Featured Stock In November’s Dividend Growth Model Portfolio

Recap from October’s Picks

Our Dividend Growth Stocks Model Portfolio outperformed the S&P 500 last month. The Model Portfolio rose 3.4% on a price return basis and rose 3.5% on a total return basis. The S&P 500 fell 0.8% on a price return and total return basis. The portfolio’s best performing stock was up 16%. Overall, 26 out of the 30 Dividend Growth Stocks outperformed the S&P last month.

The long-term success of our model portfolio strategies highlights the value of our Robo-Analyst technology[1], which scales our forensic accounting expertise (featured in Barron’s) across thousands of stocks[2].

The methodology for this model portfolio mimics an All-Cap Blend style with a focus on dividend growth. Selected stocks earn an Attractive or Very Attractive rating, generate positive free cash flow (FCF) and economic earnings, offer a current dividend yield >1%, and have a 5+ year track record of consecutive dividend growth. This model portfolio is designed for investors who are more focused on long-term capital appreciation than current income, but still appreciate the power of dividends, especially growing dividends.

Featured Stock from November: PepsiCo Inc. (PEP: $118/share)

PepsiCo (PEP) is the featured stock from November’s Dividend Growth Stocks Model Portfolio. PEP was previously featured as a Long Idea in September 2017 and remains a top pick.

Since 2007, PEP has grown after-tax profit (NOPAT) by 3% compounded annually to $7.8 billion in 2017. Over the last twelve months, PEP’s NOPAT has increased to $7.9 billion. PEP’s NOPAT margin improved from 11.1% in 2012 to 12.2% TTM while its return on invested capital (ROIC) has averaged 10% over the past five years.

Figure 1: PEP After-Tax Operating Profit Since 2012


Sources: New Constructs, LLC and company filings

Steady Dividend Growth Supported by FCF

PEP has increased its annual dividend each of the last 46 years. The current annualized dividend has grown from $2.24/share in 2013 to $3.71/share in 2018, or 11% compounded annually. Positive FCF fueled dividend growth in the past and should continue to do so in the future. From 2013-2017, PEP generated cumulative FCF of $40.4 billion (24% of market cap), which is more than double the $19.9 billion in dividends paid over the same time. Over the TTM, PEP has generated $7.9 billion in FCF and paid $4.8 billion in dividends.

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

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