3 Dividend Aristocrats You Can Safely Buy That Are Set To Fly
Summary
- Stocks have roared higher at 4X their historical rate in recent months. The S&P 500 is 35% overvalued, the dividend aristocrats 15% overvalued.
- Fortunately, blue-chip bargains are always available if you know where to look. Here, I highlight the safest and best aristocrats for any goal and need.
- MO, WBA, and PII represent the best yield, value, and long-term growth potential among the dividend aristocrats and champions.
- Each trades at a reasonable to attractive valuation, has safe or very safe dividends expected to grow steadily over time faster than inflation, and market-beating return potentials.
- In fact, in the next few years, each of these aristocrats is capable of outperforming the 35% overvalued S&P 500 by 15 to 30X. Within a well-diversified and prudently risk-managed portfolio, these three companies represent the kind of disciplined financial science that can help you achieve a rich retirement.
- I do much more than just articles at The Dividend Kings: Members get access to model portfolios, regular updates, a chat room, and more. Get started today »
The market has been red hot since the news of the Pfizer (PFE) vaccine broke in early November.
The market has been rising at 4X the historical rate ever since. Now concerns over rising interest rates have many worried that various speculative bubbles might be about to pop.
S&P 500 Total Return Consensus Forecast
| Year | Upside Potential By End of That Year | Consensus CAGR Return Potential By End of That Year | Probability-Weighted Return (Annualized) |
| 2021 | -23.20% | -27.10% | -20.30% |
| 2022 | -9.90% | -5.50% | -4.10% |
| 2023 | 2.50% | 0.89% | 0.67% |
| 2026 | 36.02% | 5.41% | 3.28% |
(Source: Dividend Kings S&P 500 Valuation & Total Return Tool)
While long-term buy and hold index investors are not likely facing a lost decade, returns could be very weak for a long time. And of course, short-term volatility could be nasty.
Even the legendary dividend aristocrats are not necessarily a safe place to park your money right now.
- Since November, aristocrats have been rising at 2X their historical rate
- Today, they are 15% overvalued as a group
- Vs 35% overvalued for the S&P 500
Dividend Aristocrats Vs S&P 500 Since 1990
| Year | Aristocrats Returns | Cumulative Returns | S&P 500 Total Returns | Cumulative Returns |
| 1990 | 5.70% | 105.70% | -3.2% | 96.8% |
| 1991 | 38.50% | 146.4% | 30.4% | 126.2% |
| 1992 | 10.10% | 161.2% | 7.6% | 135.8% |
| 1993 | 4.30% | 168.1% | 10.1% | 149.5% |
| 1994 | 0.90% | 169.6% | 1.3% | 151.5% |
| 1995 | 34.60% | 228.3% | 37.6% | 208.4% |
| 1996 | 20.90% | 276.0% | 22.9% | 256.2% |
| 1997 | 34.50% | 371.3% | 33.3% | 341.5% |
| 1998 | 16.80% | 433.6% | 28.6% | 439.1% |
| 1999 | -5.40% | 410.2% | 21.0% | 531.4% |
| 2000 | 10.10% | 451.7% | -9.1% | 483.0% |
| 2001 | 10.80% | 500.4% | -11.9% | 425.5% |
| 2002 | -9.90% | 450.9% | -22.1% | 331.5% |
| 2003 | 25.40% | 565.4% | 28.7% | 426.6% |
| 2004 | 15.50% | 653.1% | 10.9% | 473.1% |
| 2005 | 3.70% | 677.2% | 4.9% | 496.3% |
| 2006 | 17.30% | 794.4% | 15.8% | 574.7% |
| 2007 | -2.10% | 777.7% | 5.6% | 606.9% |
| 2008 | -21.90% | 607.4% | -37.0% | 382.4% |
| 2009 | 26.60% | 768.9% | 26.4% | 483.3% |
| 2010 | 19.40% | 918.1% | 15.1% | 556.3% |
| 2011 | 8.30% | 994.3% | 2.1% | 568.0% |
| 2012 | 16.90% | 1162.4% | 16.0% | 658.8% |
| 2013 | 32.30% | 1537.8% | 32.4% | 872.3% |
| 2014 | 15.80% | 1780.8% | 13.7% | 991.8% |
| 2015 | 0.90% | 1796.8% | 1.4% | 1005.7% |
| 2016 | 11.80% | 2008.8% | 12.0% | 1126.4% |
| 2017 | 21.70% | 2444.7% | 21.8% | 1371.9% |
| 2018 | -2.70% | 2378.7% | -4.4% | 1311.5% |
| 2019 | 28% | 3044.8% | 31.5% | 1724.7% |
| 2020 | 8.70% | 3309.7% | 18.4% | 2042.0% |
| Aristocrats Median Return Since 1990 | Average Return Since 1990 | Annualized Returns Since 1990 | S&P 500 Annual Returns Since 1990 | |
| 11.80% | 12.8% | 12.30% | 10.75% |
(Source: Ploutos)
Both the S&P 500 and aristocrats have delivered fantastic returns over the past 30 years. However, valuations have now gotten so stretched that the laws of financial physics are going to eventually take their toll.
