Portfolio Highlights: Quarterly Movers & Shakers, March 2023

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During the past three months, the S&P 500 index declined by 1% due to sticky inflation and rising rates. The following high quality stocks all generated strong double-digit gains during the same time period.

Meta Platforms New $40 Billion Buyback (META)

Meta reported 2022 revenues decreased by 1% to $116.6 billion with net income declining 41% to $23.2 billion. These results include a $13.7 billion loss from Reality Labs, which includes augmented and virtual related consumer hardware, software, and content, as the company invests in the metaverse. Facebook’s daily active users increased by 4% during the year to a record 2 billion while monthly active users increased by 2% to 2.96 billion. Return on shareholders’ equity was a still friendly 18.5% for the year. Meta repurchased $27.9 billion of its stock during the year. In addition, Meta announced a new $40 billion increase to the share repurchase authorization. After losing friends last year, Meta’s stock bounced back 53% over the last three months. Hold.

Booking Holdings New $20 Billion Buyback (BKNG)

Booking Holdings reported record 2022 revenues of $17.1 billion, up 56% from last year, with net income and EPS both traveling over 100% higher to $3.1 billion and $76.35, respectively. During the year, Booking Holdings’ free cash flow increased 146% to $6.2 billion. The company returned $6.6 billion to shareholders via share repurchases. Management announced a new $20 billion share repurchase program and expects to complete the program within the next four years as they plan to return all free cash flow to shareholders. Booking’s stock traveled 26% higher during the past three months. Buy.

PulteGroup $1.1 Billion Buyback (PHM)

PulteGroup reported 2022 revenues increased 17% to $16.2 billion with net income increasing 34% to $2.6 billion and EPS up 48% to $11.01. Return on shareholders’ equity for 2022 was a lofty 29%. In 2022, the company repurchased 24.2 million shares for $1.1 billion, at an average price of $44.48 per share. The shares repurchased represented about 9.7% of the shares outstanding at the beginning of 2022. In addition, the dividend payout rate per share increased by 7% with the company paying dividends of $144 million during the year. Despite the adverse impact of rising rates on the affordability of new homes, PulteGroup’s stock constructed a 23% rebound during the past three months. Hold.

Nike $18 Billion Buyback (NKE)

NIKE reported fiscal 2023 second-quarter revenues jumped 17% to $13.3 billion with net income coming in flatfooted at $1.3 billion. NIKE continued its strong track record of investing to fuel growth and consistently increasing returns to shareholders, including 21 consecutive years of rising dividend payouts. During the second quarter, NIKE paid dividends of $480 million, up 10% from the prior year. In addition, the company repurchased $1.6 billion of its common stock as part of the four-year, $18 billion buyback program approved by the Board of Directors in June 2022. As of November 30, 2022, a total of 19 million shares have been repurchased under the program for a total of approximately $1.9 billion. Over the last six years, NIKE’s stock has raced higher providing a 119% total return. Hold.

Ulta Beauty Double-Digit Eps Growth (ULTA)

Ulta Beauty outlined its financial targets for 2022-2024. The company expects sales to compound at a 5% to 7% annual rate with operating margins of 13%-14%. This should lead to low double-digit EPS compound annual growth during the period. Over the past five years, Ulta Beauty’s stock has provided a pretty 82% gain. Buy.

Stryker Increased its Dividend by 8% (SYK)

Stryker reported 2022 sales increased 7.8% to $18.45 billion with earnings and EPS up more than 18% to $2.36 billion and $6.17, respectively. During 2022, Stryker generated $2.0 billion in free cash flow and returned $1.05 billion to shareholders through dividend payments. Stryker recently increased its dividend by 8%. Over the last 14 years, Stryker has provided a striking 784% total return. Buy.

NVR 49% Return On Equity (NVR)

NVR’s revenues in 2022 rose 18% to $10.5 billion with net income increasing 40% to $1.7 billion and EPS jumping 53% to $491.82. Return on shareholders’ equity was a strong 49% in fiscal 2022. During the year, the company repurchased 323 million shares for an average price of $4,635.71 per share and ended the year with $2.5 billion in cash, $915 million in long-term debt, and $3.5 billion in shareholders’ equity on its sturdy balance sheet. Strong results in 2022 are expected to be followed by lower sales and earnings in 2023 and potentially 2024 due to rising mortgage rates which have led to cancellations and a lower backlog. With much of the “bad” news already priced into the homebuilders, NVR’s stock rebounded 15% during the past three months. Hold.

