Financial Performance

Dividend stocks are dirt cheap. It may be time to back up the truck.

The stock market always overreacts, and this year it seems as if investors believe dividend stocks have become toxic. But a look at yields on quality dividend stocks relative to the market underlines what may be an excellent opportunity for long-term investors to pursue growth with an income stream that builds up over the years.

The current environment, in which you can get a yield of more than 5% yield on your cash at a bank or lock in a yield of 4.57% on a10-year U.S. Treasury note
BX:TMUBMUSD10Y
or close to 5% on a 20-year Treasury bond
BX:TMUBMUSD20Y
seems to have made some investors forget two things: A stock’s dividend payout can rise over the long term, and so can it is price.

It is never fun to see your portfolio underperform during a broad market swing. And people have a tendency to prefer jumping on a trend hoping to keep riding it, rather than taking advantage of opportunities brought about by price declines. We may be at such a moment for quality dividend stocks, based on their yields relative to that of the benchmark S&P 500
SPX.

Drew Justman of Madison Funds explained during an interview with MarketWatch how he and John Brown, who co-manage the Madison Dividend Income Fund, BHBFX MDMIX and the new Madison Dividend Value ETF
DIVL,
use relative dividend yields as part of their screening process for stocks. He said he has never seen such yields, when compared with that of the broad market, during 20 years of work as a securities analyst and portfolio manager.

Dividend stocks are down

Before diving in, we can illustrate the market’s current loathing of dividend stocks by comparing the performance of the Schwab U.S. Equity ETF
SCHD,
which tracks the Dow Jones U.S. Dividend 100 Index, with that of the SPDR S&P 500 ETF Trust
SPY.
Let’s look at a total return chart (with dividends reinvested) starting at the end of 2021, since the Federal Reserve started its cycle of interest rate increases in March 2022:

FactSet

The Dow Jones U.S. Dividend 100 Index is made up of “high-dividend-yielding stocks in the U.S. with a record of consistently paying dividends, selected for fundamental strength relative to their peers, based on financial ratios,” according to S&P Dow Jones Indices.

The end results for the two ETFs from the end of 2021 through Tuesday are similar. But you can see how the performance pattern has been different, with the dividend stocks holding up well during the stock market’s reaction to the Fed’s move last year, but trailing the market’s recovery as yields on CDs and bonds have become so much more attractive this year. Let’s break down the performance since the end of 2021, this time bringing in the Madison Dividend Income Fund’s Class Y and Class I shares:

Fund	2023 return	2022 return	Return since the end of 2021
SPDR S&P 500 ETF Trust	14.9%	-18.2%	-6.0%
Schwab U.S. Dividend Equity ETF	-3.8%	-3.2%	-6.9%
Madison Dividend Income Fund – Class Y	-4.7%	-5.4%	-9.9%
Madison Dividend Income Fund – Class I	-4.7%	-5.3%	-9.7%
Source: FactSet

Dividend stocks held up well during 2022, as the S&P 500 fell more than 18%. But they have been left behind during this year’s rally.

The Madison Dividend Income Fund was established in 1986. The Class Y shares have annual expenses of 0.91% of assets under management and are rated three stars (out of five) within Morningstar’s “Large Value” fund category. The Class I shares have only been available since 2020. They have a lower expense ratio of 0.81% and are distributed through investment advisers or through platforms such as Schwab, which charges a $50 fee to buy Class I shares.

The opportunity — high relative yields

The Madison Dividend Income Fund holds 40 stocks. Justman explained that when he and Brown select stocks for the fund their investible universe begins with the components of the Russell 1000 Index
RUT,
which is made up of the largest 1,000 companies by market capitalization listed on U.S. exchanges. Their first cut narrows the list to about 225 stocks with dividend yields of at least 1.1 times that of the index.