Decades of red hot markets invariably result in weak, or even negative decades.
The good news is that assuming you have 30+ years to wait, both the S&P 500 and dividend aristocrats are likely to make you decent returns.
- S&P 500 LT total return consensus 1.6% yield + 6.4% CAGR growth = 8.0% CAGR = 6.0% CAGR adjusted for inflation
- Dividend aristocrats = 2.1% yield + 7.0% growth = 9.1% = 7.1% CAGR adjusted for inflation
Those returns are far less than the last 30 years, but multiple expansions can't continue forever.
But, of course, low or even negative short to medium-term returns are primarily the concern of passive, index fund investors.
We stick to our view that 2021 will be a stockpicker's paradise with big money-making opportunities if you are willing to go against the grain." Eduardo Lecubarri, JPMorgan (emphasis added)
So, let's apply some simple financial science to screen for the highest quality dividend blue-chips, trading at reasonable or even attractive valuations.
In other words, even in this highly overvalued market, let's find the dividend aristocrats you can safely buy that are set to fly.
Dividend Aristocrats You Can Safely Buy That Are Set To Fly
(Source: Dividend Kings Company Screening Tool)
- sorted by LT analyst total return consensus
- green = potentially good buy or better
- blue = potentially reasonable buy
Using the Dividend Kings company screening tool to find the safest dividend aristocrats to buy right now is easy.
The company screener runs off a 490 company Master List which includes
- every dividend aristocrat (S&P 500 companies with 25+ year dividend growth streaks)
- every dividend champion (any US-listed company with a 25+ year dividend growth streak)
- every dividend king (any US-listed company with a 50+ year dividend growth streak)
- every 12/12 Ultra SWAN (as close to perfect quality companies as exist)
Step 1 is always to select reasonably or attractively valued companies, based on quality and margin of safety appropriate for their risk profiles.
DK Safety And Valuation Rating System
| Quality Score | Meaning | Max Invested Capital Risk Recommendation | Margin Of Safety Potentially Good Buy | Strong Buy | Very Strong Buy | Ultra-Value Buy |
| 3 | Terrible, Very High Long-Term Bankruptcy Risk | 0% | NA (avoid) | NA (avoid) | NA (avoid) | NA (avoid) |
| 4 | Very Poor | 0% | NA (avoid) | NA (avoid) | NA (avoid) | NA (avoid) |
| 5 | Poor | 0% | NA (avoid) | NA (avoid) | NA (avoid) | NA (avoid) |
| 6 | Below-Average, Fallen Angels (very speculative) | 1% | 45% | 55% | 65% | 75% |
| 7 | Average (Relative to S&P 500) | 2.5% | 35% | 45% | 55% | 65% |
| 8 | Above-Average | 5% (unless speculative then 2.5%) | 25% to 30% | 35% to 40% | 45% to 50% | 55% to 60% |
| 9 | Blue-Chip | 7% (unless speculative then 2.5%) | 20% to 25% | 30% to 35% | 40% to 45% | 50% to 55% |
| 10 | SWAN (a higher caliber of Blue-Chip) | 7% (unless speculative then 2.5%) | 15% to 20% | 25% to 30% | 35% to 40% | 45% to 50% |
| 11 | Super SWAN (exceptionally dependable blue-chips) | 7% (unless speculative then 2.5%) | 10% to 15% | 20% to 25% | 30% to 35% | 40% to 45% |
| 12 | Ultra SWAN (as close to perfect companies as exist) | 7% (unless speculative then 2.5%) | 5% to 10% | 15% to 20% | 25% to 30% | 35% to 40% |
Step 2 we select for only the dividend champions (32 out of 128 of which are potential reasonable or attractive buys)
- you can also screen for official aristocrats or kings
Next, we select for above-average quality or better, and above-average dividend safety or better.
