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3 Undervalued Dividend Growth Stocks Based On Cash Flow - YouTube
Channel: unknown
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welcome back to the longest finance
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channel today i want to talk about three
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attractively valued dividend growth
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stocks but show you their valuations
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from a different perspective using cash
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flow to value the business cash flow is
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probably one of the most important
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pieces of information investors should
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pay attention to many famous investors
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often derive their valuations for stocks
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using some fashion of discounting future
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cash flows the price to earnings ratio
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is probably the most popular valuation
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measure for stocks yet it is derived
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using the earnings per share figure that
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is more easily inflatable for businesses
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and therefore i personally prefer to
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look at the price to cash flow that in
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my opinion is a more accurate measure
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for valuation so let's take a look at
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three stocks that i personally own from
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a discounted cash flow perspective to
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see how well value they are today before
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we jump in though i would really
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appreciate it if you guys gave this
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video a like it really helps out the
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channel and subscribe if you enjoy the
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content first up we have best buy that
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is having a rather rough week you could
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argue the stock is being pulled down by
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target that dropped pretty significantly
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on earnings this week but that's neither
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here nor there what i am interested in
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is how much is best buy stock worth
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today and where it can go in five years
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so let's try to come up with a value for
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the stock first and then i'll take a
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look at the actual price to see if it's
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track to be valued before i dive in here
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i would just like to mention that the
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way i selected these three stocks i am
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looking at today is by taking the top 30
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highest quality companies on my high
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growth dividend watch list and then
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looking at the price to free cash flow
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ratio and selecting the three stocks
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with the lowest ratio i used finvis to
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compare the stocks but i'll be computing
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cash flow and ratios myself in this
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analysis alright so to compute the free
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cash flow all you need is a cash flow
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statement you can take the cash from
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operations and back out capital
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expenditures simple enough so for
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example in 2013 best buy had 1.5 billion
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cash from operations and 769 million in
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capex spending resulting in 817 million
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of free cash flow so i computed the free
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cash flow for the past 10 years and as
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you can see the cash flow would go up
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and down but generally it is increased
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during the last decade the next step is
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to divide the cash flow by the number of
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diluted shares outstanding the reason i
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am using diluted shares is because they
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include all the possible shares that
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exist which includes options warrants
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and any convertible debt basically it is
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a more complete figure as compared to
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the basic shares outstanding so the cash
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flow per share in 2013 was 2 dollars and
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40 cents and by 2022 it rose to 10
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dollars and 10 cents a pretty good
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increase over the course of the past
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decade i went ahead and looked up the
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closing price for the stock around month
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and january when best buys fiscal year
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ends and i divided the close price for
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the stock by the cash flow per share to
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find the price to cash flow multiple the
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multiple ranged from a low of 6.8 in
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2021 to a high of 15.4 in 2018 with the
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average being right around 11. i would
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say that as a general rule of thumb a
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price to free cash flow of 15 is
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considered to be fairly valued anything
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above is generally expensive and below
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is considered attractively valued
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obviously this generalization will not
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apply evenly to all stocks growth stocks
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will often trade for very high multiples
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and value stocks with low growth will
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trade for very low multiples for best
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buy we can use this long-term average of
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11 as a fair price to cash flow multiple
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so based on the 10.1 price to cash flow
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multiple for 2022 fiscal year-end we can
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derive a fair price for the stock of 111
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dollars based on the 11x multiple and a
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higher fare price of 151 dollars based
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on the 15x multiple shares today trade
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for around 70 so the price is
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significantly below for value from a
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cash flow perspective with the actual
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price to cash for multiple being 6.93
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this essentially means that you're
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paying 6.93 cents for every dollar of
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cash flow best buy generates let's
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forecast the cash flow out for 5 years
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to see what type of valuation and
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returns we can expect should the stock
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return to fair multiples cash from
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operations has increased by 8.3 on
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average during the last decade so i'll
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assume it can grow at this pace over the
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next five years capex has actually
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declined by about half a percent but
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i'll assume a two percent increase for
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future capital expenditures better to
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stay conservative here the diluted
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shares outstanding have shrunk by 3.34
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and i'll apply the same pattern for the
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next five years these assumptions bring
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us to a cash flow per share of 19.1 in
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2027. at the 15x multiple this would
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imply a share price of 287 dollars for
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the stock and a more conservative
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estimate of 210 dollars at the lower 11x
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multiple based on these estimates we can
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expect a low range annualized return of
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about 24
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and a high range estimate of about 32
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percent now this is assuming that best
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buy can continue to grow the cash flow
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generates at the same pace as it has
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averaged during the last decade and it
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also assumes that the stock market will
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price shares of best buy at a fair value
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in 2027. in the short term stock prices
