I love dividends.
Specifically, I’m a big fan of Dividend Aristocrats. These are companies who have the enviable track record of increasing their dividend payments at least once a year for the past 25+ years.
It’s very rare to find Dividend Aristocrats trading at a discount but here are 3 of these esteemed companies who may still be undervalued.
1 – CINCINNATI FINANCIAL
Cincinnati Financial (Nasdaq: CINF) is the 20th largest insurance company by market share in the USA. It controls 1% of the domestic property and casualty insurance premiums. In addition to its life and disability insurance business, CINF provides commercial leasing and financing activites to its subsidiaries and representative, and asset management services to institutions, corporations and individuals.
When the coronavirus pandemic broke out, the stock plunged along with the overall market, falling 42% from $115.21 in mid February to $66.78 in late March. The stock then started to rally, trading in the $75-$87 range in April, before plunging again in May.
What caused the stock crash again? Are CINF’s fundamentals eroding?
CINF is not just an insurance company, they are also financial investors. The company owns hundreds of securities and bonds. When the market goes up, the value of their equities rise; when the market goes down, the value of their equities goes down.
In Q1 2020, CINF reported a ($1.5bn) loss in Investments profit and a $53 million decrease in after-tax property casualty underwriting income, which resulted in a 10% decrease in Book Value per share, which fell to $50.02 from $60.55. Investors sold the news and the price fell from $82.03 on April 17th to a new low of $48.54 on May 13th, 2020.
While this sounds alarming, there is no reason to panic.
Indeed, the bulk of the negative net income comes from unrealized losses. Share prices fell in March but CINF did not sell the vast majority its losing positions. In fact, they only sold $79 million worth of losing stock and held on to the other $1.649Bn.
Considering that the market is already up significantly since March 31st, this unrealized loss is probably close to halved right now. I expect Q2 and Q3 2020 results to post smaller losses and, if the overall market rally continues, we should see a return to positive net income by Q4 2020 or Q1 2021.
Thus, CINF is not in financial trouble.
Despite the disappointing quarter, CINF declared a quarterly dividend of $0.60 per share. They also took advantage of the stock price’s plunge to repurchase $256 million of common stock, which indicates that management believes the stock is undervalued. CINF ended the quarter with $163 million of free cash flow.
Further, the 3.91% dividend yield is the highest since 2012. The payout ratio of 68.88% is right where it should be and the 5-year dividend growth rate of 5.24% is reasonable. With 59 years of dividend growth, CINF is a more than reliable dividend payer.
The poor Q1 2020 results are temporary and I fully expect CINF to bounce back in the next quarters. I believe the current price represents an incredible opportunity to purchase this Dividend King at a bargain price.
2 – SYSCO
Systems and Services Company, better known as Sysco (NYSE: SYY), is an American multinational corporation involved in marketing and distributing food products, smallwares, kitchen equipment and tabletop items to restaurants, healthcare and educational facilities, hospitality businesses like hotels and inns, and wholesale to other companies that provide foodservice (like Aramark and Sodexo).
With over 600,000 clients, Sysco is the world’s largest broadline food distributor. They also provide management consulting services to various clients. In total, they operate approximately 330 distribution facilities worldwide; providing service to over 90 countries.
I started writing this article when Sysco was at under $57. At that moment, the stock was down 50% from its Dec 2019 high of $85.80. Today, the stock is trading for just over $61, buoyed by a recent Wells Fargo Buy recommendation with a $70 price target.
Is it too late to buy the stock?
I don’t think so.
It’s important to note that the closing of businesses and restaurants during confinement produced disappointing Q1 2020 financial results. From December 2019 to March 2020, Sysco’s sales decreased 6.5% to $13.7bn, Operating Income decreased 88.6% to $60.3M, and Free Cash Flow decreased 60% to $113M.
Despite these negative earnings, I have 4 reasons to believe Sysco is still a good investment.
First, Sysco reacted quickly to the economic downturn. They removed more than $500 million of expenses from the business for Q4 2020 and reduced their workforce by 33% through layoffs and temporary furloughs. Sysco also rerouted its transportation fleet to reduce miles driven and increase productivity. These drastic measures will free up the liquidity necessary to cover operating expenses while business picks up.
Second, the hospitality sector is rallying due to the reopening of the economy. Restaurant bookings, which fell 100% to zero during lockdowns, are starting to rise again. Hotel occupancy rates, which fell to 20% in April, are also rising again. Businesses at large are also reopening and the US unemployment rate dipped to 13% as the economy gained 2.5M jobs. These metrics point to a gradual economic recovery. If sustained, this is great news not only for Sysco, but for the entire stock market.
Third, insiders are buying up shares of the company. Joshua D. Frank and Nelson Peltz of Trian Fund Management (a company who owns equity in Sysco), both purchased $33.8M worth of stock at $48 per share. That’s a significant investment signalling they believe the company was undervalued at those levels.
Fourth, the dividend is safe. On May 22nd, Sysco declared a $0.45 dividend per share, in line with previous. With 49 years of dividend increases, the company has a long history of navigating through troubled waters. Its sheer size and massive clientele mean it will eventually bounce back and perform strong. The 3% yield is attractive.
For these reasons, I think Sysco stock will recover quickly. The price has already increased significantly since late May and investors interested in purchasing the stock should do so before the dip is well behind us.
3 – PEOPLE’S UNITED BANK
People’s United Bank (NYSE: PBCT) is the 46th-largest full-service bank in the USA. It operates 403 branches and has more than 5,000 employees. With 27 years of consecutive dividend growth and a current dividend yield of 5%, PCBT is a tempting purchase.
Is the stock really on sale or are we buying into a value trap?
For starters, I was pleased to see that PBCT reported very good Q1 2020 results:
- Total Revenue is up 21.61% from Q1 2019, to $519.8M from $427.4M
- Operating Earnings is up 14.71% from Q1 2019, to $141.1M from $123M
- Net Income is up 13.78% from Q1 2019, to $130.M from $114.6M
- Free Cash Flow is up to $204M from ($25.8M) in Q1 2019.
However Jack Barnes, PBCT’s CEO, declared that “COVID-19 will have a meaningful effect on results for the remainder of 2020″. Indeed, the coronavirus has ravaged the real economy and its effects on company earnings won’t be felt until Q2-Q4 2020. Its only upon release of those results that we will see whether the company is truly resilient
Many small business are on the brink of bankruptcy and this could have profound effects on the banking sector. That said, banks are central to the economy and the Cantillon Effect guarantees they will somehow profit from the Fed’s essentially never ending quantitative easing policies.
Putting these considerations aside, the main reason I’m interested in this stock is the reliable dividend.
On April 24th, PBCT declared a quarterly dividend of $0.18 per share. With a yield of 5.35% and 27 years of dividend growth, it’s difficult to resist starting a position.
One last consideration: PBCT bought back $308.8M worth of common stock in Q1 2020. Compare that to 2016-2019, where they only spent $13.8.M on stock buybacks. This suggests the company believes the stock is undervalued.
I also think the stock is still undervalued and I picked up a few shares last week when the price was slightly above $12. However, the price is rising quickly and will soon reach fair value levels. The dividend yield will still be attractive but the potential capital gains will be very slim.
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Disclaimer: This is not financial advice. Conduct your own research before investing.