day. Did the value of the company change so drastically? Nope. But the market can be completely irrational in the short-term and such volatility is table stakes for anyone owning even dividend aristocrats with exceptional growth records like AbbVie.

This is why I always say to size your position for your personal risk profile AND to leave room to buy more should a stock fall further. I maxed out my risk limit on AbbVie at $75, mistakenly thinking "there is no way the market could take it lower." I was very wrong.

AbbVie appears to have bottomed at $62.66 (at least so far). My biggest mistake had nothing to do with analyzing the company's fundamentals or valuation, but merely in buying too aggressively too early, and thus missing the opportunity to add more at a safe and rapidly growing 6.8% yield.

As for Brookfield Property, there is a reason this REIT/LP has traded at such low multiples over time. Brookfield's mastery in using non-recourse self-amortizing debt safely is legendary, spanning 30 years, two recessions and a full-blown credit crisis.

BUT there is a reason that most REITs choose to use unsecured debt that then secured debt. Brookfield's highly leveraged balance sheet means that it's growth relies more on capital recycling and M&A than Brookfield's other LPs (like BIP, BEP, and TERP).

In a healthy global economy that's not an issue. The LP/REIT is self-funding its growth plans and thus has no need for future equity raises. However, while Brookfield has proven it can cash in on recessions like nobody's business in the past until the REIT/LP can reduce its payout ratio to that 80% target, it may not be able to reach that 7% to 9% cash flow growth guidance, should the global economy not cooperate and commercial real estate prices crash.

I'm not worried about BPR/BPY's payout safety, but its growth potential might take a hit in a bad enough recession, which is why I model 5% to 9% growth, in case management misses on growth guidance.

BPY Peak Declines Since 2014

(Source: Portfolio Visualizer) portfolio 1 = BPY

And while REITs are generally low volatility (VNQ beta since 2014 has been 0.49) BPY's volatility is 27% greater than the overall REIT sector. You can see that this sometimes results in very sharp declines, as occurred in late 2018 when the market fell 19.8% but BPY/BPR plunged 26%.

Sizing stocks correctly for your portfolio isn't just about fundamental risk (the business model failing and the dividend getting gutted), it's also about not owning more of a stock than you can emotionally stand to see crash for no fundamental reason.

The fundamental risk with Altria is, of course, that the bears might finally be proven right and the company's ability to drive historical 7% to 9% long-term earnings, cash flow and dividend growth might not be sustainable in the face of a never-ending regulatory onslaught.

The analyst consensus for MO's long-term growth is down 1.4% since the vapocalypse began. While 6.6% long-term growth is still enough to make Altria a potential retirement making high-yield investment, it's always possible the company fails to achieve even that very low growth bar.

While I'm confident that Altria will keep safely growing its dividend for many years to come (just a question of how fast) we also can't forget that this historically low volatility stock (0.36 beta since 1986) can often become a Wall Street pariah.

Altria Peak Declines Since 1986

(Source: Portfolio Visualizer) portfolio 1 = MO

While Altria's bear markets tend to be much shorter than the S&P 500's (as long as 6.25 years following the tech crash) the stock can still take up to 2.5 years to recover all-time highs if it started in a bubble.

Altria began the current bear market 33% overvalued and might theoretically take three or four years to recover its former levels. Altria peaked at $75 back in 2017. If the company lives up to analyst expectations then it's fair value won't reach that level until 2022, when fair value will be $78.

But as we can see now, a company's fair value can be meaningless to the stock market if a perfect storm of negatively engulfs it. The reason I use five-year total return models is that USUALLY, that's a long enough period of time for fundamentals to trump sentiment.

But even if that proves to be the case, and Altria finally returns to fair value and hits fresh all-time highs in 2022, that would represent a five-year bear market for the stock. Anyone buying this high-yield dividend king needs to keep in mind that we might be in for a long wait before Wall Street values it fairly.

How long? Legendary value investor Joel Greenblatt said that stocks can remain undervalued for two to three years (underperforming for three years can age you a decade). Peter Lynch pointed out that sometimes it took him five years for his successful investments to start showing a profit.

Altria is a high-yield deep value investment and if you can't stomach the idea of collecting safe 8.2% yielding dividends that grows steadily over time while ignoring the share price remaining in the toilet for a long time, don't buy it for your portfolio.

Bottom Line: I'm Confident Enough In AbbVie, Brookfield Property, And Altria To Not Just Recommend Them But To Invest 28% Of My Life Savings In These 3 Blue Chips

Like any of my recommendations, I'm not saying that AbbVie, Brookfield Property or Altria are "must own" stocks. Everyone's risk profile and needs are different and I merely consider these three undervalued high-yield blue chips to be reasonable and prudent buys at today's attractive valuations for my needs and many of my readers.

AbbVie's double-digit earnings, cash flow, and dividend growth, initially driven entirely by blockbuster Humira, appears set to continue through at least 2022. Even beyond that the excellent management team, which has proven highly adept at navigating the complex risk profile of the pharma industry, is likely to deliver some of the best long-term safe dividend growth in the industry.

Brookfield Property is a great choice for anyone looking to entrust their money to the Berkshire Hathaway of global real estate, and enjoy a safe 6.5% yield that grows 5% to 8% over time. While BPR/BPY isn't likely to ever close its NAV gap entirely, over time even the complex corporate structure and high amounts of securitized debt shouldn't keep this LP/REIT from achieving its fair value, and thus achieving or even exceeding management's long-term 12% to 15% CAGR total return goals.

Altria is once more mired in a bear market created by the market's fears over the same kinds of regulatory risks and declining cigarette volumes as it's faced for the past 50+ years. But even the current "vapocalypse", should it result in a worst-case scenario that FDA Commission Ned Sharpless has said is highly unlikely, would still likely see this dividend king deliver 6% to 8% long-term dividend growth for many more years, if not decades.

If you're comfortable with the risk profiles of these companies, then ABBV, BPR/BPY, and MO, from today's 12% to 38% discounts to fair value, represent reasonable and prudent buys that could deliver between 13% and 26% annualized total returns over the next five years.

Just remember to size your positions appropriately for your needs, not forgetting that even quality undervalued blue chips can fall further and so leave space under your risk cap to buy more if they do.

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This article was written by

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Adam Galas is a co-founder of Wide Moat Research ("WMR"), a subscription-based publisher of financial information, serving over 5,000 investors around the world. WMR has a team of experienced multi-disciplined analysts covering all dividend categories, including REITs, MLPs, BDCs, and traditional C-Corps.


The WMR brands include: (1) The Intelligent REIT Investor (newsletter), (2) The Intelligent Dividend Investor (newsletter), (3) iREIT on Alpha (Seeking Alpha), and (4) The Dividend Kings (Seeking Alpha).


I'm a proud Army veteran and have seven years of experience as an analyst/investment writer for Dividend Kings, iREIT, The Intelligent Dividend Investor, The Motley Fool, Simply Safe Dividends, Seeking Alpha, and the Adam Mesh Trading Group. I'm proud to be one of the founders of The Dividend Kings, joining forces with Brad Thomas, Chuck Carnevale, and other leading income writers to offer the best premium service on Seeking Alpha's Market Place.


My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives.


With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and safe and dependable income streams in all economic and market conditions.


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Disclosure: I am/we are long MO, ABBV, BPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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