Featured Stock In January’s Dividend Growth Model Portfolio

Companies with FCF well in excess of dividend payments provide higher quality dividend growth opportunities because we know the firm generates the cash to support the current dividend as well as a higher dividend. On the flip side, the dividend of a company where FCF falls short of the dividend payment over time cannot be trusted to grow or even stay the same because of inadequate free cash flow.

Figure 2: Free Cash Flow (FCF) vs. Regular Dividend Payments

Sources: New Constructs, LLC and company filings

BBY Holds Significant Upside Potential

At its current price of $59/share, BBY has a price-to-economic book value (PEBV) ratio of 0.9. This ratio means the market expects BBY’s NOPAT to permanently decline by 10%. This expectation seems overly pessimistic for a firm that has grown NOPAT by 12% compounded annually since fiscal 2014.

If BBY can maintain current NOPAT margins (3% TTM) and grow NOPAT by just 2% compounded annually for the next decade, the stock is worth $77/share today – a 31% upside. Click here to see the math behind this dynamic DCF scenario. Add in BBY’s 3% dividend yield and history of dividend growth, and it’s clear why this stock is in January’s Dividend Growth Stocks Model Portfolio.

Critical Details Found in Financial Filings by Our Robo-Analyst Technology

As investors focus more on fundamental research, research automation technology is needed to analyze all the critical financial details in financial filings. Below are specifics on the adjustments we make based on Robo-Analyst findings in Best Buy’s fiscal 2018 10-K:

Income Statement: we made $523 million of adjustments with a net effect of removing $423 million in non-operating expense (1% of revenue). See all adjustments made to BBY’s income statement here.

Balance Sheet: we made $7.2 billion of adjustments to calculate invested capital with a net increase of $4.0 billion. The most notable adjustment was $2.6 billion (50% of reported net assets) in off balance sheet operating leases. See all adjustments to BBY’s balance sheet here.

View single page >> |

Disclosure: David Trainer, Kyle Guske II, and Sam McBride receive no compensation to write about any specific stock, style, or theme.

How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.


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