The Madison team calculates a stock’s relative dividend yield by dividing its yield by that of the S&P 500. Let’s do that for the Schwab U.S. Equity ETF
SCHD
(because it tracks the Dow Jones U.S. Dividend 100 Index) to illustrate the opportunity that Justman highlighted:

Index or ETF	Dividend yield	5-year Avg. yield	10-year Avg. yield	15-year Avg. yield	Relative yield	5-year Avg. relative yield	10-year Avg. relative yield	15-year Avg. relative yield
Schwab U.S. Dividend Equity ETF	3.99%	3.41%	3.20%	3.16%	2.6	2.1	1.8	1.6
S&P 500	1.55%	1.62%	1.79%	1.92%
Source: FactSet

The Schwab U.S. Equity ETF’s relative yield is 2.6 — that is, its dividend yield is 2.6 times that of the S&P 500, which is much higher than the long-term averages going back 15 years. If we went back 20 years, the average relative yield would be 1.7.

Examples of high-quality stocks with high relative dividend yields

After narrowing down the Russell 1000 to about 225 stocks with relative dividend yields of at least 1.1, Justman and Brown cut further to about 80 companies with a long history of raising dividends and with strong balance sheets, before moving further through a deeper analysis to arrive at a portfolio of about 40 stocks.

When asked about oil companies and others that pay fixed quarterly dividends plus variable dividends, he said, “We try to reach out to the company and get an estimate of special dividends and try to factor that in.” Two examples of companies held by the fund that pay variable dividends are ConocoPhillips
COP,
-0.29%
and EOG Resources Inc.
EOG,
+0.52%.

Since the balance-sheet requirement is subjective “almost all fund holdings are investment-grade rated,” Justman said. That refers to credit ratings by Standard & Poor’s, Moody’s Investors Service or Fitch Ratings. He went further, saying about 80% of the fund’s holdings were rated “A-minus or better.” BBB- is the lowest investment-grade rating from S&P. Fidelity breaks down the credit agencies’ ratings hierarchy.

Justman named nine stocks held by the fund as good examples of quality companies with high relative yields to the S&P 500:

Company	Ticker	Dividend yield	Relative yield	2023 return	2022 return	Return since the end of 2021
CME Group Inc. Class A	CME, +0.47%	2.04%	1.3	31%	-23%	1%
Home Depot, Inc.	HD, -0.39%	2.79%	1.8	-3%	-22%	-25%
Lowe’s Cos., Inc.	LOW, +0.27%	2.17%	1.4	3%	-21%	-19%
Morgan Stanley	MS, -1.54%	4.24%	2.7	-3%	-10%	-13%
U.S. Bancorp	USB, -0.25%	5.89%	3.8	-22%	-19%	-37%
Medtronic PLC	MDT, -4.32%	3.62%	2.3	1%	-23%	-22%
Texas Instruments Inc.	TXN, -0.21%	3.30%	2.1	-3%	-10%	-12%
United Parcel Service Inc. Class B	UPS, -0.16%	4.17%	2.7	-8%	-16%	-23%
Union Pacific Corp.	UNP, +1.52%	2.52%	1.6	2%	-16%	-15%
Source: FactSet

Click on the tickers for more about each company, fund or index.

Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.

Now let’s see how these companies have grown their dividend payouts over the past five years. Leaving the companies in the same order, here are compound annual growth rates (CAGR) for dividends.

Before showing this next set of data, let’s work through one example among the nine stocks:

If you had purchased shares of Home Depot Inc.
HD,
-0.39%
five years ago, you would have paid $193.70 a share if you went in at the close on Oct. 10, 2018. At that time, the company’s quarterly dividend was $1.03 cents a share, for an annual dividend rate of $4.12, which made for a then-current yield of 2.13%.
If you had held your shares of Home Depot for five years through Tuesday, your quarterly dividend would have increased to $2.09 a share, for a current annual payout of $8.36. The company’s dividend has increased at a compound annual growth rate (CAGR) of 15.2% over the past five years. In comparison, the S&P 500’s weighted dividend rate has increased at a CAGR of 6.24% over the past five years, according to FactSet.
That annual payout rate of $8.36 would make for a current dividend yield of 2.79% for a new investor who went in at Tuesday’s closing price of $299.22. But if you had not reinvested, the dividend yield on your five-year-old shares (based on what you would have paid for them) would be 4.32%. And your share price would have risen 54%. And if you had reinvested your dividends, your total return for the five years would have been 75%, slightly ahead of the 74% return for the S&P 500 SPX during that period.

