Valuentum Exclusive Analysis for the Discerning Investor

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This Remains a Technically-Driven Stock Market
Image: We expect the S&P 500 (SPY) to test support at both its technical uptrend and the 200-day moving average. In the event the SPY breaks through technical support, we’d be looking to “raise cash” across the newsletter portfolios. S&P 500 companies will end 2022 with roughly a 4%-5% decline in fourth-quarter 2022 earnings, but earnings season has come in better-than-feared. We expect the Fed to continue to raise rates given recent producer price inflation readings and a continued strong labor market. The 10-year Treasury continues to pose headwinds to asset values, and while many are talking of “disinflation,” we expect the market to remain technically driven and begin to test support at the 200-day moving average across major indices. We believe 2023 will be a choppy year, as we look ahead to better times in 2024.

ICYMI: As Expected, Stock Pickers Trounce the Indexes When It Matters
Image: Charles Dickens. Image Source: Public Domain. “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.” -- Charles Dickens, A Tale of Two Cities. We are big believers in prudent and diversified stock selection more than we ever have before, and we have little confidence in applying correlations, as in traditional asset allocation, to try to achieve financial goals and manage risks. In this age of wisdom, we like to follow the data, and the data keeps pointing to prudent and diversified stock selection as one of the best risk-adjusted ways to achieve long-term financial goals. To each, their own, but we continue to like stocks for the long run, and 2022 was yet another example why!

Follow Up on Intel’s Dividend Cut: We Will Strive to Do a Better Job Communicating
As noted in our brief note on Intel this morning, “Intel Cuts Dividend, As Expected,” we have now refreshed the company’s reports on the website, with updated Dividend Safety and Dividend Growth Potential ratings, both as VERY POOR. After factoring in Intel’s updated outlook to our valuation model from its fourth-quarter release, our updated fair value estimate is now $25 per share (was $27 per share) and our updated Dividend Cushion ratio is -1.7 (negative 1.7), was 0.4. This includes the dividend cut.

Intel Cuts Dividend, As Expected
Image Source: Aaron Fulkerson. The Dividend Cushion ratio caught another dividend cut. This time it was Intel’s. With a Dividend Cushion ratio of 0.4, Intel announced February 22 that it has slashed its dividend by nearly two thirds, to $0.125 on a quarterly basis, down from its prior quarterly dividend of $0.365. The company’s estimated forward yield now stands at ~1.9%, and we can’t say that the dividend cut was unexpected given its massive net debt position and significantly weakened free cash flow generation--the two most important components behind an assessment of its cash-based intrinsic value and dividend health.

Walmart Warns: “Prices Are Still High and There Is Considerable Pressure on the Consumer”
Image Source: Mike Mozart. Walmart’s outlook may very well be conservative, but its commentary certainly doesn’t bode well for many discretionary retailers and the broader economy. With the labor markets still strong and the producer price index still coming in hot, the Federal Reserve is not yet done raising rates. We expect the markets to test their uptrends and 200-day moving averages in the coming days to weeks, and if we break through these support levels to the downside, we won’t hesitate to “raise some cash” across the newsletter portfolios. When Walmart warns about the health of the consumer, we pay attention.

Home Depot’s Comps, Operating Income Fall in Q4; Hikes Dividend 10%
Image Source: Mike Mozart. On February 21, home improvement retailer Home Depot reported weak fourth quarter 2022 results that showed comparable store sales for the period falling 0.3% and operating income dropping 1.5% from the same period a year ago. Diluted earnings per share advanced 2.8% from last year’s quarter. The company is dealing with a weakened consumer spending environment and difficult comparisons from pandemic-driven demand of a year ago. Home Depot raised its dividend payout to 10%, to $2.09 per share, or $8.36 per share on an annualized basis. That translates into a forward estimated dividend yield of ~2.6%.

Phillip Morris’ Acquisition of Swedish Match Accelerates Smoke-Free Push
Image Source: Phillip Morris. On February 9, Phillip Morris reported fourth-quarter 2022 results. The company’s performance continues to be impacted by the War in Ukraine. Net revenue growth came in at 0.6% for the quarter, while operating income fell 0.8%. However, excluding sales in Russia and Ukraine, net revenue growth advanced 7.9% in the quarter, while operating income growth advanced 10.3%, a much better showing on an adjusted basis. Smoke-free products accounted for ~36.0% of total net revenue in the period. We continue to like Phillip Morris as an income idea, with shares yielding ~5% at the time of this writing. Our fair value estimate stands at ~$105 per share.

Online Sports Betting Surges But DraftKings’ Cash Burn Continues to Intensify; We Prefer More Conservative Gaming Plays Such as Churchill Downs
Image: Online sports betting platform DraftKings continues to burn through hundreds of millions of dollars each year. Data: SEC Filings, Seeking Alpha. Over the past 52 weeks, Churchill Downs’ stock has advanced ~10%, while DraftKings’ stock is down ~7% and Penn Entertainment’s shares have fallen over 34%. Online sports betting will only grow as more and more states pass laws in favor of its adoption and more and more consumers take up gambling as a hobby, but the best risk-adjusted opportunities may still rest with the more traditional gaming operators that aren’t burning through hundreds of millions in free cash flow every year to chase growth. We don’t like the moral underpinnings of the gambling industry at all, but we cannot deny the long-term growth potential of the industry. Churchill Downs may not be levered to online sports gaming anymore, but the company remains free cash flow rich with a tremendously lucrative asset base, and for that, it’s one of our favorite picks in the group.

PepsiCo's Pricing Actions Fantastic; Needs Better Free Cash Flow in 2023 to Cover 10% Dividend Hike
Image Source: PepsiCo. PepsiCo revealed tremendous product pricing power during its fourth quarter of 2022, but inflationary pressures were still present across its business operations. The beverage and snacks giant raised its dividend 10%, marking the 51st consecutive year the company has upped its payout. However, PepsiCo will have to step up its free cash flow generation during 2023 in order to cover the increased payout obligations. During 2022, for example, free cash flow came up short in covering cash dividends paid. PepsiCo also has a rather large net debt position, even as it plans to spend $1 billion in buybacks during 2023. We still like PepsiCo as an idea in the Best Ideas Newsletter portfolio, however, and peg its fair value estimate at $187 per share. Shares yield ~2.8% at the time of this writing.

The Dividend Cushion Ratio Warned of Risk to V.F. Corp’s Dividend
Image: The Dividend Cushion ratio is one of the most powerful financial tools an income or dividend growth investor can use in conjunction with qualitative dividend analysis. The ratio is one-of-a-kind in that it is both free-cash-flow based and forward looking. Since its creation in 2012, the Dividend Cushion ratio has forewarned readers of approximately 50 dividend cuts. We estimate its efficacy at ~90%.V.F. Corp cut its quarterly dividend by more than 40% on February 7, to a quarterly rate of $0.30 per share from $0.51 per share previously. The cut is yet further evidence of the importance of paying attention to the cash-based sources of intrinsic value--net cash on the balance sheet and future expected free cash flow--when it comes to evaluating dividend health. Please be sure to pay attention to the Dividend Cushion ratios of firms that you follow. Even if you are not a dividend growth or income investor, the Dividend Cushion ratio provides an assessment of the cash-based sources of intrinsic value relative to future potential outlays in the form of the dividend.