RL - 5 Dividend Growth Stocks To Consider Buying

2023-12-07 14:25:11 ET

Summary

• Korn Ferry, Gilead Sciences, Qualcomm, Ralph Lauren, and Manpower are identified as five companies with high dividend yields and strong capacity for future dividend increases.
• Korn Ferry is a leader in leadership and talent consulting services with significant growth opportunities.
• Gilead Sciences has pivoted towards new products and acquisitions to improve its outlook, though it still faces headwinds from COVID-related revenue decline.
• Qualcomm is well-positioned for growth with its strong patent portfolio and strength in 5G technology. Ralph Lauren aims to improve its omni-channel selling capabilities and digital presence.
• Korn Ferry recently raised its dividend in a big way. Could the other four be next with big dividend increases?

By Valuentum Analysts

Dividend growth investing has probably never been more popular than it is today. We like to evaluate a company’s dividend on a forward-looking basis via the Dividend Cushion ratio that is driven by the discounted cash flow [DCF] model we use to derive a company's fair value estimate. The Dividend Cushion ratio adds our forward-looking projections of a company’s future free cash flows over the next five years, to net cash, or subtracts net debt, and then divides the sum by future forecasts of cash dividends paid. This results in a forward-looking cash-flow based dividend coverage ratio that also considers a firm’s leverage on the balance sheet.

We like to view the Dividend Cushion ratio as a dividend-cut predictor, but it perhaps is most relevant as a measure that assesses the probability of a dividend cut. If we were to multiply a company’s Dividend Cushion ratio by its dividend yield, one arrives at a sorting mechanism for companies that have high dividend yields, but also strong capacity for future increases on the basis of their financial make-up. Here are five companies that register among the highest marks ('Multiplier') on this basis, with their forward-looking Dividend Cushion ratio and Multiplier, which multiplies their respective dividend yield and Dividend Cushion ratio, shown below. These entities are well-positioned financially to generate significant dividend growth in future periods, in our view.

Korn Ferry ( KFY )

Korn Ferry helps its clients recruit world-class leadership talent. The firm is a single source for a wide range of leadership and talent consulting services. Its fee revenue is well-diversified by both specialty practice and by geographical markets given its diverse customer base.

Korn Ferry believes it has some significant growth opportunities ahead of it, though its latest quarterly results were somewhat weak, showcasing revenue declines. Nonetheless, the company continues to experience resilience in its Digital and Consulting business lines, which advanced nicely in the quarter. Management is also pursuing restructuring initiatives, which should help improve profitability going forward.

As of the end of fiscal 2023, Korn Ferry had a nice net cash position. The firm is a stellar free cash flow generator, too, generating free cash flow of $273.5 million in fiscal 2023 and $452.3 million in fiscal 2022. In March 2015, Korn Ferry declared its first quarterly dividend in company history, and management remains focused on returning cash to shareholders. We think shares are cheap, too, with our $69 per share fair value estimate meaningfully higher where shares are currently trading.

Gilead Sciences ( GILD )

Gilead’s primary areas of focus include HIV/AIDS, hepatitis B and C, serious cardiovascular/metabolic, respiratory conditions, and now oncology. The firm's drug Sovaldi and its successor Harvoni, a once-daily oral treatment of HCV infection, were once its primary product drivers and comprised a large portion of antiviral product sales, but an increasingly crowded HCV market has drastically cut its revenue from those products. More broadly, Gilead has pivoted towards new products in order to improve its outlook, and recently, the firm has had some momentum on this front.

Gilead’s Vemlidy treatment for Hepatitis B virus and its various oncology offerings including Yescarta, Tecartus, and Trodelvy have all posted decent sales performance of late. Sales of its Veklury product, which is used to treat patients with COVID-19, boomed in recent years, but are now falling drastically with the COVID-19 pandemic largely under control. Gilead is using acquisitions to boost its oncology business and reduce its dependence on its HCV franchise. We like its recent deals and Gilead’s long-term outlook has been steadily improving of late, though the firm still faces sizable headwinds as COVID-related revenue rolls off.

Qualcomm ( QCOM )

Qualcomm has revolutionized the mobile phone industry. Through its own R&D and through partnerships with other firms, the company develops forward-leaning technology and then licenses it. The firm has one of the strongest Economic Castles in our coverage. The Economic Castle is a unique measure that considers magnitude of economic value creation relative to the economic moat, which focuses more on duration of economic valuation creation via a competitive advantage analysis. Both are useful considerations.

Qualcomm’s strength in 5G has it well-positioned for growth moving forward, and artificial intelligence offers upside potential. Trade tensions between the U.S. and China are worth monitoring going forward, but this risk has always been present, so readers should take it with a grain of salt. For the fiscal year ended September 24, 2023, Qualcomm generated ~$9.85 billion in free cash flow (as shown in the image above), and we're huge fans of asset-light entities that throw off tons of free cash flow. Qualcomm ended its fiscal year with ~$4.1 billion in net debt.

Ralph Lauren ( RL )

Ralph Lauren is a leader in the design, marketing, and distribution of premium lifestyle products in four categories: apparel, home, accessories and fragrances. Its distinctive image has been developed across an expanding number of products, brands, and international markets. Competition is extraordinarily strong in the segments of the fashion and consumer product industries in which it operates. Ralph Lauren suspended its dividend in fiscal 2020 in the wake of the COVID-19 pandemic before resuming payouts in fiscal 2021.

Improving its omni-channel selling capabilities and growing its digital presence are key goals. Ralph Lauren’s digital strategy involves leveraging social media and its large following base, and the U.S. and China represent key geographic markets. For the first six months of its fiscal year, the company generated $261.2 million in free cash flow, much better than the free cash flow burn it experienced during the same period a year ago (as shown in the image above). Ralph Lauren ended its second quarter of fiscal 2024 with a modest net cash position ($327.4 million).

Manpower ( MAN )

Manpower Group offers a range of workforce services (recruitment, training, career management, outsourcing, consulting) to help raise productivity and improve strategy, quality, efficiency and cost reduction for clients. Manpower Group expects its digital investments to help build relationships with customers and enhance productivity, but these investments may weigh on margins a bit. The firm has expanded its IT offerings to the healthcare and financial services sectors, offering further opportunities.

Manpower Group exited December 2022 with a net debt position on the books, though it has historically been a stellar free cash flow generator, as shown in the image above. The company’s capital allocation priorities include paying out a growing dividend and repurchasing sizable chunks of its stock (as shown in the image below). Manpower's return on invested capital has consistently been above its weighted average cost of capital, too, showcasing its ability to generate value for shareholders through the course of the economic cycle.

Concluding Thoughts

We think these five dividend growth stocks have both decent-sized dividend yields and strong Dividend Cushion ratios that showcase their potential to keep raising their payouts at a sizable clip in future years. Korn Ferry tops the list among these select companies, and to no surprise, the company recently raised its dividend by a huge margin, but we think the other four names have sufficient capacity to deliver a large dividend increase, too. Comment with a ticker symbol below, and if it's included in our coverage, we'd be happy to share its Dividend Cushion ratio and Multiplier, too. Thank you for reading, and don't forget to follow our work!

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