Home Depot hasn’t been the best dividend grower among the nine stocks named by Justman, but it is a good example of how an investor can build income over the long term, while also enjoying capital appreciation.

Here’s the dividend CAGR comparison for the nine stocks:

Company	Ticker	Five-year dividend CAGR	Dividend yield on shares purchased five years ago	Dividend yield five years ago	Current dividend yield	Five-year price change	Five-year total return
CME Group Inc. Class A	CME, +0.47%	9.46%	2.44%	1.55%	2.04%	20%	42%
Home Depot Inc.	HD, -0.39%	15.20%	4.32%	2.13%	2.79%	54%	75%
Lowe’s Cos, Inc.	LOW, +0.27%	18.04%	4.14%	1.81%	2.17%	91%	109%
Morgan Stanley	MS, -1.54%	23.16%	7.62%	2.69%	4.24%	80%	108%
U.S. Bancorp	USB, -0.25%	5.34%	3.60%	2.78%	5.89%	-39%	-26%
Medtronic PLC	MDT, -4.32%	6.65%	2.90%	2.10%	3.62%	-20%	-9%
Texas Instruments Inc.	TXN, -0.21%	11.04%	5.24%	3.10%	3.30%	59%	82%
United Parcel Service Inc. Class B	UPS, -0.16%	12.23%	5.56%	3.12%	4.17%	33%	56%
Union Pacific Corp.	UNP, +1.52%	10.20%	3.37%	2.07%	2.52%	34%	49%
Source: FactSet

This isn’t to say that Justman and Brown have held all of these stocks over the past five years. In fact, Lowe’s Cos.
LOW,
+0.27%
was added to the portfolio this year, as was United Parcel Service Inc.
UPS,
-0.16%.
But for most of these companies, dividends have compounded at relatively high rates.

When asked to name an example of a stock the fund had sold, Justman said he and Brown decided to part ways with Verizon Communications Inc.
VZ,
-0.94%
last year, “as we became concerned about its fundamental competitive position in its industry.”

Summing up the scene for dividend stocks, Justman said, “It seems this year the market is treating dividend stocks as fixed-income instruments. We think that is a short-term issue and that this is a great opportunity.”

Don’t miss: How to tell if it is worth avoiding taxes with a municipal-bond ETF

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October 11, 2023

Birkenstock’s stock falls 10% in trading debut after IPO priced at lower end of range

Iconic German sandal maker Birkenstock Holdings Ltd.’s stock fell 10% out of the gate in its trading debut Wednesday, signaling that investors remain cautious about new deals and the casual-footwear market remains competitive.

The company’s initial public offering priced at $46 a share late Tuesday, a bit shy of the midpoint of its expected range. The company
BIRK,
-11.63%
is trading on the New York Stock Exchange under the ticker “BIRK.” Goldman Sachs, JPMorgan and Morgan Stanley were the lead underwriters on the deal.

The deal was expected to prove the latest test for the IPO market, which recently saw three key deals perform strongly on their first day of trade, only to fall back in subsequent sessions.

Chip maker Arm Holdings Ltd.
ARM,
-1.09%
; Klaviyo
KVYO,
-3.11%
a digital marketing company; and Instacart, which trades as Maplebear Inc.
CART,
-7.04%
; all enjoyed strong gains on their first day of trade but pared those in the following sessions. Instacart was quoted at $25.50 on Wednesday, well below its issue price of $30.

Birkenstock clearly has its fans, as its customers are brand loyal, with 70% of existing U.S. consumers, for example, purchasing at least two pairs of its shoes, according to its filing documents.

A survey found 86% of recent purchasers said they wanted to buy again, while 40% said they did not even consider another brand while buying.

But as Kyle Rodda, Senior Market Analyst at Capital.com, said the Birkenstock deal was to be a good measure of broader market sentiment and sentiment toward consumer-sensitive stocks.

