The yield on Walgreens stock is far above the average for the S&P 500. Courtesy Walgreens Boots Alliance
Walgreens Boots Alliance, MSC Industrial Direct ,and Ames National each scored a recommendation as a stock to consider for a safe dividend portfolio, nudging out other reliable dividend payers offering lower yields.
New Constructs, a stock research firm, issues an updated Safest Yields Model Portfolio once a month. It looks for high dividends that it believes are unlikely to be cut. The free cash flow a company generates is a key consideration.
“Companies with strong free cash flow provide safer dividend yields because they know they generate the cash to support the dividend,” according to a recent research note the firm put out to update its dividend portfolios.
A common definition of free cash flow is cash from operations minus capital expenditures. It is a measure of how much cash a company has left over for purposes such as paying a dividend, buying back stock, or making acquisitions.
New Constructs has two safe-dividend portfolios: one for large and midcap stocks, and the other for small-caps. Walgreens Boots Alliance (ticker: WBA), which operates a global chain of drugstores, and MSC Industrial Direct (MSM), whose products include cutting tools and measuring instruments, are the latest additions to the list of bigger companies.
New Constructs added Ames National (ATLO), a bank holding company, to the portfolio of small-cap companies.
Common stock in Walgreens Boots Alliance was recently yielding 3.8%, a hefty level considering that the S&P 500
‘s average is about 1.3%.
In an email to Barron’s, New Constructs CEO David Trainer points out that “despite no clear recovery in profits” since the pandemic, Walgreens Boots Alliance “continues to generate significant free cash flow to support its dividend payment.”
The consensus FactSet earnings estimate for its current fiscal year, which ends next August, is $4.94 a share, up slightly from the $4.91 it earned in the latest fiscal year. In the past fiscal year, free cash flow totaled nearly $4.2 billion, up nearly 2% from the 12 months ended August 2020.
The stock has performed well this year, returning about 26% through Friday, dividends included, compared with around 22% for the S&P 500.
MSC Industrial Direct sports a yield of 3.6%. “Since fiscal 2017, MSC’s industrial cumulative [free cash flow] easily covers its regular dividend payments from $1.80/share in fiscal 2017 to $3.00/share in fiscal 2021,” according to New Constructs.
The stock has been more or less flat so far this year. Its market capitalization was recently at about $4.6 billion, putting it in the smaller midcap category.
Ames National stock, which yields 4.4%, had returned about 2% this year as of Friday. It sports a small market capitalization of about $215 million, according to FactSet.
New Constructs points out that the banking company has been consistent in paying its dividend, which went from 84 cents a share annually in 2016 to a little more than $1 a share over the past 12 months.
In joining the safe dividend portfolios, these three companies supplanted three others. Walgreens Boots Alliance took the place of Kellogg (K), MSC Industrial Direct replaced Flowers Foods (FLO), and Ames National succeeded First Bancorp (FNLC). All three companies had higher dividend yields than the ones they replaced, according to Trainer.
Each of the companies removed from this month’s portfolio would have qualified for the safe-dividend portfolios had safe, higher-yield alternatives not been available, says Trainer. “They just had lower yields than the additions that took their place.”