| Rating | Dividend Kings Safety Score (72 Safety Metric Model) | Approximate Dividend Cut Risk (Average Recession) | Approximate Dividend Cut Risk In Pandemic Level Recession |
| 1 (very unsafe) | 0% to 20% | over 4% | 16+% |
| 2 (unsafe average) | 21% to 40% | over 2% | 8% to 16% |
| 3 (average) | 41% to 60% | 2% | 4% to 8% |
| 4 (safe) | 61% to 80% | 1% | 2% to 4% |
| 5 (very safe) | 81% to 100% | 0.5% | 1% to 2% |
| ED | 86% | 0.5% | 1.7% |
Eliminating two average quality champions and three with average safety, we are left with 27 dividend champions.
- above-average quality or better
- above-average dividend safety
- 25+ year dividend growth streaks
- fair value or better (we fully participate in all future growth and then some)
This brings us a list of safe dividend champions you can consider buying today, for the long term, with minimal risk of making a stupid investing mistake.
Now, the question is how to select the three best aristocrats for your needs?
You can sort the company screener by any of the fundamental metrics
- LT analyst total return consensus
- yield
- discount to fair value
- dividend growth streak
- 15-year average annual volatility
- Joel Greenblatt's return on capital (Greenblatt's gold standard proxy for quality and moatiness)
- ROC industry percentile
- 13-year median ROC
- 5-year ROC trend
- market cap
- Peter Lynch's PEG ratio
- 13-year Median ROC/PEG ratio (quality + value + growth)
- median LT analyst growth consensus
Why are these the metrics that we can sort the screener by?
7 Proven Alpha Factors For Beating The S&P 500 Over Time
(Source: Ploutos) data as of the end of February
Because it's how we can screen for six of the seven alpha factors.
In the short term, Wall Street is a casino, because anything can happen.
In the long term, Wall Street is also a casino, ruled entirely by statistics, probability, and math.
In other words, in the short term, luck is far more important than fundamentals.
And in the long term, fundamentals are far more powerful than luck, 11X more powerful, to be precise.
The stock market is designed to transfer money from the active to the patient. - Warren Buffett
So, let's go with three of the most powerful fundamentals there are, what I call the holy trinity: yield, growth, and value.
These are literally, the only three factors that directly determine total returns.
Altria (MO): Highest Yielding + Highest Greenblatt Quality (Return On Capital) Aristocrat
Market-Determined Fair Value
| Metric | Historical Fair Value Multiples (all-years) | 2020 | 2021 | 2022 | 2023 |
| 5-Year Average Yield | 5.01% | $69 | $71 | $74 | $80 |
| 13-Year Median Yield | 4.97% | $69 | $71 | $75 | $80 |
| 25-year average yield | 5.31% | $65 | $67 | $70 | $75 |
| Earnings | 14.2 | $62 | $65 | $69 | $74 |
| Operating Cash Flow | 14.5 | $62 | $66 | $65 | $60 |
| Owner Earnings (Buffett Smoothed Out FCF) | 18.1 | $76 | $78 | NA | NA |
| EBITDA | 8.9 | $39 | $58 | $60 | $61 |
| EBIT (operating income) | 9.0 | $74 | $58 | $60 | $61 |
| Average | $62 | $66 | $67 | $69 | |
| Current Price | $44.91 | ||||
Discount To Fair Value | 28% | 32% | 33% | 35% | |
| Upside To Fair Value | 38% | 47% | 50% | 54% | |
Annualized Total Return Potential (including dividends) | NA | 55% | 31% | 24% |
(Source: F.A.S.T. Graphs, FactSet Research) MO fair value is $65 until the 4% dividend hike analysts forecast in August
MO's margin of safety needs to be 5% for us to consider it a potentially good buy based on its quality and risk profile. It's currently 32% undervalued making it a potentially good buy and the 2nd most undervalued aristocrat. It's the most undervalued dividend king.