“It might tell us, too, whether cashed-up millennials like to buy the stocks of products they commonly find on the bottom shelf of their wardrobes,” he said in emailed comments.

The valuation of around $8.6 billion also looks rich, he said. Based on the company’s latest revenue release, the stock’s price-to-sales ratio is above 6, “which is at the higher end of comparable consumer discretionary companies on Wall Street.

“In a higher interest rate environment, these multiples may be hard to sustain in the short term, especially if consumer spending slows as expected next year as interest rate hikes bite households,” Rodda said.

David Trainer, Chief Executive of independent equity research company New Constructs, said ahead of the deal that the valuation was far too high, noting that it was higher than peers such as Skechers USA Inc.
SKX,
-0.67%,
Crocs Inc.
CROX,
-0.12%
and Steve Madden Ltd.
SHOO,
+0.60%.

“Even more shockingly, the only footwear companies with a larger market cap are Nike Inc.
NKE,
+0.80%
and Deckers Outdoor
DECK,
-0.07%,
” he said, referring to the maker of Uggs.

“While Birkenstock is profitable, we think it is fair to say that the $8.7 billion valuation mark is too high, especially for a company that was valued at just $4.3 billion in early 2021. Not a whole lot has changed since then,” Trainer said in a report.

For more, see: Birkenstock is going public: 5 things to know about the iconic German sandal maker’s IPO designs

Trainer estimated that Birkenstock would need to generate more than $3.8 billion in annual revenue to justify its valuation, which is more than three times the $1.24 billion chalked up for all of 2022, according to its filing documents with the Securities and Exchange Commission.

“We don’t doubt that Birkenstock has strong brand equity and produces stylish sandals, but there is really no reason for this company to be public,” said Trainer. “We don’t think investors should expect to make any money by buying this IPO.”

The Renaissance IPO exchange-traded fund
IPO
has gained 29% in the year to date, while the S&P 500
SPX
has gained 13%.

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October 11, 2023

ChargePoint Stock Plunges on Capital Raise

If anyone wanted evidence that the market feels skittish just look at stocks related to electric vehicles. They are getting hammered on capital raising activity that, frankly, should surprise no one.

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October 11, 2023

Pharmacy Giant Walgreens Names Tim Wentworth as New CEO

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October 10, 2023

PepsiCo’s stock climbs after earnings beat consensus and company raises guidance

Shares of PepsiCo Inc.
PEP,
+0.67%
rose 2.5% in premarket trading Tuesday, after the beverage and snack giant reported third-quarter earnings that topped consensus and raised its full-year guidance.

Net income rose to $3.092 billion, or $2.24 a share, from $2.702 billion, or $1.95 a share, in the same period a year ago.

Excluding nonrecurring items, core earnings per share of $2.25 were ahead of the FactSet consensus of $2.15.

Revenue grew to $23.453 billion from $21.971 billion, also ahead of the FactSet consensus of $23.413 billion.

“We are pleased with our performance as our businesses and associates displayed tremendous agility and resilience across geographies and categories in an evolving and dynamic environment,” Chief Executive Ramon Laguarta said in a statement.

Revenue at Frito-Lay North America rose 7%, while it was up 5% at Quaker Foods North America. PepsiCo Beverages North America rose 8%, while Latin America was up 21% and Europe up 2%.

Revenue for Africa, Middle East and South Asia fell 6%, while Asia Pacific, Australia and New Zealand and China Region’s revenue was up 4%.

For 2023, the company revised its core EPS guidance to $7.54 from $7.47 previously.

“For fiscal year 2024, we expect to deliver results towards the upper end of our long-term target ranges for both organic revenue and core constant currency EPS growth,” said the statement.

The company’s long-term target ranges for both organic revenue growth — 4% to 6% growth — and core constant currency EPS growth– high-single-digit percentage increase– remain unchanged.

The stock has fallen 11% in the year to date, while the S&P 500
SPX
has gained 13%.

