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As I previously discussed, there are two general styles of dividend investing: high-yield investing and dividend growth investing (aka, DGI). The former is favored by those who are well into their retirement, while the latter works the best for future or early retirees as I showed using Intercontinental Exchange, Inc. (ICE) as the example.
Below, I explain how we at The Natural Resources Hub screen for the best dividend stocks, and present two actionable ideas, one each for high yield and dividend growth-oriented investors.
Dividend yield is the ratio of a company's current annual dividend compared to its current share price. Dividend growth rate is the annualized percentage rate of growth a particular stock's dividend undergoes over a period of time, typically one year. The sum of the dividend yield and dividend growth can be called the expected total return, from which one may calculate at what share price an entry should be made so as to meet a hurdle rate of total return.
I assume a high-yield investor has a 10% hurdle rate of total return. Our goal here is to identify dividend-paying stocks that yield not much less than the CPI, currently at 8.3%, such that the current yield in combination with anticipated dividend raises will handily beat inflation in the foreseeable future.
Fig. 1. Scatter plot of the dividend kings in terms of dividend yield and dividend growth rate, with high-yield dividend investing targets highlighted (Laurentian Research for The Natural Resources Hub based on data sourced from Seeking Alpha and company financial filings)
A dividend growth investor, I assume, expects a >15% rate of total return per year and a >15% dividend yield, in 10 years, to his/her cost basis.
Fig. 2. Scatter plot of the dividend kings in terms of dividend yield and dividend growth rate, with dividend growth investing targets highlighted (Laurentian Research for Natural Resources Hub based on data sourced from Seeking Alpha and company financial filings)
As pointed out by a fellow Seeking Alpha author, in spite of the negativity about smoking, sin stock Altria continues to post respectable sales growth on the back of its strength in pricing power and non-cigarette businesses.
With an 8.78% dividend yield - the highest among all dividend kings, Altria has an expected rate of total return as high as 14% per year. If you have a lower bar of 10% annual total return, my calculation indicates you could buy the stock all the way up to $84 per share. The stock changed hands at $42.82 apiece as of October 7, 2022, which gives an income-oriented investor a sufficiently large margin of safety.
How could Altria be so cheap? A slew of risk factors keep many investors away from the sin stock. Firstly, unfavorable litigation outcomes may adversely impact its financial performance. Juul Labs, of which Altria owns 35%, agreed to pay $438.5 million to over 30 U.S. states to settle a two-year probe over its marketing practice of E-cigarette and vaping devices. Juul had to lay off staff, suspend international expansion, and consider a potential Chapter-11 bankruptcy filing. Secondly, the commercialization of new products, e.g., IQOS devices and related Marlboro HeatSticks, in the U.S. market may or may not lead to success. Thirdly, demographical changes may result in shifts of adult tobacco consumer behavior. As a good case in point, pot smoking, already more popular in America than tobacco smoking, continues to build momentum.
AbbVie has a portfolio of pharmaceutical products, diversified across immunology, hematologic oncology, aesthetics, neuroscience, eye care and other areas.
Its psoriasis and arthritis drug Skyrizi, cancer drug Imbruvica and especially inflammatory treatment Humira are the so-called blockbusters. These drugs underpin its above-industry profitability, as can be seen in its high gross margin (70.72%), net margin (22.04%), leveraged FCF margin (32.48%), and ROE (92.36%).
Net revenue came to $14.6 billion in the 2Q2022, increasing by 4.5% over the same quarter one year ago, thanks to (temporarily) regained strength in Humira sales and rapidly rising importance of Skyrizi and Rinvoq, offset by declining sales of Imbruvica and eye care products (Table 1).
Table 1. Key product portfolio of AbbVie, shown with revenue for the 2Q2022 (AbbVie)
Fig. 3. AbbVie R&D pipeline (AbbVie)
AbbVie has an expected rate of total return of 19.33% per year. The company said it would continue to raise dividends despite possibly weaker revenue growth in the next couple of years, allowing payout ratio to creep above the current 42%. If AbbVie can maintain the historical dividend growth rate (15.27%), the stock is projected to yield 16.8% to cost by 2032.
At $138.76 per share as of as of October 7, 2022, the stock traded at a forward P/E non-GAAP multiple of 10.1X, a bargain for a pharmaceutical stalwart. The low valuation multiple reflects the uncertainties faced by AbbVie. As discussed above, the elephant in the room is the loss of exclusivity on Humira, while Skyrizi and Rinvoq need time to ramp up in sales. Once such an uncertainty is in the rear-view mirror, however, AbbVie will end up having some of the lowest loss of exclusivity exposure in the industry for the rest of the decade, according to AbbVie vice chairman and president Rob Michael. Supposing his outlook holds water, the best time for a dividend growth investor with a 10-year time horizon to make an entry into AbbVie is somewhere between now and end-2024.
Drug-makers are known to weather recessions reasonably well. For that very reason, investors tend to flock to the pharmaceutical industry, causing the drug stocks to outperform the broader market.
Dividend kings form a fertile corner in the market where income investors pick high-yield and DGI stocks.
Our screening of dividend kings leads to the identification of two ideas that are in or near the window of opportunity:
A global recession, should it happen, is believed to have little impact on the financial performance of both companies. So, a generational opportunity may arise for investors who have been waiting on the sidelines to make an entry into two dividend kings, if their share prices go down with the broader market.
The Natural Resources Hub is the one-stop solution for income investors seeking the highest-quality dividend ideas, and for capital-appreciation investors looking to reap multi-bagger gains at moderate risks.
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This article was written by
As a natural resources industry expert with years of successful investing experience, I conduct in-depth research to generate alpha-rich, low-risk ideas for the member of The Natural Resources Hub (TNRH). I focus on identifying high-quality deep values in the natural resources sector and undervalued wide-moat businesses, an investment approach that has proven to be extremely rewarding over the years.
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Disclosure: Besides myself, TNRH is fortunate enough to have multiple other contributing authors who post articles for and share their views with our thriving community. These authors include Silver Coast Research, ..., among others. I'd like to emphasize that the articles contributed by these authors are the product of their respective independent research and analysis.
Disclosure: I/we have a beneficial long position in the shares of MO either through stock ownership, options, or other derivatives. 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.