- a return to fair value by 2023 would mean a 24% CAGR total return
- 2021 fair value range: $58 to $78
- 2021 Harmonic Average Fair Value (smooths out outliers): $65
- fair value range: 31% (medium uncertainty)
Altria 2023 Consensus Return Potential
(Source: F.A.S.T. Graphs, FactSet Research)
If MO grows as analysts expect through 2023, and returns to historical fair value, then analysts expect
- 90% total returns
- 25.4% CAGR returns
- vs 0.9% CAGR S&P 500
In the short term, boring, slow-growing and undervalued MO has the potential to outperform the S&P 500 by 28X.
Altria 2026 Consensus Return Potential
(Source: F.A.S.T. Graphs, FactSet Research)
If MO grows as analysts expect through 2026, and returns to historical fair value, then analysts expect
- 132% total returns
- 15.5% CAGR returns
- vs 5.4% CAGR S&P 500
- 11.0% CAGR 5-year risk-adjusted expected returns vs 2.6% S&P 500
- 4.2X market's risk-adjusted expected returns
Over the very long term (30+ years), here's what analysts expect.
- 7.7% yield + 2.2% CAGR growth = 9.9% CAGR total returns (9.7% to 13.7% CAGR range)
- vs 8.0% CAGR S&P 500 and 9.1% CAGR dividend aristocrats
Over the next five years, MO has the potential to deliver returns on par with the greatest investors in history.
But not from some complex, speculative investment you have to manage yourself. MO is a 100% liquid, passive investment, run by competent, trustworthy, and adaptable managers working hard to make you rich.
- blue-chip bargain investing at its finest
Investment Decision Score
I never recommend a company, much less put my own money at risk, without first knowing exactly how prudent a potential investment it is relative to the S&P 500, most people's default alternative.
The investment decision score is based on valuation and the three core principles of all successful long-term investors.
| Ticker | Quality Score | Safety Score | Investment Grade | Today's 5+ Yr Risk-Adjusted Expected Return | |
| MO | 12 (Ultra SWAN) | 5 (Very Safe) | A | 11.03% | |
| Goal | Scores | Scale | Interpretation | ||
| Valuation | 4 | Very Strong Buy | MO's 31.40% discount to fair value earns it a 4-of-4 score for valuation timeliness | ||
| Preservation of Capital | 5 | Average | MO's credit rating of BBB implies a 7.5% chance of bankruptcy risk and earns it a 5-of-7 score for Preservation of Capital | ||
| Return of Capital | 10 | Exceptional | MO's 47.33% vs. the S&P's 10.61% 5-year potential for return via dividends earns it a 10-of-10 Return of Capital score | ||
| Return on Capital | 10 | Exceptional | MO's 11.03% vs. the S&P's 2.65% 5-year risk-adjusted expected return (RAER) earns it a 10-of-10 Return on Capital score | ||
| Total Score | 29 | Max score of 31 | S&P's Score | ||
| Investment Score | 94% | Excellent | 73/100 = C(Market Average) | ||
| Investment Letter Grade | A | ||||
(Source: Dividend Kings Automated Investment Decision Tool)
Altria is one of the most reasonable and prudent high-yield companies you can buy today.
- objectively superior quality to the average S&P 500 company (including based on credit ratings, returns on capital, historical returns, and dividend growth streak, a Graham standard of quality)
- 4.8X the yield
- with a much safer dividend (as seen by a 51-year dividend growth streak)
- 4.5X the 5-year income-generating capacity
- 4.2X the risk-adjusted expected returns of the S&P 500
- about 2% better annual very long-term consensus total return potential than the S&P 500 and 1% more than the Aristocrats
That's assuming you're
- comfortable with the risk profile
- own it within a diversified and prudently risk-managed portfolio
Fundamental Risk Summary
Investors in tobacco companies should have the stomach for fat-tail risk, particularly those holding shares in a single-market pure-play like Altria. Overall, we believe the risk of a significant adverse event is lower than it was one or two decades ago, but the shifting sands of regulation have created some new risks to Altria's business model in recent years and we have raised our uncertainty rating to medium from low.
Litigation risk still remains, but adverse judgments have been manageable recently. While it is almost impossible to forecast the magnitude of any awards against the tobacco industry, we expect payouts to be within Altria's annual free cash flow.