Quarterly Rating Change From Hold To Buy

ADP Free Cash Flow +34% 

Automatic Data Processing reported fiscal second-quarter revenues increased 9% to $4.4 billion with the company processing a 17% jump in net income to $813.1 million and an 18% gain in EPS to $1.95. These results reflected the strong growth in new business bookings, client revenue retention near record levels, and continued healthy employment trends within ADP’s client base.

Interest earned on funds held for clients (float income) increased 77% to $187 million, reflecting a 4% increase in the average client funds balance to $33.4 billion and a 90 basis points increase in the average interest yield to 2.2%.

During the first half of the year, free cash flow increased 34% to $1.5 billion with the company paying $865.5 million in dividends and repurchasing $553.5 million of its common stock. Thanks to strong cash flows, ADP has increased its dividend for 48 consecutive years.

ADP maintained its full-year guidance for fiscal 2023 for 8% to 9% revenue growth and 15% to 17% adjusted EPS growth with a margin expansion of 125 to 150 basis points. While ADP notes that job growth is slowing, the company does not see any broad-based softness in the labor market.

In 2023, for the 17th consecutive year, ADP has been named by Fortune® magazine as one of the “World’s Most Admired Companies,” which highlights companies with consistently strong performance and reputations.

We also admire ADP’s stock performance which has provided us with a 159% gain over the last seven years. Buy.

General Dynamics 18% Return On Equity (GD)

Boosted by Russia’s invasion of Ukraine and the increased threat environment, General Dynamics ended the year with a record backlog of $91.1 billion. In 2022, General Dynamics reported a 2.4% increase in revenue to $39.4 billion with net income up 4.1% to $3.4 billion and EPS up 5.5% to $12.19.

During 2022, General Dynamics generated a powerful 18.3% return on shareholders’ equity and a free cash flow of $3.47 billion. The company returned nearly $2.6 billion to shareholders in 2022 through dividends of $1.37 billion and share repurchases of $1.23 billion. In 2023, management expects revenues in the range of $41.2 billion to $41.3 billion, up 4.7% from 2022, and EPS between $12.60 and $12.65, up 3.6% from 2022 at the mid-range. Over the last four years, General Dynamics’ stock has marched higher providing us with a salute-worthy 40% total return. Buy.

Tractor Supply Increased its Dividend by 12% (TSCO)

In 2022, Tractor Supply reported a 12% increase in sales to $14.2 billion with net income increasing 9% to $1.09 billion and EPS up 13% to $9.71. The company generated an impressive 53% return on shareholders’ equity during 2022 and $583.6 million in free cash flow. During 2022, Tractor Supply paid dividends of $409.6 million and repurchased $700.1 million of its stock. The dividend was recently increased by 12%, marking the 14th straight year of dividend increases. In fiscal 2023, management forecasts net sales of $15 billion to $15.3 billion with EPS in the $10.30 to $10.60 range. During the past six years, Tractor Supply has plowed up a hefty 260% total return. Buy.

PepsiCo Popped Dividend 10% Higher (PEP)

PepsiCo reported fourth-quarter revenues rose 11% to $27.9 billion with net income and EPS each dropping 61% to $518 million and $.37, respectively. The decline in reported EPS reflects a $1.6 billion impairment charge, primarily related to its SodaStream business. Core constant currency EPS increased by 10%.

For the full 2022 year, revenue rose 9% to $86.3 billion with net income and EPS each increasing 17% to $8.9 billion and $6.42, respectively. Organic revenue growth accelerated to 14.4% for the full year, reflecting the geographical and category diversity of PepsiCo’s portfolio with both the global beverage and convenience foods businesses performing well.

Return on shareholders’ equity during 2022 was a tasty 52%. Free cash flow decreased 20% during the year to $5.6 billion, primarily due to higher capital expenditures. The company returned $7.6 billion to shareholders through dividend payments of $6.1 billion and share repurchases of $1.5 billion.

For fiscal 2023, the company expects a 6% increase in organic revenue, an 8% increase in constant currency EPS growth, and total cash paid to shareholders of about $7.7 billion through dividend payments of $6.7 billion and share repurchases of $1.0 billion. PepsiCo announced a 10% increase in its annualized dividend to $5.06, representing the 51st consecutive year of dividend increases. During the year, PepsiCo expects an approximate two-percentage-point foreign exchange translation headwind to impact reported net revenue and core EPS growth. Over the last nine years, PepsiCo’s stock has more than doubled while the company also provides tasty dividends. Buy.

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