(CLX) The Clorox Company (HD) The Home Depot, Inc. (JKHY) Jack Henry & Assoc., Inc. (PII) Polaris, Inc.
Catalysts for Record Profit Margins
Technology, Rising Productivity, Lower Taxes, Government Spending?
Catalysts for Record Profit Margins
Technology, Rising Productivity, Lower Taxes, Government Spending?
The Dividend Aristocrats are stocks in the S&P 500 that have increased their dividends for at least 25 consecutive years. The Dividend Kings are stocks that are not required to be in the S&P 500 but have increased their dividends at least 50 consecutive years. 25 and 50 years of consecutive dividend increases are impressive accomplishments. Companies that achieve these accomplishments strive to maintain their membership in these groups as investors are attracted to companies that produce consistent results.
Shortly after publishing the Mid-May issue 3M Company also announced a reduction of their dividend. In the First-February issue we presented the 3M chart and in the discussion suggested that based on the company’s guidance there appeared to be a way forward to maintain the dividend. Clearly, this was overly optimistic. Management has done a lot of what it can do, given the circumstances. Cost reductions have more cash going through the company, and it settled what it could settle, at amounts and timeframes that wouldn’t destroy the
True, rates have come off their highs, but it is a decent argument that they will remain higher for longer, and the prospect of rates returning to their QE or pandemic lows is improbable. Accordingly, profit margins will eventually be impacted once those record low rates have to be refinanced.
Over the last several weeks two Dividend Kings in the IQT universe have reduced their dividend payouts: Leggett & Platt Inc (LEG), and 3M Company (MMM). I detailed the issues at LEG in the opening Editorial of the Mid-May issue, which, to recall are cash flow issues that are impacting the company’s credit agreement and working capital. Management made the unpopular, but necessary decision to preserve the company for the long-term by freeing up cash flow to pay down debt and get their working capital right, although it meant reducing the dividend to do so.
company. Margins are improving and the it appears the organic sales declines have ended. We will know better after the July report the impacts to the ROIC, FCFY, and PVR. I will produce an updated chart for
the chart archive, which will show that 3M remains in the Undervalued category as it is still trading at its historically repetitive area of high dividend yield.
***
As a kid, okay, I’ll be honest and admit even into college I really enjoyed the Roadrunner cartoons. Poor Wylie Coyote, try as he might he never could capture the Roadrunner, and all of his well-thought out plans tended to backfire on him. I mean seriously, who doesn’t know it’s not safe to play with dynamite or run off a cliff?
Investors could learn a lesson or two from the Roadrunner, more specifically how to avoid danger. The market gives off a lot of signals, only they aren’t always as obvious as a box marked danger or a sign that reads cliff ahead, do not advance.
Valuations provide a signal about the potential for future returns, or losses, based on the starting point. Current valuations can be characterized as extreme as they are
within reach of those in August 1929 and January 2022, which is close to three times the historical norm. This is not a new thing, but a majority of investors are not familiar, or don’t care about historical valuation extremes. We know this by observing their buying and selling decisions. Those buying and selling decisions, however, determines whether their outcomes are positive or negative.
Prevailing sentiment is high because the market has been advancing to new highs in the major averages. The assumption is that this trend will continue indefinitely. Assuming that P/E ratios remain elevated and continue to be multiplied by record earnings from record profit margins, well, they could be correct. A study of market history, however, suggests this is a combination with a finite, not infinite, life span.
There are a number of factors that are promoted as the catalyst for these record profit margins such as advances in technology, rising productivity, lower taxes, and/or government spending, etc. Those are contributing factors to be sure, but the primary catalyst has been a prolonged period of declining interest rates, which has created a trend of falling interest costs.
As you know, the days of record low interest rates has gone by the wayside. True, rates have come off their highs, but it is a decent argument that they will remain higher for longer, and the prospect of rates returning to their QE or pandemic lows is
improbable. Accordingly, profit margins will eventually be impacted once those record low rates have to be refinanced. When one leg of the stool collapses the rest will follow.
Of course, that day is not today, so valuations do not matter, which means it is okay to continue to buy at the high. Until something blows up, or falls off a cliff, nothing to see here, just move along.
