3 Top Holdings For "Mr. Wonderful"

Cutout paper illustration representing scheme and Stocks inscription

Image Source: Pexels

Kevin O’Leary is Chairman of O’Shares Investments, but you probably know him as “Mr. Wonderful.” He can be seen on CNBC as well as the television show "Shark Tank." Investors who have seen him on TV have likely heard him discuss his investment philosophy. Mr. Wonderful looks for stocks that exhibit three main characteristics:

  1. First, they must be quality companies with strong financial performance and solid balance sheets.
  2. Second, he believes a portfolio should be diversified across different market sectors.
  3. Third, and perhaps most important, he demands income — he insists the stocks he invests in pay dividends.

Here's a look at 3 stocks that represent large positions in his O'Shares US Quality Dividend ETF (OUSA) portfolio.

Johnson & Johnson (JNJ)

  • Dividend Yield: 2.57%.
  • Percentage of the O'Shares US Quality Dividend ETF portfolio: 4.65%.

Johnson & Johnson is one of the most well-known dividend stocks in the marketplace, so it should come as no surprise that it is a top holding for OUSA. Johnson & Johnson is a healthcare giant with a market capitalization of around $436 billion. It has very large businesses across healthcare, including pharmaceuticals, medical devices, and consumer health products. The company has annual sales in excess of $82 billion.

On July 21, Johnson & Johnson released second-quarter earnings results for the period ending June 30, 2021. Revenue increased 27.1% to $23.3 billion, which was $770 million above what analysts had anticipated. Adjusted earnings-per-share of $2.48 was an $0.81, or 49%, an improvement from the prior year and $0.19 better than expected.

Pharmaceutical sales remain strong, with revenue growing 17.2% year-over-year. Oncology was up almost 27%. Darzalex, which treats multiple myeloma, continues to see high uptake rates and had an increase in market share in all regions. Imbruvica, which treats lymphoma, also acquired additional market share even as COVID-19 related delays were a headwind.

Immunology was up just over 20% as Stelara, which treats immune-mediated inflammatory diseases, once again saw elevated uptake rates in Crohn’s Disease and Ulcerative Colitis. The consumer segment returned to growth with revenue advancing more than 13%.

Johnson & Johnson’s key competitive advantage is the size and scale of its business. It invested over $3.39 billion in R&D in the last quarter alone to grow its market share.

Johnson & Johnson is a worldwide leader in a number of healthcare categories, with 26 individual products or platforms that generate over $1 billion in annual sales each. Johnson & Johnson’s diversification allows it to grow each year. It has increased its adjusted operating earnings for 37 consecutive years.

It is also one of the most recession-resistant businesses investors will find. In the Great Recession, earnings-per-share grew by 10% in 2008, and 1% in 2009, at a time when many other companies were struggling. This resilience gives Johnson & Johnson steady profits, even during recessions, which allows it to continue increasing its dividend each year.

We expect 6% annual earnings-per-share growth over the next five years. The company’s pharmaceutical pipeline is a major growth catalyst. For example, last quarter Darzalex saw sales increased by over 59.2%, while Imbruvica’s revenue increased by 17.7%. New products such as these will continue to fuel Johnson & Johnson ’s future growth.

Johnson & Johnson is a Dividend King, and it has an excellent balance sheet to help maintain its dividend growth. It has a AAA credit rating from Standard & Poor’s. The combination of valuation changes, EPS growth, and the 2.57% dividend yield lead to total expected returns of ~7.5% per year over the next five years.

Home Depot (HD)

  • Dividend Yield: 1.98%.
  • Percentage of the O'Shares US Quality Dividend ETF portfolio: 5.05%.

Home Depot was founded in 1978, and since that time it has grown into the leading home improvement retailer with almost 2,300 stores in the U.S., Canada, and Mexico. In all, Home Depot generates annual revenue of approximately $130 billion.

Home Depot reported second-quarter results on Aug. 17. The company reported record second-quarter sales of $41.1 billion, an 8.1% increase year-over-year. Comparable sales increased 4.5%, and 3.4% specifically in the U.S. Net earnings of $4.8 billion were up 11% from $4.3 billion, year-over-year.

