• March 25, 2023

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Recap from April’s Picks

On a price return basis, the Safest Dividend Yields Model Portfolio (-2.0%) outperformed the S&P 500 (-6.8%) by 4.8% from April 21, 2022 through May 17, 2022. On a total return basis, the Model Portfolio (-1.8%) outperformed the S&P 500 (-6.8%) by 5.0% over the same time. The best performing large cap stock was up 14% and the best performing small cap stock was up 7%. Overall, 18 out of the 20 Safest Dividend Yield stocks outperformed their respective benchmarks (S&P 500 and Russell 2000) from April 21, 2022 through May 17, 2022.

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 flow provide higher quality and safer dividend yields because I know they have the cash to support the dividend. I think this portfolio provides a uniquely well-screened group of stocks that can help clients outperform.

Featured Stock for May: Best Buy


Best Buy (BBY) is the featured stock in May’s Safest Dividend Yields Model Portfolio. I originally made Best Buy a Long Idea in November 2018 and recently reiterated the pick in October 2021. Since my original report, the stock is up 7% vs. a 40% rise for the S&P 500.

Best Buy has grown revenue by 6% compounded annually and net operating profit after-tax (NOPAT) by 12% compounded annually since fiscal 2017 (FYE is 1/29/22). Best Buy’s NOPAT margin rose from 4% in fiscal 2017 to 5% in fiscal 2022, while invested capital turns improved from 4.1 to 5.6 over the same time. Rising NOPAT margins and invested capital turns drive the company’s return on invested capital (ROIC) from 14% in fiscal 2017 to 27% in fiscal 2022.

Figure 1: Best Buy’s Revenue and NOPAT Since Fiscal 2017

Free Cash Flow Supports Regular Dividend Payments

Best Buy has paid dividends in each year since fiscal 2003 and increased its regular dividend from $1.36/share in fiscal 2018 to $2.80/share in fiscal 2022. The current quarterly dividend, when annualized, provides a 4.4% dividend yield.

Best Buy’s cumulative FCF easily exceeds its regular dividend payments. From fiscal 2018 to fiscal 2022, Best Buy generated $9.6 billion (58% of current market cap) in FCF while paying $2.7 billion in dividends, per Figure 2.


Should the economic slowdown in 2022 worsen, and the company’s FCF turn negative as it did in fiscal 2009, the company’s $2.9 billion of cash and cash equivalents provide an extra layer of protection for the dividend. For reference, the company paid $688 million in dividends in fiscal 2021.

Figure 2: Best Buy’s FCF vs. Regular Dividends Since Fiscal 2018

Companies with strong FCF provide higher quality dividend yields because the firm has the cash to support its dividend. Dividends from companies with low or negative FCF cannot be trusted as much because the company may not be able to sustain paying dividends.

Best Buy Is Undervalued

At its current price of $80/share, Best Buy has a price-to-economic book value (PEBV) ratio of 0.5. This ratio means the market expects Best Buy’s NOPAT to permanently decline by 50%. This expectation seems overly pessimistic given that Best Buy grew NOPAT by 7% compounded annually over the past two decades and 12% compounded annually over the past five years.

Even if Best Buy’s NOPAT margin falls to 4% (five-year average vs. 5% over the TTM) and the company’s NOPAT falls by 1% compounded annually over the next decade, the stock is worth $153/share today – a 91% upside. See the math behind this reverse DCF scenario. Should the company grow NOPAT more in line with historical growth rates, the stock has even more upside.

Critical Details Found in Financial Filings by My Firm’s Robo-Analyst Technology

Below are specifics on the adjustments I make based on Robo-Analyst findings in Best Buy’s 10-K:

Income Statement: I made $315 million in adjustments with a net effect of removing $9 million in non-operating expenses (<1% of revenue).

Balance Sheet: I made $3.9 billion in adjustments to calculate invested capital with a net increase of $1.0 billion. The most notable adjustment was $2.4 billion (36% of reported net assets) in asset write-downs.

Valuation: I made $4.2 billion in adjustments with a net effect of decreasing shareholder value by $3.4 billion. Apart from total debt, one of the most notable adjustments to shareholder value was $348 million in excess cash. This adjustment represents 2% of Best Buy’s market value.

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


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