A review of periods where the Fed lowered most aggressively is where the worst market losses occurred. Until valuations were reduced to where real value was present was when lowering rates was bullish for stocks. The Fed lowered all through 2008 until the market reversed in March of 2009. In short, if investors are risk-off, which they clearly were throughout 2008 until March 2009, then lowering rates doesn’t achieve anything.
There are a number of factors that are promoted as the catalyst for these record profit margins such as advances in technology, rising productivity, lower taxes, and/or government spending, etc. Those are contributing factors to be sure, but the primary catalyst has been a prolonged period of declining interest rates, which has created a trend of falling interest costs.
This is the juncture I hear the “yes, but,” eventually the Fed will begin to lower Fed fund rates, which will provide the energy for the next move up in the market averages. I would argue that investors have already baked the returns from lowered rates into the cake. Help me to understand why the Fed would lower rates in the face of an economy that will not roll over and die and employment remains high?
I thought the Fed only lowered when, or after, the economy had fallen off the cliff and/ or employment was plummeting. Clearly I am missing something.
For now, it is risk-on, and as long as Nvidia and the other AI stocks continue to “deliver,” and the Fed continues to hold out hope that their intention is to begin reducing rates, then the party will roll on. As enlightened investors we will watch, but we don’t have to participate. Such is the life of the dividend-centric value investor.
That is all, now soldier on.
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Blue Chip Stocks
Investment Quality Trends publishes a lot of data and information on high-quality, dividend-paying Blue Chip stocks. This data and information is most beneficial to Subscribers that have carefully considered their investment objective(s), risk tolerance, investment time horizon, and experience.
About Model Portfolios
Because we follow such a wide variety of companies that are dynamically moving in price, along with a steady influx of new Subscribers, we do not construct and maintain model portfolios as it is impractical, if not impossible, to construct and maintain model portfolios to meet every Subscribers individual investment objectives.
Portfolio Base
In our experience, a portfolio of 25 to 30 companies initially chosen from the Undervalued category, diversified equally across the 9 to 10 industrial sectors, is sufficient to outperform the major indices on a consistent, long-term basis. To assist Subscribers in establishing a foundation for a 25 to 30 position portfolio we introduced The Lucky 13 in January 2000. The goal of the Lucky 13 is to outperform the broad market over one year and a day to achieve long-term capital gain tax treatment.
Using the Timely Ten
Recognizing that Subscribers desired input on portfolio construction beyond the onceper-year Lucky 13, we initiated The Timely Ten feature as a compliment.
For a detailed description of how the Timely Ten is constructed, and how we intended it to be used can be found here.
https://iqtrends.com/subscriptions_timely10.php
Managing Editor: Kelley Wright
Hey gang. Weyco Group (WEYS) has advanced to its Rising Trend, which precludes it from remaining in the Timely Ten. Remember, the Rising Trends are the HOLD area. Although the internals for 3M (MMM) remain at the top of our tracking measures we will need the July Q1 to calculate the impact of the SOLV spin-off and to dig into the cash flow statement and balance sheet.
State Street Corp (STT) makes a return appearance to the TT as does Enterprise Products Partners (EPD). I believe this marks the first entry for Polaris Industries (PII), which we profile in this issue. Joining PII in the profiles are long-time stalwarts Clorox Company (CLX), The Home Depot Inc (HD), and Jack Henry & Associates, Inc (JKHY) as they are back in the Undervalued category.
Johnson & Johnson (JNJ), which we profiled in the First-May issue has returned to the Undervalued category albeit at the tippy top of its Undervalued range for the first time in a very long time. With an Economic Book Value of $118.81 per share the PVR is 1.2 at the current price. Given the challenges JNJ faces we would like to see it closer to its actual Undervalue price and yield.
Changes to Blue Chip Listings
Upgrades to Select Blue Chips
The Cigna Group (CI), Entergy Corp (ETR). Quality Ranking increases to B+.
Downgrades to Faded Blue Chips
Allstate Corp (ALL), Equifax (EFX), Harley-Davidson (HOG), Key Corp (KEY), Merck & Co (MRK), and RTX Corp (RTX). All due to reductions in the Quality Ranking.