The FDA regulates the tobacco industry in the U.S. The recent ban on flavored nicotine liquids demonstrates the FDA is willing to take significant steps to prevent the uptake of nicotine products by new consumers. One further measure still under consideration is a menthol ban on cigarettes, an outcome we think is unlikely.
Regulatory risks remain in the core cigarette business as well, including a potential clampdown on the use of menthol and an enforced reduction of the level of nicotine in cigarettes. The menthol category has had the sword of Damocles hanging over it for several years, with no restrictive access yet coming to fruition. The FDA did not take the opportunity to curb the use of menthol when it abolished other flavors in cigarettes in 2009, and we still view the risk to the menthol category as limited. The potential for limits on the nicotine levels in cigarettes is a relatively new risk, however, with the FDA announcing in the summer of 2017 that it will investigate the potential for nicotine control. We do not believe such controls are a foregone conclusion, however, because they could have unforeseen consequences such as increasing cigarette volumes.
The introduction of plain packaging would be detrimental to Altria's wide economic moat and remains a low probability risk." - Morningstar
Walgreens (WBA): Most Undervalued Dividend Aristocrat
Further Research
Market-Determined Fair Value
| Metric | Historical Fair Value Multiples (15-years) | 2020 | 2021 | 2022 |
| 5-year Average Yield | 2.47% | $76 | $77 | $80 |
| Earnings | 14.5 | $70 | $75 | $82 |
| Operating Cash Flow | 9.9 | $68 | $68 | $78 |
| Free Cash Flow | 14.2 | $61 | $66 | $73 |
| EBITDA | 8.4 | $64 | $68 | $71 |
| EBIT (operating income) | 11.1 | $66 | $70 | $74 |
| Average | $67 | $70 | $76 | |
| Current Price | $47.55 | |||
Discount To Fair Value | 29% | 33% | 38% | |
| Upside To Fair Value | 41% | 48% | 60% | |
Annualized Total Return Potential (including dividends) | NA | 20% | 33% |
(Source: F.A.S.T. Graphs, FactSet Research)
MOs margin of safety needs to be 25% for us to consider it a potentially good if speculative buy based on its quality and risk profile.
It's currently 33% undervalued making it a potentially good though speculative buy and the most undervalued aristocrat. WBA's turnaround is what makes it speculative, especially in a pandemic that has hurt its retail business.
- a return to fair value by 2022 would mean a 33% CAGR total return
- 2021 fair value range: $66 to $76
- 2021 Harmonic Average Fair Value (smooths out outliers): $70
- fair value range: 14% (very low)
Walgreens 2023 Consensus Return Potential
(Source: F.A.S.T. Graphs, FactSet Research)
If WBA grows as analysts expect through 2023, and returns to historical fair value, then analysts expect
- 81% total returns
- 26.8% CAGR returns
- vs 0.9% CAGR S&P 500
In the short-term boring, slow-growing, and deeply undervalued WBA has the potential to outperform the highly overvalued S&P 500 by 30X.
Walgreens 2026 Consensus Return Potential
(Source: F.A.S.T. Graphs, FactSet Research)
If WBA grows as analysts expect through 2026, and returns to historical fair value, then analysts expect
- 127% total returns
- 16.1% CAGR returns
- vs 5.4% CAGR S&P 500
- 10.7% CAGR 5-year risk-adjusted expected returns vs 2.7% S&P 500
- 4.0X market's risk-adjusted expected returns
Over the very long term (30+ years), here's what analysts expect.
- 3.9% yield + 3.6% CAGR growth = 7.5% CAGR total returns (5.9% to 10.9% CAGR range)
- vs 8.0% CAGR S&P 500 and 9.1% CAGR dividend aristocrats
Investment Decision Score
I never recommend a company, much less put my own money at risk, without first knowing exactly how prudent a potential investment it is relative to the S&P 500, most people's default alternative.