Home Depot’s most compelling competitive advantage is its leadership position in the home improvement industry. Not only is demand for home improvement products growing at a high rate in the U.S., but the industry is highly concentrated with just two major operators, Home Depot and Lowe’s (LOW), taking the vast majority of market share.

Home Depot has also proven to be extremely resilient to recessions, including the coronavirus pandemic, which has arguably helped Home Depot as consumers continue to spend much more time at home. Home Depot has a projected 2021 dividend payout ratio just above 45%, which indicates a safe dividend.

Home Depot has generated strong earnings growth in the past decade, as it has successfully capitalized on the housing and construction boom that ensued following the Great Recession of 2008-2010. E-commerce is another growth catalyst for Home Depot, as the company has invested heavily to expand its digital footprint.

Home Depot stated that sales leveraging its digital platforms increased approximately 27% last quarter. We see five-year annual earnings growth of 9.0%, consisting of comparable sales in the mid-single digits, a low single-digit tailwind from buybacks, and a steady, boost from operating margin expansion. The combination of EPS growth, valuation headwinds, and the 1.98% dividend yield lead to expected returns of ~10.6% per year through 2025.

Microsoft Corporation (MSFT)

  • Dividend Yield: 0.75%.
  • Percentage of O'Shares US Quality Dividend ETF portfolio: 6.14%.

Microsoft Corporation, founded in 1975 and headquartered in Redmond, WA, develops, manufactures, and sells both software and hardware to businesses and consumers. Its offerings include operating systems, business software, software development tools, video games and gaming hardware, and cloud services.

On July 27, 2021, Microsoft reported Q4 and fiscal year 2021 results for the period ending June 30, 2021. For the quarter, the company generated revenue of $46.2 billion, representing a 21.3% increase compared to Q4 2020.

The growth was across the board with Productivity and Business Processes, Intelligent Cloud, and Personal Computing growing 25%, 30%, and 9%, respectively. Azure, Microsoft’s high-growth cloud platform, grew by 51% year-over-year. Net income equaled $16.5 billion, or $2.17 per share, compared to $11.2 billion, or $1.46 per share, in Q4 2020.

After years of solid growth, Microsoft had a hard time growing its profits during the 2011 through 2015 time frame. After some change-up in its management and a strategic shift towards cloud computing and mobile, Microsoft’s growth has been reinvigorated. Growth rates for revenues and especially profits have been compelling during recent years.

Microsoft’s cloud business is growing at a rapid pace thanks to Azure, which has been growing tremendously for a few years. Microsoft’s Office product range, which had been a low-growth cash cow for many years, is showing strong growth rates as well after Microsoft changed its business model towards the Office 365 software-as-a-service (SaaS) system.

Due to low variable costs, Microsoft should be able to maintain a solid earnings growth rate for the foreseeable future. Buybacks are an additional factor for earnings-per-share growth, although this form of capital allocation becomes less attractive with an elevated valuation.

Further, Microsoft displays a fine dividend growth record, numbering 20 years of consecutive annual dividend increases. The company’s latest increase earlier in September was once again in the double-digits, hiking the quarterly DPS by 11% to $0.62/share.

Microsoft has a great moat in the operating system & Office business units and a strong market position in cloud computing. It is unlikely that the company will lose market share with its older, established products, whereas cloud computing is such a high-growth industry that there is enough room for growth for multiple companies.

The company has a renowned brand and a global presence, which provides competitive advantages. Microsoft is also relatively resilient against recessions, and like Johnson & Johnson, it has a AAA credit rating.

Unfortunately, Microsoft stock appears overvalued, with a forward P/E ratio of 33.5. Our fair value estimate is a P/E ratio of 24. Expected EPS growth of 7% and the 0.8% dividend yield will boost returns, but overall total returns are estimated at just ~1.1% per year.

Disclaimer: © 2021 MoneyShow.com, LLC. All Rights Reserved. 

How did you like this article? Let us know so we can better customize your reading experience.


Leave a comment to automatically be entered into our contest to win a free Echo Show.