Six new stocks made April’s Safest Dividend Yields Model Portfolio, which was made available to members on April 20, 2023.

Recap from March’s Picks

On a price return basis, our Safest Dividend Yields Model Portfolio (+4.8%) underperformed the S&P 500 (+5.6%) by 0.8% from March 22, 2023 through April 18, 2023. On a total return basis, the Model Portfolio (+5.3%) underperformed the S&P 500 (+5.6%) by 0.3% over the same time. The best performing large-cap stock was up 37%, and the best performing small-cap stock was up 9%. Overall, eleven out of the 20 Safest Dividend Yield stocks outperformed their respective benchmarks (S&P 500 and Russell 2000) from March 22, 2023 through April 18, 2023.

Buy the Safest Dividend Yields Model Portfolio

This report leverages our cutting-edge Robo-Analyst technology to deliver proven-superior[1] fundamental research and support more cost-effective fulfillment of the fiduciary duty of care.

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

Featured Stock for April: KeyCorp (KEY: $11/share)

KeyCorp (KEY) is the featured stock in April’s Safest Dividend Yields Model Portfolio.

Since 2012, KeyCorp has grown revenue by 6% compounded annually and net operating profit after tax (NOPAT) by 11% compounded annually. KeyCorp’s NOPAT margin improved from 16% in 2012 to 26% in 2022, while invested capital turns remained unchanged at 0.4. Rising NOPAT margins drive the company’s return on invested capital (ROIC) from 7% in 2012 to 10% in 2022.

Figure 1: KeyCorp’s Revenue & NOPAT Since 2012

Sources: New Constructs, LLC and company filings

Free Cash Flow Exceeds Regular Dividend Payments

KeyCorp has increased its regular dividend from $0.38/share in 2017 to $0.79/share in 2022. The current quarterly dividend, when annualized, equals $0.82/share and provides a 7.8% dividend yield.

More importantly, KeyCorp’s free cash flow (FCF) easily exceeds its regular dividend payments. From 2017 to 2022, KeyCorp generated $7.0 billion (55% of current enterprise value) in FCF while paying $4.2 billion in dividends. See Figure 2.

Figure 2: KeyCorp’s FCF Vs. Regular Dividends Since 2017

Sources: New Constructs, LLC and company filings

As Figure 2 shows, KeyCorp’s dividends are backed by a history of reliable cash flows. Dividends from companies with low or negative FCF are less dependable since the company may not be able to sustain paying dividends.

KEY Is Undervalued

At its current price of $11/share, KeyCorp has a price-to-economic book value (PEBV) ratio of 0.5. This ratio means the market expects KeyCorp’s NOPAT to permanently fall 50% from its 2022 level. This expectation seems overly pessimistic given that KeyCorp has grown NOPAT by 11% compounded annually since 2012.

Even if KeyCorp’s NOPAT margin falls to 16% and grows revenue by just 2% compounded annually for the next decade, the stock would be worth $15+/share today – a 36% upside. In this scenario, KeyCorp’s NOPAT would fall 3% compounded annually from 2023 through 2032. Should the company’s NOPAT grow more in line with historical growth rates, the stock has even more upside.

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

Below are specifics on the adjustments we make based on Robo-Analyst findings in KeyCorp’s 10-K:

Income Statement: we made $623 million in adjustments with a net effect of removing $351 million in non-operating expenses (4% of revenue). Clients can see all adjustments made to KeyCorp’s income statement on the GAAP Reconciliation tab on the Ratings page on our website.

Balance Sheet: we made $12.3 billion in adjustments to calculate invested capital with a net increase of $7.2 billion. The most notable adjustment was $6.3 billion (47% of reported net assets) in other comprehensive income. See all adjustments made to KeyCorp’s balance sheet on the GAAP Reconciliation tab on the Ratings page on our website.

Valuation: we made $3.7 billion in adjustments, with a net decrease of $2.8 billion in value. Apart from total debt, one of the most notable adjustments to shareholder value was $2.5 billion in the fair value of preferred capital. This adjustment represents 25% of KeyCorp’s market value. See all adjustments to KeyCorp’s valuation on the GAAP Reconciliation tab on the Ratings page on our website.

This article was originally published on April 28, 2023.

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

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[1] Our research utilizes our Core Earnings, a more reliable measure of profits, as proven in Core Earnings: New Data & Evidence, written by professors at Harvard Business School (HBS) & MIT Sloan and published in The Journal of Financial Economics.

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