The investment decision score is based on valuation and the three core principles of all successful long-term investors.
| Ticker | Quality Score | Safety Score | Investment Grade | Today's 5+ Yr RAER | |
| WBA | 9 (Blue-Chip) | 4 (safe) | A | 10.74% | |
| Goal | Scores | Scale | Interpretation | ||
| Valuation | 4 | Good Buy | WBA's 33.70% discount to fair value earns it a 4-of-4 score for valuation timeliness | ||
| Preservation of Capital | 5 | Average | WBA's credit rating of BBB implies a 7.5% chance of bankruptcy risk and earns it a 5-of-7 score for Preservation of Capital | ||
| Return of Capital | 10 | Exceptional | WBA's 27.53% vs. the S&P's 10.61% 5-year potential for return via dividends earns it a 10-of-10 Return of Capital score | ||
| Return on Capital | 10 | Exceptional | WBA's 10.74% vs. the S&P's 2.65% 5-year risk-adjusted expected return (RAER) earns it a 10-of-10 Return on Capital score | ||
| Total Score | 29 | Max score of 31 | S&P's Score | ||
| Investment Score | 94% | Excellent | 73/100 = C(Market Average) | ||
| Investment Letter Grade | A | ||||
(Source: Dividend Kings Automated Investment Decision Tool)
WBA is one of the most reasonable and prudent high-yield defensive stocks you can buy today. It offers
- slightly superior quality to the average S&P 500 company (including based on credit ratings, historical returns, and dividend growth streak, a Graham standard of quality)
- 2.4X the yield
- with a much safer dividend (as seen by a 45-year dividend growth streak)
- 2.6X the 5-year income-generating capacity
- 4.0X the risk-adjusted expected returns of the S&P 500
That's assuming you're
- comfortable with the risk profile
- own it within a diversified and prudently risk-managed portfolio
Fundamental Risk Summary
We assign Walgreens a medium uncertainty rating. Walgreens operates in a mature competitive market with a significant share and the main risks are associated with reimbursement pressure from public and private third party payers, increasing shift in mix (toward 90-day prescriptions and Medicare Part D), any increases in the cost of procurement of pharmaceuticals, and significant changes in federal or state drug regulations. The company has a significant market share so the entry of a new competitor would likely be unlikely but any significant changes to the economy or market dynamics could pose a risk.
Further, the decrease of the utilization of drugs either driven by slower new drug introductions, fewer alternative generic options, or formulary constraints by the PBM would impact management's ability to leverage the significant fixed costs of maintaining stores with high rent and staffing them with pharmacists. Walgreens may also be impacted by the consolidation of healthcare companies and providers that could influence where prescriptions are filled.
With the international operations, Walgreens faces all the same risks associated with reimbursement, mix, cost of procurement, competitive positioning, entry of new competitors, and decreasing utilization but each of these risks would vary based on the countries that the company operates (Walgreens operates in 25 countries). Lastly, significant fluctuations in the currency could negatively impact international operating results." - Morningstar
Polaris (PII): Fastest Growing Dividend Champion, Highest LT Analyst Total Return Consensus
Further Research
Market-Determined Fair Value
| Metric | Historical Fair Value Multiples (19 Years) | 2020 | 2021 | 2022 | 2023 |
| 5-Year Average Yield | 2.58% | $96 | $98 | $101 | $105 |
| 13-Year Median Yield | 2.06% | $120 | $122 | $126 | $132 |
| 25-Year Average Yield | 2.35% | $106 | $107 | $111 | $115 |
| Earnings | 17.7 | $136 | $154 | $163 | $165 |
| Owner Earnings (Buffett Smoothed Out FCF) | 15.8 | $142 | $148 | NA | NA |
| Operating Cash Flow | 11.4 | $185 | $151 | $152 | NA |
| Free Cash Flow | 18.5 | $238 | $147 | $173 | NA |
| EBITDA | 10.0 | $128 | $166 | $172 | $173 |
| EBIT (operating income) | 13.9 | $120 | $169 | $176 | $173 |
| Average | $132 | $136 | $141 | $138 | |
| Current Price | $125.00 | ||||
Discount To Fair Value | 5% | 8% | 11% | 10% | |
| Upside To Fair Value | 5% | 9% | 13% | 11% | |
Annualized Total Return Potential (include dividends) | NA | 11% | 9% | 6% |
(Source: F.A.S.T. Graphs, FactSet Research)
PII margin of safety needs to be 5% for us to consider it a potentially good buy based on its quality and risk profile.
It's currently 8% undervalued making it a potentially good buy hyper-growth buy.