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October 10, 2023

UK Retail Sales Slow in September as Consumers Avoid Big Ticket Purchases, BRC Says

By Michael Susin

Retail sales growth in the U.K. slowed in September despite a fall in inflation as the high cost of living continues to put households’ budget under pressure, according to the latest sales-monitor report from the British Retail Consortium published on Tuesday.

Total retail sales for the five weeks to Sept. 30 increased by 2.7% compared with the prior month, when it saw growth of 4.1%, and was at the same level as the three-month average growth, the report said. In September last year, retail sales were up 2.2%.

Food sales rose 7.4% over the three months to September, while non-food sales further decreased 1.2%.

“Big ticket items such as furniture and electricals performed poorly as consumers limited spending in the face of higher housing, rental and fuel costs. The Indian summer also meant sales of autumnal clothing, knitwear and coats, have yet to materialize,” BRC Chief Executive Helen Dickinson said in a note.

Looking ahead, retailers are getting ready for the ‘Golden Quarter’ amid fierce competition that is likely to bring earlier and abundant promotions ahead of Christmas, KPMG U.K. Head of retail Paul Martin said.

“Consumers will continue to seek out good deals, with price driving purchasing decisions. This is likely to be one of the most important golden quarters that we have seen in years, as for some in the sector, it could very much determine their future,” he adds.

Dickinson highlighted that retailers’ efforts might be challenged by the 400 million pounds ($489.6 million) increase in business rates expected next year, and urged Chancellor Jeremy Hunt to scrap the rates rise in the upcoming budget statement.

Write to Michael Susin at michael.susin@wsj.com

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October 9, 2023

Is Mar-a-Lago worth $1 billion? Trump’s winter home valuations are at the core of his fraud trial

FORT LAUDERDALE, Fla. — How much is Donald Trump‘s Mar-a-Lago worth? That’s been a point of contention after a New York judge ruled that the former president exaggerated the Florida property’s value when he said it’s worth at least $420 million and perhaps $1.5 billion.

Siding with New York’s attorney general in a lawsuit accusing Trump of grossly overvaluing his assets, Judge Arthur Engoron found that Trump consistently exaggerated Mar-a-Lago’s worth. He noted that one Trump estimate of the club’s value was 2,300% times the Palm Beach County tax appraiser’s valuations, which ranged from $18 million to $37 million.

But Palm Beach real estate agents who specialize in high-end properties scoffed at the idea that the estate could be worth that little, in the unlikely event Trump ever sold.

“Ludicrous,” agent Liza Pulitzer said about the judge citing the county’s tax appraisal as a benchmark. Homes a tenth the size of Mar-a-Lago on tiny inland lots sell for that in the Town of Palm Beach, a wealthy island enclave.

“The entire real estate community felt it was a joke when they saw that figure,” said Pulitzer, who works for the firm Brown Harris Stevens.

“That thing would get snapped up for hundreds and hundreds of millions of dollars,” said Rob Thomson, owner of Waterfront Properties and a Mar-a-Lago member. “There is zero chance that it’s going to sell for $40 million or $50 million.”

In the ongoing trial over the lawsuit, though, what a private buyer might pay for a place like Mar-a-Lago isn’t the only factor in determining whether Trump is liable for fraud.

WHAT IS MAR-A-LAGO?

The 126-room, 62,500-square-foot (5,810-square-meter) mansion is Trump’s primary home. It is also a club, private beach resort, historical artifact and banquet hall with a ballroom that features gold leaf. It is where Trump stored government documents federal prosecutors say he took illegally after leaving office in 2021.

While Trump has long admitted using “truthful hyperbole” in his business dealings, he is not exaggerating when he calls Mar-a-Lago unique.

Built in 1927 by cereal heiress Marjorie Merriweather Post and her second husband, financier E.F. Hutton, she gave the property its name — Spanish for “sea-to-lake” — because its 17 acres (7 hectares) stretch from the Atlantic Ocean to the Intracoastal Waterway.

Post kept the mansion after the couple’s divorce, using it to host opulent galas. In 1969, Mar-a-Lago was designated a National Historic Landmark.

