Stocks

Two Buy Stories From The Q2 Earnings Season

The following is a guest post from Mike, a former private banker and passionate investor blogging at The Dividend Guy Blog and founder of Dividend Stocks Rock.

In May, we often read a bunch of articles about stats telling us to sell away and come back in the fall. As a dividend growth investor, I always found those stories strange. After all, why would I sacrifice one or two dividend payments from my favorite stocks just because *they might* lose in value? So while others are selling, I’m keeping a close eye on the market to find buy stories.

Over the past month, I went through hundreds of quarterly earnings to find the most interesting stocks on the market. I’ve found many stories I liked, and I wanted to share 2 Kings stories with a happy ending for your portfolio.

#1 The King with a Knee on the Floor

Q2 Earnings Season 2

Source: Ycharts

The first story I want to share with you is one with a King and his court that was definitely expecting more of him. 3M Co (MMM) is a dividend king showing over 50 years of consecutive dividend growth. However, this does not seem to be enough for the market.

The problem with MMM isn’t its most recent quarterly performances. On April 24th, the company delivered solid results:

  • Non-GAAP EPS of $2.50, up by +15%, missed estimates by $0.01.
  • Revenue of $8.28B, up by +7.8%, beat estimates by $30M.
  • Dividend of $1.36/share, no increase.

What the CEO Said:

“Coming off a strong 2017, our team opened the new year with broad-based organic growth of three percent, with positive growth across all business groups. We also continued to invest in our commercialization capabilities, while returning significant cash to our shareholders – including a 16 percent dividend increase. Going forward we will continue to execute the 3M Playbook and leverage the world-class capabilities of our people and our enterprise, and I am confident we will deliver strong results in 2018.”

It was another day under the sun as MMM posted a strong quarter. However, the market didn’t like it that much since MMM missed on earnings and posted weaker guidance for 2018. Earnings are expected to be in the range of $10.20-$10.55 per share (vs. $10.20-$10.70), with organic local-currency sales growth of 3%-4% (from 3%-5%).

The market got pessimistic about many industrial companies recently and MMM is just one more victim. However, the MMM investment thesis remains incredibly strong going forward.

First, we have a company showing incredible diversification. The company serves multiple sectors from industrials to healthcare and operates across the world. There will always be growth potential through a specific segment or somewhere in the world.

Second, MMM invests massively in its future and generates multiple growth vectors. Management invests about $2 billion per year (about 6% of sales) in R&D to improve its existing products, invent new ones, and keep its edge against the competition. Plus, the company also spends between $1B and $2B in acquisitions each year.

Finally, MMM more than doubled its dividend in the past 5 years. The company shows a dividend CAGR of 16.43% over the past 5 years (including their most recent increase of 16% in early 2018). Now that MMM is close to 2.50% yield, it may be the perfect timing to invest.

#2 The King of Content Walking in the Dead Money Valley

Q2 Earnings Season

Source: Ycharts

My second story includes the King of content: Disney (DIS). Throughout the past 12 years, Disney made three strategic acquisitions that will shape a decade of growth. Pixar (2006), Marvel (2009), and Star Wars (2012) have all been acquired for a total of less than $16 billion. However, as ESPN revenue suffers from consumers cutting their cable, investors are worried. DIS isn’t showing any returns for investors over the past 3 years.

On May 8th, Disney published a strong quarter, but the stock remains in the dead money valley.

  • Non-GAAP EPS of $1.84, up by +22.7%, beat estimates by $0.14.
  • Revenue of $14.60B, up by +9.4%, beat estimates by $490M.
  • Dividend of $0.84/share, no increase.

What the CEO Said:

“Driven by strong results in our parks and resorts and studio businesses, our Q2 performance reflects our continued ability to drive significant shareholder value. Our ability to create extraordinary content like Black Panther and Avengers: Infinity War and leverage it across all business units, the unique value proposition we’re creating for consumers with our DTC platforms, and our recent reorganization strengthen our confidence that we are very well positioned for future growth.”

I understand why investors are concerned about ESPN slowing down and not finding a way to keep people watching cable. But the market seems to forget DIS is growing through other vectors.

First, Disney has found the magic formula to dominate the box office year after year. This year #1 and #2 positions at the box office are Black Panther and Infinity War. You can bet on another blockbuster coming that will make the top 5 of 2018 with Solo – A Star Wars Story. The company has a bunch of Marvel and Star Wars movies lined-up for the next decade and Frozen 2 comes to theatres next year.

Second, Disney does not only make money out of the movies, it creates multiple streams of incomes from the same story. The power of Disney resides in its ability to use its content for various income sources. DIS is currently finishing its Star Wars extension in their parks which will bring millions of visitors in the upcoming years. It would not be surprising to see Avenger extension projects coming shortly. Apparel, action figures, princesses and other toys are so many examples of how much money Disney can generate from the very same character.

Finally, Disney has an eye on the future of content streaming. DIS has entered into an agreement to buy Fox (FOX) (more content in its universe!) which also includes another 30% shares in Hulu (Disney already owns 30%). Hulu is the second largest streaming company behind Netflix (NFLX). It already announced it will take its content away from Netflix and produce its own streaming services. It doesn’t really matter if the deal with FOX goes through or not (there are rumors Comcast (CMCSA) tries to outbid DIS): Disney is going ahead with a sports streaming service in 2019 (through its investment in BAMtech). Then, it will also offer a “family streaming service” with its Princesses, Pixar, Star Wars, and Marvel characters. Disney doesn’t have to beat Netflix, it just has to serve as a complement. Which family won’t pay an additional $10 per month on top of their Netflix subscription to have their kids watch Disney’s movies and series?

Not all Earnings Stories are Fairy Tales

I strongly believe that both MMM and DIS are strong additions to any dividend growth investor’s portfolio. On the opposite side, there are also a few horror stories among the current earnings reports. My team and I make sure you don’t miss one. Our goal is to help you find buy and sell triggers and take action on stocks that deserve (or not!) to be in your portfolio. We track nearly a thousand dividend stocks and pull out those stories for you, you might want to check out how we do it.

Article by Dividend Growth Investor