- a return to fair value by 2023 would mean a mere 6% CAGR total return
- 2021 fair value range: $98 to $169
- 2021 Harmonic Average Fair Value (smooths out outliers): $136
- fair value range: 52% (high uncertainty)
Polaris 2023 Consensus Return Potential
(Source: F.A.S.T. Graphs, FactSet Research)
If PII grows as analysts expect through 2023, and returns to historical fair value, then analysts expect
- 44% total returns
- 13.7% CAGR returns
- vs 0.9% CAGR S&P 500
In the short-term PII has the potential to outperform the S&P 500 by 15X.
Polaris 2026 Consensus Return Potential
(Source: F.A.S.T Graphs, FactSet Research)
If PII grows as analysts expect through 2026, and returns to historical fair value, then analysts expect
- 135% total returns
- 15.8% CAGR returns
- vs 5.4% CAGR S&P 500
- 10.7% CAGR 5-year risk-adjusted expected returns vs 2.6% S&P 500
- 4.1X market's risk-adjusted expected returns
Over the very long term (30+ years), here's what analysts expect.
- 2.0% yield + 16.0% CAGR growth = 18.0% CAGR total returns (14.0% to 24.0% CAGR range)
- vs 8.0% CAGR S&P 500 and 9.1% CAGR dividend aristocrats
Investment Decision Score
I never recommend a company, much less put my own money at risk, without first knowing exactly how prudent a potential investment it is relative to the S&P 500, most people's default alternative.
The investment decision score is based on valuation and the three core principles of all successful long-term investors.
| Ticker | Quality Score | Safety Score | Investment Grade | Today's 5+ Yr RAER | |
| PII | 12 (Ultra SWAN) | 5 (Very Safe) | A- | 10.70% | |
| Goal | Scores | Scale | Interpretation | ||
| Valuation | 4 | Good Buy | PII's 8.23% discount to fair value earns it a 4-of-4 score for valuation timeliness | ||
| Preservation of Capital | 6 | Above Average | PII's credit rating of BBB+ implies a 5% chance of bankruptcy risk and earns it a 6-of-7 score for Preservation of Capital | ||
| Return of Capital | 8 | Very Good | PII's 17.84% vs. the S&P's 10.62% 5-year potential for return via dividends earns it an 8-of-10 Return of Capital score | ||
| Return on Capital | 10 | Exceptional | PII's 10.70% vs. the S&P's 2.66% 5-year risk-adjusted expected return (RAER) earns it a 10-of-10 Return on Capital score | ||
| Total Score | 28 | Max score of 31 | S&P's Score | ||
| Investment Score | 90% | Very Good | 73/100 = C(Market Average) | ||
| Investment Letter Grade | A- | ||||
(Source: Dividend Kings Automated Investment Decision Tool)
PII is one of the most reasonable and prudent hyper-growth dividend champions you can buy today.
- objectively superior quality to the average S&P 500 company (including based on returns on capital, historical returns, and dividend growth streak, a Graham standard of quality)
- 1.3X the yield
- with a much safer dividend (as seen by a 26-year dividend growth streak)
- 1.7X the 5-year income-generating capacity
- 4.0X the risk-adjusted expected returns of the S&P 500
- more than double the consensus LT total return potential
That's assuming you're
- comfortable with the risk profile
- own it within a diversified and prudently risk-managed portfolio
Fundamental Risk Summary
Polaris faces a number of different risks. Motorcycles, snowmobiles, and ATVs are all big-ticket items, and a widespread slowdown in the global economic environment could hamper the replacement and adoption rates of these products.
A more protracted domestic downturn could also affect financing rates at the dealer (floor plan) and retail levels. In recent years, consumers have financed about one-third of the vehicles sold in the U.S. and changes in lending standards could prove problematic. Polaris faces integration risk, particularly as it has become more acquisitive (TAP, Boat Holdings), and liability risk, as it self-insures against product liability claims. Weather is the biggest factor Polaris cannot control; sales of snowmobiles are correlated with the amount of snowfall generated in any given season, making segment volume more volatile than the others.
Also, the most significant ESG risk surrounds safety issues related to using Powersports products, resulting from persistent recalls (which can weigh on the firm's ability to maintain its brand equity). Foreign exchange exposure could prove unpredictable as the firm grows internationally, making sales uncertain. Finally, actions surrounding tariffs could alter profitability.