New Additions
AGCO Corp (AGCO), International Bancshares Corp (IBOC), and John B Sanfilippo & Son (JBSS).
New Removal
Lakeland Bancorp (LBAI) was merged/acquired by Provident Financial Services (PFS). PFS does not meet the minimum Criteria for inclusion.
Yields To Watch
The dividend-yields indicating the Undervalue area have been established over multiple market-cycles. Although these lowprice / high-yield instances are repetitive, they are neither absolute nor inviolate. In fact, a range of 10% above and below Undervalue is normal behavior. For various reasons though, stocks will occasionally exceed this 10% range.
Typically this is a transitory event as abnormally high-yields will attract sufficient buying interest to return dividend-yields to longestablished norms. On those occasions when a dividendyield deviates 30% or more from Undervalue, however, IQ Trends will highlight those stocks in this space so Subscribers can make note of the abnormal behavior.
218.18 Pts Up: 89.97 Yield: 2.20% % Up: 70.2%
Price: 120.00 Pts Dn: 8.21
4.00% Dn: 6.4%
The Clorox Company (CLX)
The Clorox Company (CLX)
Since its divestiture from The Procter Gamble Company in 1969, Clorox has expanded into a company with over $7.3 billion in annual sales, operations in approximately 25 countries, and products in more than 100 markets. CLX employed about 8,700 worldwide as of FY 2023, down from 9,000 in FY 2022. Clorox markets some of the most recognized consumer brands, including its namesake bleach and cleaning products, Pine-Sol cleaners, Fresh Step cat litter, Glad bags and wraps, Kingsford grilling products, Hidden Valley dressings, Brita water filtration systems, Burt’s Bees personal care products, and various vitamins, minerals, and supplements. About 80% of the company’s sales are generated from brands that hold the No. 1 or No. 2 market share positions in their categories. This is down from the prior few years, as Clorox has lost some market share to new and existing competitors. Cleaning products make up 42% of its annual sales, Bags/wraps 16%, and food products 11%. Walmart is CLX’s largest customer, accounting for about 26% of annual sales. Clorox’s five largest customers accounted for nearly half of the company’s consolidated net sales for each of the fiscal years 2023, 2022, 2021, and 2020. CLX purchases raw materials from numerous unaffiliated U.S. and international suppliers, some of
which are sole-source or single-source suppliers. Key raw materials include resin, diesel, sodium, hypochlorite, corrugated cardboard, soybean oil, jet fuel, and other agricultural commodities. Clorox has had a disappointing past few years following a banner FY 2020. In FY 2023, net sales increased 4% and adjusted EPS increased 24% to $5.09. In FY 2019 (pre-pandemic), Clorox generated EPS of $6.32, demonstrating the tremendous amount of pressure the company is currently facing. On a trailing-12-month basis revenue of $7.2 billion is +0.5% compared to the year-ago period. Gross margins were 39.4%, up 360 bps from 35.8% in FY 2022. In FY 2019 (pre-pandemic), Clorox posted 43.9% gross margins. Persistently high manufacturing and logistics costs, as well as high commodity costs, the conflict in Ukraine, and supply chain challenges have pressured margins. On a trailing-12month basis, adjusted gross margins registered at 42% vs. the 37.8% adjusted gross margin in the year-ago period, reflecting CLX’s strong pricing and cost savings initiatives in the last 12 months, however, the pricing power is largely in the rear-view mirror. The ROIC, FCFY, and PVR are 9%, 4%, and 1.9 respectively. The Economic Book Value is $68.54 per share.