Post, who died in 1973, bequeathed the property to the U.S. government as a winter get-away for presidents, but Richard Nixon, Gerald Ford and Jimmy Carter never used it. The government, citing the high upkeep costs, returned it to Post’s foundation in 1981.

The property fell into disrepair. Trump bought it in 1985 for about $10 million, the equivalent of $30 million today. He invested heavily in its refurbishment.

By the early 1990s, however, Trump was in financial distress after several of his businesses flopped. He told Palm Beach town officials he couldn’t afford the $3 million annual upkeep, and proposed subdividing the property and building mansions. The town rejected the plan.

Negotiations continued and in 1993 the town agreed he could turn the estate into a private club, giving him cash flow he could use for maintenance. He built the ballroom, but signed away development rights.

The agreement limits the club to 500 members — the initiation fee is $500,000 with annual dues of $20,000.

Trump typically lives at Mar-a-Lago from October to May before summering in New Jersey.

SO WHAT IS MAR-A-LAGO WORTH?

That’s hard to say. The biggest problem is there are no comparable properties. No one builds mansions in Palm Beach like Mar-a-Lago anymore and those that did exist were demolished long ago, broken up or turned into a museum.

Trump, in an April deposition, justified his belief that Mar-a-Lago could be worth $1 billion by comparing it to the price the Mona Lisa or a painting by Renoir would command — the ultra-wealthy will pay a premium to buy something that’s one-of-a-kind.

Eli Beracha, chair of Florida International University’s Hollo School of Real Estate, agreed it’s difficult to assess the value of any unique property. The fact that Trump owned Mar-a-Lago would likely increase its sale price.

“Some people are going to argue that not everyone likes Trump — some people would actually pay less because of that. … But the high bidder is probably going to be a person who buys it because it belonged to Trump,” Beracha said.

Pulitzer said the rock-bottom price for Mar-a-Lago would be $300 million. Thomson said at least $600 million. If uber-billionaires got into a bidding war, they said, a sale of a billion dollars or more would be possible.

The much smaller Palm Beach compound once owned by the Kennedy political dynasty sold for $70 million three years ago.

SO HOW DID PALM BEACH COUNTY COME UP WITH SUCH A LOW TAX ASSESSMENT?

The county gives Mar-a-Lago its current value for taxation of $37 million based on its annual net operating income as a club and not on its resale value as a home or its reconstruction cost. It is one of nine private clubs in the county taxed that way.

Becky Robinson, the tax assessor’s spokesperson, said that method is used because private clubs are so rarely sold or built, making it impossible to set their tax rates by comparing them to similar properties. Mar-a-Lago’s property tax bill will be $602,000 this year, county records show.

U.S. Rep. Jared Moskowitz, a South Florida Democrat, wrote the county saying if Trump claims Mar-a-Lago is worth $1 billion, he should be taxed accordingly. If Mar-a-Lago had a $1 billion assessed value, it’s property tax bill would be approximately $18 million.

Robinson said the county bases its assessments on the law and its formulas, not the value owners claim.

WHY IT MATTERS

In her lawsuit against Trump, New York Attorney General Letitia James argued that Mar-a-Lago was one of multiple assets Trump overvalued in financial statements given to banks and others.

On those statements, Trump valued Mar-a-Lago as high as $739 million — a figure James said ignored deed restrictions requiring the property to be used as a social club — not a private home. Her lawyers have argued that in his financial statements, Trump should have valued Mar-a-Lago the same way the county does, based on its club status.

Trump’s financial statements, the New York lawyers wrote, valued the club “based on the false and misleading premise that it was an unrestricted residential plot of land that could be sold and used as a private home, which was clearly not the case.”

Trump’s lawyers have said no trickery was involved, and that banks probably didn’t rely on his financial statements anyway when determining whether to lend him money.

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October 9, 2023

Rivian Drops Again on Capital Raise. Credibility Is an Issue.

has had a big high and a big surprise in the past week—and Wall Street isn’t happy about it.

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October 9, 2023