TipRanks Quality Dividend Newsletter – Edition #1
Introduction to Quality Dividend Stocks
Dividend stocks have a place in every investment portfolio because they provide a steady and reliable source of income, while helping with diversification and adding stability to the portfolio’s performance. Dividend stocks also tend to perform better than non-dividend stocks during market downturns and offer the potential for long-term capital appreciation.
Statistically, dividend-paying companies that have increased their payouts over time have outperformed non-dividend payers as well as the broader market, while showing lower volatility. Simply put, with quality dividend stocks, investors get better long-term performance with lower risk.
Choosing Resilience and Quality Within the Dividend Space
In these uncertain times, it’s prudent for market participants to seek safety. However, safety doesn’t necessarily mean ditching stocks overall. Equities retain their long-term appeal, as over the medium- to long-term holding period, stocks have provided investors with a higher cumulative total return than bonds and any other lower-risk instrument. Of course, in a difficult macroeconomic and market environment, it would not be sensible to blindly follow indexes, as the returns are and will continue to be increasingly driven by stock specifics. That is why we advise a selective approach to stock choice, overweighting recession-resilient sectors with a focus on quality, stability, and dividends.
Historically, certain sectors and industries within the S&P 500 (SPX) have been more resilient during periods of economic downturn. Defensive sectors are less sensitive to economic cycles and tend to show stable revenues and earnings, which can be attractive to investors during times of market uncertainty. Companies in these sectors provide essential goods and services, demand for which tends to remain relatively stable; thus, these firms can be more resilient than others even during tough times.
Besides the sector analysis, in times of economic and market turbulence, prudent investors are advised to choose quality over theoretical prospects for growth. Research shows that quality stocks have historically outperformed the broad market in the long term, as these companies can maintain their earnings in different stages of the market cycles, compounding returns to shareholders. That is why it is of utmost importance to incorporate quality metrics, such as profitability, earnings stability, free cash flow generation, etc., into the analysis underlying the choice of stocks for a portfolio.
Why Investors Need the TipRanks Quality Dividend Newsletter
Not all dividend stocks are created equal. There are numerous dividend-paying stocks on the market, and they differ significantly from one another.
Some companies have a long history of consistently paying and increasing their dividends, while others may have a more volatile dividend record. Many companies that have been increasing their dividends for decades still pay a very low dividend yield when compared to their industry competitors.
On the other hand, although high-dividend-yield shares can be attractive to income-seeking investors, these stocks may not always pay consistent cash dividends in all economic conditions. That’s because high yield can sometimes originate from a decline in a company’s share price, or represent the company’s compensation to its shareholders for lack of growth. Simply put, a high dividend yield doesn’t necessarily mean quality, and it doesn’t guarantee future dividend growth or stability.
Companies that have proven their ability to provide stable and rising dividends over a long period are the easy option for aspiring income investors, allowing for quick decision-making with no apparent need for deep analysis; this popularity leads to higher demand and, consecutively, higher prices of these stocks. Stocks that are expensive compared to their peers typically have less space for share price appreciation, which can result in lower returns over time.
So how can an investor find high-quality, high-dividend stocks that are not overvalued but still have a decent upside that, together with dividends, will comprise an attractive total return?
The answer is simple: TipRanks’ Smart Dividend Newsletter provides you with weekly investment ideas for safe-bet quality stocks that are outstanding dividend payers compared to their peers.
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Quality Dividend Stock – This Week’s Top Pick
Without further ado, let’s dive straight into our recommendation for a quality dividend stock for this week.
Today, our top pick for Quality Dividend investors is a Fortune 500 company with stellar finances and an outstanding earnings record, whose stock has performed well in the long and short term, but still remains cheap compared to its competitors. On top of all that, the company’s dividend yield is almost twice the average for its industry.
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The Interpublic Group of Companies, Inc. (IPG) is an American advertising conglomerate, a global provider of marketing solutions. With approximately 58,000 employees in all major world markets, IPG companies specialize in advertising, digital marketing, communications planning, media, public relations, and specialty marketing. The company was founded in 1930 as McCann-Erickson Incorporated and changed its name to The Interpublic Group of Companies, Inc. in 1961. IPG has been publicly traded since 1971. Interpublic is a large-cap company with a market cap of $14.9 billion.