We remain concerned that the Powersports industry has numerous key players that can compete on price to gain share. In ATVs, competitors like Honda and Deere are formidable players, while Indian has to compete with motorcycle manufacturing giants Honda and Harley-Davidson. All of the aforementioned brands have huge franchises and financial resources, which could cause the environment to become promotional.
Although Polaris has held its ground against these incumbents, competitive winds can get the best of the company in 2004 when it sold its personal watercraft business, and the concern remains that it could happen again (we surmise this was a factor in the Victory wind-down decision)." - Morningstar
Bottom Line: No Matter The Market Great Aristocrats Bargains Are Always On Sale
I can't tell you what the market will do tomorrow, the next week, or even the next year. What I can tell you is that if you make consistently reasonable and prudent decisions, over time you'll get rich on Wall Street.
Altria, Walgreens, and Polaris represent the top-yielding, undervalued, and fastest-growing dividend aristocrats and champions you can safely buy today.
That doesn't mean that they might fall in a broader market correction, no stock can claim that.
What it does mean is that you're buying each one with a sufficient margin of safety based on its quality and risk profile. Based on the best available facts and reasoning we have today, owning these three aristocrats within a diversified and prudently risk-managed portfolio is likely to result in very solid long-term income and total returns.
Luck is what happens when preparation meets opportunity. - Seneca
It's time to obsess over short-term stock price fluctuations. It's time to stop treating Wall Street like a casino, or at least stop being the gambler at the blackjack table.
It's time to start thinking like a business owner and become the casino. When you apply disciplined financial science for long enough, you become the house. And as we all know, the house always in the end.
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This article was written by
Dividend Sensei (Adam Galas) is an Army veteran and stock analyst with 20+ years of market experience.
He is a founding author of the investing group The Dividend Kings which focuses on helping investors safeguard and grow their money in all market conditions through the highest-quality dividend investments. Dividend Sensei and the team of analysts (Brad Thomas, Justin Law, Nicholas Ward, Chuck Carnevale, and Sebastian Wolf) help members invest more intelligently in dividend stocks. Features include: 13 model portfolios, buy ideas, company research reports, and a thriving chat community for readers looking to learn how to invest more intelligently in dividend stocks. Learn more.Analyst’s Disclosure: I am/we are long MO, WBA, PII. 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.
Dividend Kings own MO, WBA, and PII in our portfolios.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (102)
Who will probably do heroin if offered (or alcohol or cannabis for that matter)
But scoff at the thought of cigarettes ...I think smokes don't have a future
Something like half the DA’s today were not on the DA list 10 years ago.So what is the point of factoring DA status into a buy/sell rating?Why is it that no one other than amateur investors, not WS analysts, valuation professionals, nor financials scholars, ever refer to it (DA) in their analyses or valuation models.
You cannot find the term “Dividend Aristocrat” in any credible grad school financial textbook or professional research article. Period. Zero.
Long CVS, MO, PM, BTI
This is the opposite of a company like PLTR right? One has the future AI tech but does not have the customer base while this old lady has the customer base but future is dull.
That or I am to green which I am but I am smart and it seems like social media and media in general are manipulating the markets at a level that has me backing off. I dumped it into BABA apologizing to my inner populist bc it seems safe. CCP uses it as a weapon so maybe Ma disappears but CCP will just force it to grow for investors.
(1) I know you do financial analysis, I understand that, but sometimes for some companies, the market undergoes a fundamental and sometimes irrevocable change.WBA may be one. It is not a speculative turnaround as you say. They are being aggressively dis-intermediated out of their industry. Retail pharmacy/PBM is raw meat target for every consulting firm and new AI technology out there. And that’s before Amazon moves in on their brick and mortar business.Which brings me to the second thing...(2) The article title “Aristocrats...Set to Fly”?
Even if I am wrong about WBA, one cannot responsibly describe it as a company as “Set to Fly.” Your business strategy can either go for click bait or authenticity and credibility. You cannot have it both ways.
Because it (b&m pharmacy retail) is now a very low margin, high volume business requiring very high asset turnover. Grocery store - not growth.Reasons for Amazon adding WBA to their “portfolio” do not apply to individual investors. Amazon, as an operator, can achieve synergies, e.g., economies of scale, may see strategic value to defend larger grocery business, etc.If anything, reason to buy AMZN, not WBA. If WBA was “cheap”, AMZN would buy it.My point being, WBA is not exactly “set to fly.”