The Home Depot, Inc. (HD)
The Home Depot, Inc. (HD)
Home Depot is the world’s largest home improvement retailer with $152.7 billion in revenues in FY 2023 (Jan.). HD operates on a fiscal year basis ending on the Sunday nearest January 31 and can include 52 or 53 weeks. The most recent fiscal year ended January 28, 2024 (FY 2023). HD is currently operating in FY 2024, which ends on February 2, 2025, and will include a 53rd week. Stores average approximately 104,000 square feet, plus 24,000 square feet of garden center and storage space, and stock 30,000 to 40,000 items, including brand name and proprietary items. Home Depot stores serve three customer groups: Do-It-Yourself (DIY) customers, typically homeowners who complete their own projects and installations; Do-It-For-Me (DIFM) customers, usually homeowners who purchase materials and hire third parties to complete the project and/or installation; and Professional (Pro) customers, consisting of professional remodelers, general contractors, repair people, and tradespeople. HD had a mixed quarter with an unexpected delay in Spring and the challenging macro environment weighing on the company’s results. Diluted earnings per share were
down 5% year-over-year, but still beat analyst estimates. Revenues were also down 2.3 year-over-year, and missed analyst estimates by $224.6 million. Comparable sales declined 2.8% during the quarter, coming in worse than analyst expectations of a decline of 2.2% year-over-year. On a positive note management reaffirmed their guidance for FY24 with both sales growth and diluted earnings per share growth due to fact that it’s a 53-week year. The 53rd week is expected to contribute $2.3 billion in sales and approximately $0.30 to diluted EPS. The company also announced its intention to acquire a residential specialty trade distributor, SRS Distribution. Acquiring SRS is in line with the company’s strategy as HD has switched its focus from the DIY segment to the Pro segment. SRS is a key player in the specialty trade space, which will offer HD immediate access to Pro customers. Lastly, the Specialty Contractor segment is expected to show tremendous growth in the coming years. The ROIC, FCFY, and PVR are 27%, 4%, and 2.2 respectively. The Economic Book Value is $152.50 per share.
Jack Henry & Associates, Inc. (JKHY.O)
Jack Henry & Associates, Inc. (JKHY.O):
JKHY provides core banking solutions to 940 banks ranging from de novo to multi-billion-dollar institutions with assets of up to $50 billion. JKHY supplies core data processing solutions to over 710 credit union customers of all sizes. The core software systems mainly include the integrated applications needed to process deposits, loans, general ledger transactions, and maintain centralized customer/member data. The company’s banking solutions support both on-premise and private cloud environments, across distinct core platforms with integrated complementary solutions. In addition to core solutions, JKHY offers an array of specialized, platform-agnostic products and services to financial institutions. These complementary solutions cover areas like financial performance, imaging, payments processing, security, retail delivery, and online/mobile capabilities. The firm’s offerings boost the performance of traditional financial entities of all sizes,
as well as non-traditional diverse corporations. Overall, JKHY serve over 7,500 customers, including over 1,650 core bank and credit union clients, along with nearly 5,880 customers using our non-core specialized products, with innovative, personalized, and data-driven solutions that lower barriers to financial health. JKHY’s business strategy is to generate organic growth in revenues and earnings, aided by acquisitions. It pursues acquisitions that could potentially expand the company’s bases of solutions and users, provide solutions to existing and potential customers, and enable the company to expand beyond its traditional markets. Acquisitions have enabled the company to broaden and supplement its existing product offerings and expand its addressable market. The ROIC, FCY, and PVR are 16%, 2%, and 2.5 respectively. The Economic Book Value is $64.21 per share.
Polaris, Inc. (PII)
Polaris, Inc. (PII)
Polaris Inc. designs, engineers, manufactures, and markets powersports vehicles in the United States, Canada, and internationally. It operates through three segments: Off-Road, OnRoad, and Marine. The company offers off-road vehicles (ORVs), including all-terrain vehicles and side-by-side vehicles; military and commercial ORVs; snowmobiles; motorcycles; and motoroadsters, quadricycles, and boats. It also provides ORV accessories comprising winches, bumper/brush guards, plows, racks, wheels and tires, pull-behinds, cab systems, lighting and audio systems, cargo box accessories, tracks, and oil; snowmobile accessories, which include covers, traction products, reverse kits, electric starters, tracks, bags, windshields, oil, and lubricants; and motorcycle accessories, such as saddle bags, handlebars, backrests, exhausts, windshields, seats, oil, and various chrome accessories. In addition, the company offers light duty hauling and passenger vehicles;
gear and apparel, such as helmets, goggles, jackets, gloves, boots, bibs, hats, pants, and leathers; and pontoon and deck boats. The company provides its products through dealers and distributors, and retail and e-commerce marketplaces. The stock has hit a rough patch lately, but it has leading brands such as Indian Motorcycles and offers a solid dividend yield which continues to grow over time. Polaris has increased the dividend for 28 years in a row and it completed $179 million in share buybacks last year. The company was founded in 1945 and is headquartered in Medina, Minnesota. The ROIC, FCFY, and PVR are 12%, 5%, and 1.2 respectively. The Economic Book Value is $66.11 per share.
