Featured Stock In February’s Safest Dividend Yields Model Portfolio

This Model Portfolio leverages our Robo-Analyst technology[1], which scales our forensic accounting expertise (featured in Barron’s) across thousands of stocks.[2]

This Model Portfolio only includes stocks that earn an Attractive or Very Attractive rating, have positive free cash flow and economic earnings, and offer a dividend yield greater than 3%. Companies with strong free cash flowprovide higher quality and safer dividend yields because we know they have the cash to support the dividend. We think this portfolio provides a uniquely well-screened group of stocks that can help clients outperform.

Featured Stock for February: Omnicom Group (OMC: $76/share)

Omnicom Group (OMC) is the featured stock in February’s Safest Dividend Yield Model Portfolio. We also featured OMC as a Long Idea in May 2018.

Since 2013, OMC has grown after-tax operating profit (NOPAT) by 3% compounded annually. NOPAT margin has increased from 9% in 2013 to 10% in 2018 and return on invested capital (ROIC) has improved from 12% to 14% over the same time.

Figure 1: OMC Profitability Since 2013

Sources: New Constructs, LLC and company filings

OMC’s Free Cash Flow Supports Dividend Payments

Since 2014, OMC has increased its annual dividend from $1.90/share to $2.40/share, or 6% compounded annually. This increase in dividend payments has been supported by OMC’s free cash flow. From 2014-2018, OMC generated a cumulative $6.6 billion (39% of market cap) in FCF while paying $2.5 billion in dividends.

Companies with strong free cash flow provide higher quality dividend yields because we know the firm has the cash to support its dividend. On the flip side, dividends from companies with low or negative free cash flow cannot be trusted as much because the company may not be able to sustain paying dividends.

Figure 2: OMC’s FCF vs. Dividends Since 2014

Sources: New Constructs, LLC and company filings

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

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