IPG is the second-largest advertising company in the world, operating as a holding company for a group of advertising agencies and media firms that include McCann-Erickson Worldwide, Ammirati Puris Lintas, the Lowe Group, and Western International Media. Through its subsidiaries, Interpublic serves more than 4,000 clients in more than 110 countries. IPG’s clients include American Express (AXP), Netflix (NFLX), GoPro (GPRO), Crocs (CROX), PepsiCo (PEP), Mattel (MAT), Spotify (SPOT), and many other well-known names.
Interpublic is one of the “Big 5” global advertising agencies, with diversified sources of income – via different geographies as well as types of services it provides through different agencies it holds. IPG’s extensive network of agencies and a broad range of services give it an advantage in the very competitive advertising industry. Judging by its growing revenues, IPG is adapting well to the business landscape changes due to digital disruption. This adaptation is a result of IPG’s heavy focus on data and analytics, as the company has made meaningful investments in technology and data-driven marketing solutions.
IPG is a financially healthy company, with short-term assets covering both its short- and long-term liabilities. IPG’s debt is well covered by operating cash flow, while EBIT well covers its interest payments.
Interpublic has an outstanding earnings record: the company’s EPS has beaten analysts’ estimates in each quarter since these estimates began in Q2 2019. IPG’s earnings have grown by 13% per year over the past 5 years. Revenue and operating income have been steadily rising in the last decade, barring a relatively small decline during the Covid-19 crisis. The company’s return on equity (ROE) is exceptionally high compared to its sector; so are its return on assets (ROA) and return on total capital (ROTC).
On April 27th, IPG reported its Q1 2023 results; revenues and earnings beat estimates, just like in the previous quarters. Revenues declined year-on-year on the back of the decrease in the technology sector’s marketing efforts; this result was consistent with the company’s earlier forecast. Management confirmed that the company is on track to achieve its 2023 organic revenue growth target and to further expand the full-year EBITDA margin.
IPG stock has performed well in the long and short term. IPG’s 5-year and 10-year performance is very similar to that of the S&P 500. In the past 12 months, Interpublic has easily beaten the benchmark index: Interpublic’s shares have risen over 23% versus S&P 500’s 5.5%. Year-to-date, the company’s shares have moved up north of 14%, while the benchmark has logged in a 9.6% increase.
Despite the stock’s impressive run in the past year, IPG remains undervalued. With a P/E (TTM) ratio of 16.7, it’s selling at a 16% discount to its sector; its Forward P/E of 14.7 (versus the sector’s average of 19.5) also points to the fact that there’s value to be found in the stock.
Analysts have been upgrading IPG’s earnings forecasts; a positive revision trend correlates with a favorable outlook in the short- to medium-term period. The stock’s average upside for the next 12 months is projected to be around 7%; however, that looks like an understatement, given IPG’s strong fundamentals and leading market position. IPG certainly isn’t a growth stock; it’s far from being a speculative boom-or-bust play. Therefore, its long-term performance, which is in line with that of the benchmark, with dividend income added to the mix, looks more than satisfactory.
Interpublic is rated 8/10 (“Outperform”) by TipRanks’ Smart Score system:
Interpublic pays a respectable 3.25% dividend yield, maintaining a more than healthy 44% payout ratio. IPG’s dividend yield is almost twice as high as the Advertising industry’s median. Meanwhile, its payout ratio is low compared to the industry’s average of 60%, indicating the management’s prudence towards the company’s income and leaving the company with more cash to reinvest in its future growth. IPG’s dividends per share have been stable in the past 10 years; dividend payments have increased annually in the past decade.
IPG also returns capital to its shareholders through various share buyback programs. Thus, during the first quarter of 2023, the company repurchased 2.2 million shares of its common stock at an aggregate cost of $77.8 million.
To sum it all up, we can say that IPG demonstrates financial health, business advantages, respectable growth, and stability in returning capital to shareholders, through both share buybacks and a well-covered and growing dividend. While IPG is no longer as cheap as it was a year ago, it is still value-priced considering its history and future potential for strong long-term income and returns.
