Category Archives: Dividend Ideas

Why Altria trades at a 28% discount to Philip Morris

At ~$41 per share, Altria (NYSE:MO) trades at a P/E of ~10 and offers a yield of ~8.1%. At ~$72 per share, Philip Morris (NYSE:PM) trades at ~13.9 times earnings and offers a yield of 6.5%. Why is MO cheaper than PM?

One reason is MO’s bigger debt levels, such that its S&P credit rating is “BBB”, which is much worse than PM’s “A” rating.

Another reason is that investors are worried that a MO-PM merger would lead to essentially a dividend cut for current MO shareholders. PM currently offers a 6.5% yield that’s 20% lower than MO’s current yield.

Since the merger could be a potential all-stock, merger of equals, based on Tuesday’s market close prices, the combined market cap of Altria and Philip Morris would be ~$190.3 billion.

Additionally, based on the percentage of their current market caps the combined company’s annual payout would be ~$4.14 per share with a share price of ~$59.54 for the combined company. This implies a yield of ~6.95% for the combined company.

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Why TD Bank is a Top Dividend Stock to Buy Now

Low-Risk Toronto-Dominion Bank

  • Recent Price: CAD$72.20
  • Yields: 4.1%
  • Dividend Growth of +7%
  • 5-year total returns estimate: 11-12% per year
  • Discount of ~12%

Toronto-Dominion Bank (TSX:TD)(NYSE:TD) has a 1st or 2nd position in Canada and a sizeable business in the U.S. (about 38% of net income). It focuses on retail banking, which is perceived to be lower risk.

Recent Performance

TD’s recent performance has been stable. In the first 9 months of fiscal 2019, TD’s revenue climbed 6.8% to CAD$30.7 billion and adjusted earnings-per-share rose 5.6% to CAD$5.11. The U.S. Retail segment continues to be the key driver of growth. The provision for credit losses ratio was 0.43%, which aligns with the average of the Big Six banks.

TD’s capital position remains strong with its common equity tier 1 capital ratio at 12%, and its shareholders’ equity rose 11% from $78 billion a year ago to $86 billion today.

Strong Dividend Track Record

TD has reached our minimum yield target of 4.1%.

Source: TD Q3 2019 Quick Facts (pdf)

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CVS Health: Dividend Stock Still a Strong Buy

CVS Health (NYSE:CVS) was substantially undervalued before the 7% pop on Wednesday. It remains a strong buy for long-term investors.

Why the Pop?

CVS reported its Q2 results on Wednesday. And the stock appreciated 7% because the business performed better than expected with the company beating its own Q2 adjusted earnings per share (“EPS”) guidance by 10%. As a result, it also boosted its full-year guidance modestly by about 1.8% to $6.89-7.00.

Additionally, the Aetna integration and debt reduction have been progressing well.

Q2 Results

Adjusted revenues increased 36% to $63.4 billion, adjusted operating income rising 55% to $4 billion, adjusted EPS rising 12% to $1.89, and cash flow from operations climbing 82% to $5.3 billion. The large spike in revenues and operating income is attributable to the Aetna acquisition, which was closed on November 28, 2018.

The Leveraged Balance Sheet

The Aetna acquisition resulted in CVS’s leveraged balance sheet. At the end of Q2, CVS’s net debt arrived at $61.3 billion, leading to a D/E of 99.6% and a debt-to-assets ratio of 28%.

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