Dividend Increases
Dow Jones Industrial Average
An Illuminating Concept
When all other factors which rate analytical consideration have been digested, the underlying value of dividends, which determines yield, will in the long run also determine price. The key to value, therefore, lies in yield as reflected by the dividend trend. Individual stock prices fluctuate between repetitive extremes of high dividend yield and low dividend yield. These recurring extremes of yield establish Undervalue and Overvalue price levels. When a dividend is raised, the Undervalue and Overvalue price levels are raised automatically so they will continue to reflect the historically established yield extremes.
Each stock has its own distinctive high and low yield characteristics and must be evaluated individually.
Undervalued: Buying Area
These stocks have declined sufficiently in price to reach their individual repetitive area of high dividend yield. A further decline in price is minimized as this would result in an abnormally high dividend yield. Buying consideration should be given to stocks in this area after careful examination of the other statistics listed.
(Continued on page 13)
Undervalued: (continued)
Rising Trends: Hold Area
Stocks that have moved at least 10% from the Undervalued category are automatically placed into the Rising Trends category. These stocks are moving UP toward the Overvalued area. As long as the upward trends remain intact, the investor should retain these securities. When the uptrends finally end, usually in the Overvalued area, a decision to preserve profits and capital must then be made. Downside risk expands as the Overvalued area is approached.
Overvalue: Selling Area ................................................
Each stock has reached its own distinctive high price with low dividend yield. Unless dividends are raised, it may be anticipated that overpriced stocks will decline toward Undervalue. It is important to recognize the potential downside risk which exists at the Overvalue level. Selling here preserves profits and capital.
Declining Trends: To Undervalue
Stocks that have moved at least 10% from the Overvalued category are automatically placed into the Declining Trends category. These stocks are moving DOWN toward the Undervalued area. The investor holding these declining stocks should expect shrinking prices until a turnaround takes place, usually in the Undervalued area. The investor looking for investment opportunities should avoid these stocks until their declining trends are concluded.
(Continued on page 17)
Declining Trends: (continued)
indicates Dividend In Danger
Symbol indicates Dividend In Danger due to GAAP
Capital “G” denotes a remarkable 10% average annual dividend growth over the past 12 years.
Lower case “g” meets the 10% / 12 yr. test, but the 3 and 5 year trends do not.
Highlight Areas
Dividend In Danger
About “G” and “g” Bold / Italicized
Baby Blue Chips
The stocks listed as Baby Blue Chips are working toward Select Blue Chip status as they meet all the Criteria for Select Blue Chips EXCEPT having only fifteen years of uninterrupted dividends. Fifteen years is important as this period includes both the 2008-2009 and Pandemic bear markets. While not yet full-fledged Select Blue Chips, we believe them preferable to non-dividend paying stocks, or stocks with insufficient dividend histories to establish repetitive Undervalue/Overvalue dividend yields.
Criteria for Select Blue Chips
The IQ Trends register of Select Blue Chips is an elite representation of the highest quality and most prosperous corporations in the country. According to our method, a stock will achieve the designation of Select Blue Chip after it has met at least 5 of the 6 following qualifications and may remain with 4 criterions:
1. 2. 3. Dividend increases 5 times in the last 12 years S&P Quality Ranking in the “A” category At least 5,000,000 shares outstanding 4. 5. 6. At least 80 institutional investors At least 25 years of uninterrupted dividends
Earnings improved in at least 7 of the last 12 years
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Mailing June 14, 2024
and information within I.Q. Trends are thoroughly researched and believed to be accurate. However, discrepancies may occur. Investors should recheck critical data before making stock purchases. The security portfolios of our employees, officers, or affiliated companies may, in some instances, include securities mentioned in this issue.
