July was a long month for my portfolio. With Capital One selling their investment portfolio to Etrade , I was looking for a new trading form. After many, many talks with Lanny, I finally settled on Ally Investing. My transfer was initiated at the beginning of July, but my assets were not fully transitioned until the end of the month. This waiting period was unique and shook up the flow of the first six-months of the year that saw me making a lot of stock purchases. For the first 30 days of July, I did not make any stock purchases. However, on the final day of the month, I was able to sneak one purchase in. Here is why I purchased shares of Tyson Foods (TSN) on July 31!
Why Tyson Foods (TSN)?
It is funny. So many of my stock purchases start with a simple conversation with Lanny. Often times, we are joking around, eating Papa Johns pizza, discussing undervalued dividend stocks. He was running his watch list by me and I was running a stock screener to identify my own listing of stocks. Lanny likes to talk a lot, so while he was explaining his August dividend stock list to me, I was able to perform my own filter and see that Tyson Foods was looking pretty darn appealing.
This was on July 28th. Part of what attracted me to TSN was that the company performed well in our stock screener, the stock was down year-to-date, and I liked the company’s portfolio of brands. Their brand portfolio includes consumer staples/legends such as Tyson, Ball Park, Hillshire Farms, Jimmy Dean, Hillshire Farms, Nature Raised Farms, Sara Lee, and Top/True Chews. Sure, the company predominately has meat product brands. However, their brands are diversified within the meat industry (chicken, beef, pork, etc.) and their brands are market leaders in their respective markets.
It was funny that Lanny and I discussed TSN on July 28th. At the time, I was interested in initiating a stake in the company; however, I was looking for the price to fall further and cause the dividend yield to at least exceed 2%. Well, that Monday, TSN filed a press release that caused the price to tumble. On Monday, the company’s stock fell over 7% and the price fell another 1.5%-2% the following day. What caused the price to fall?
That Monday, the company filed a pretty substantial 8-k. The 8-k indicated that the company was going to be negatively impacted by the announced tariffs and the increasing price of their meat products. Plus, their tax benefit received from Tax Reform was not as large as expected. Based on the negative news announced, the company lowered their EPS guidance for the year from a range of $6.55-$6.70 to $5.70-$6.00. The reduction of earnings is never great news; however, before I wrote off TSN as an investment, I wanted to run the company through our stock screener to see if the lowered guidance would have impacted my potential investment decision. If the company suddenly didn’t pass our Dividend Stock Screener, I would pass on further consideration of the company.
Dividend Diplomats Stock screener – TSN
Since the company reduced their EPS guidance in the earnings release and average analyst estimates were not updated yet, I am going to use an EPS figure of $5.70/share for the purposes of our stock screener. This represents the low-end of the range. I will also use the 7/30/18 closing price of $58.72 for this analysis. Here is how TSN performed when being run through our Dividend Stock Screener
- Price to Earnings Ratio – We typically look for company’s that have a P/E ratio below the broader market. TSN’s Payout Ratio was 10.30X, This is well below the broader market’s P/E ratio, which is typically in the low 20X multiple. TSN passes this metric
- Payout Ratio – Even with the reduction of earnings, TSN has a low payout ratio. Their current annual dividend is $1.20/share. Thus, we calculate a 21% dividend payout ratio. This is well below our 60% payout ratio. TSN once again passes this metric.
- Dividend Growth History and Dividend Growth Rate – TSN has a long way to go before they will be classified as a dividend aristocrat. The company has paid a dividend from 1976, so they have been paying a dividend for a long time. Their dividend increase streak is much shorter (4 years). Typically I like to see a longer streak; however, since the company has paid a dividend for a long time, I am willing to still consider investing in the company. The other aspect of this metric is the company’s DGR. The company has a five-year average dividend growth rate of 32%. That growth rate will be pretty hard t maintain and I expect it to decrease over the years. Luckily, I was reading TSN’s investor presentation from 2017 and noticed that they stated management would like to increase their dividend by at least 10% annually. Oh yeah, did I also mentioned that TSN is expected to announce this dividend increase at the beginning of August! I’ll give TSN a pass for this metric as well!
- Five-Year Average Dividend Yield – Lastly, we like to look at the current dividend yield compared to their 5-year average dividend yield, as this could potentially indicate if the company is overvalued. TSN’s current yield of 2.04% exceed their 5-year average of 1.1%. Hmmmm very interesting.
I mentioned earlier that I would place a lot of weight on this dividend stock screener given the company’s earnings release. Reading about tough times and a reduction of earnings guidance is never a good thing. However, as you can see in our stock analysis, the lowered guidance did not change the results of our stock screener at all! I felt the same way about TSN before and after the ER and based on the results, I determined I wanted to initiate a position in the company for the long-haul. I’m willing to ride out the short-term craziness discussed in the 8-k!
The Purchase Summary – TSN
After the stock screener, I made up my mind at it was time to purchase. Thus, I added 35 shares of TSN at $57.98/share. Ally offered 90 days of free trades with the transfer. So I did not incur a trade fee with this transaction. So my cost basis is $2,029.45. In total, I added $42.00 to my forward dividend income. Not the largest income total, but I’m excited to add a low-yield, high dividend growth rate stock to my portfolio. Plus, hopefully this will be increasing significantly with their coming dividend increase.
What are your thoughts about my purchase? Are you buying TSN? Or would you have held off based on their earnings release and the short-term headwinds? What do you think their upcoming dividend increase will be?
-Bert