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can swing wildly but over a long period
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of time they typically return a fair
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valuations even if the growth
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assumptions prove to be overly
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aggressive the return estimates are
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lucrative enough to warrant an
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investment i would personally be content
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with a 12 long-term annualized rate of
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return an estimated return of 24 to 32
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offers a sizable margin of safety i
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personally like best buy as a business
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and i own and have been adding to my
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position at the current valuation if we
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take a look at the last decade and
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specifically the year-end close price
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for the stock best buy has generally
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traded protractive valuations in terms
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of price to cash flow using the 15x
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multiple i believe this stock is an
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attractive opportunity today and should
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reward long-term shareholders with
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above-average total returns in addition
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at today's price it offers a pretty
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attractive dividend yield around four
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and a half percent the second stock i
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want to take a closer look at is
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tiroprice group i performed the same
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cash flow analysis on tiro as the one i
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just shared for best buy taking the cash
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from operations backing out the capex
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and dividing the result by the diluted
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chairs outstanding tero has two
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exceptions in this analysis for the
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years 2016 and 2017. the cash flow was
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very low and as a result the stock has a
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very high price to cash flow multiple to
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normalize the results i excluded these
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two years to compute the average price
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to cash flow for the last decade
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excluding 2016 and 2017 t rose cash from
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operations has increased at a rate of
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16.07
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capex has increased at a rate of 13.43
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and the diluted shares outstanding have
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shrunk by 1.45 per year when we look at
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the price to cash flow multiple for t
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row excluding 2016 and 2017 the ratio
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was the lowest in 2015 at 13 and a half
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and the highest in 2019 at 22.1 with the
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average being 18.1 so let's assume that
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a price to cash flow multiple of 18 is
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the fair value range for the stock based
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on the last fiscal year tiro's cash flow
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per share was 14 this would give us a
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fair price of 210 dollars at the 15x
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multiple and 252 dollars at the 18x
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multiple the stock trades for a price of
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about 121 dollars today so based on the
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long-term price to cash flow trends it
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looks pretty attractive if we forecast
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out the next five years at the
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previously stated growth rates sixteen
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point zero seven percent for cash from
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operations
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thirteen point four three percent for
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capex and minus one point four five
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percent for diluted shares outstanding
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we come up with the cash flow per share
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to be 32.1 in 2027. this would value the
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stock at 481 dollars using the 15x
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multiple and 577 dollars using the 18x
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multiple if this scenario would come to
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fruition it would result in a low range
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annualized return of about 31 percent
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and a high range return of about 36
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percent over the next five years these
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are very attractive rates of return that
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leave quite a large margin of safety if
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the assumptions are overly optimistic
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something to note here is that 2021 was
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a very good year for t row with the cash
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from operations being nearly twice that
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of 2020 the stock market was very hot in
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2021 and tyro benefited from this as it
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earns their income from its assets under
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management with 2022 being slightly more
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sour it's likely that the company will
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not generate as much cash flow this year
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as it did in the past so let's see what
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happens if we exclude fiscal 2021 from
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our analysis as it may be an outlier
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year for the company doing the same
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forecast as before except now starting
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from the more reasonable fiscal 2020
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financials we get a cash flow per share
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figure of 16.9 2027. at the 15x multiple
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this would give us a fair price of 254
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for the stock and 304 dollars at the 18x
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multiple both considerably lower than in
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the original example based on this
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assumption the low range annualized
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return is about 15 with the high range
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being about 20
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to me these are still very adequate
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rates of return and bear in mind that we
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have cut our starting figures by nearly
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half to come up with this forecast
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i think it's very likely terra will
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deliver returns in excess of this more
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conservative assumption the stock sports
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a very good starting dividend yield of
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almost four percent today and trades for
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a price to free cash flow of 8.64 that
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is less than half of its normal range
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the third and final company i want to
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take a look at today is lowe's i'm happy
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to see that lowe's made the top three
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lists for this analysis as i actually
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visited the store recently and it was
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packed full of people this is a great
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way to see which businesses are doing
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well because you know if a store is full
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and people are spending money some of
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that cash flow will end up in your
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pocket as a fractional owner of the
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business i did the same cash flow
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analysis for lowe's as for best buy and
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hero in 2013 the cash flow per share was
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2 dollars and 20 cents and by 2022 it
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rose to 11.80
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and really when you look at the past
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decade the cash flow was slowly growing
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but released spiked in 2021 and 2022. in
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2021 the cash flow per share was
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actually 12.30 which was better than
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2022. the price to cash flow during the
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past decade was the lowest in 2021 at 13
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and a half and the highest in 2020 at
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32.2 with the average being 18.6 based
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on 2022 cash flow per share of 11.8 we
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can compute a conservative fare price
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for lows using the 15x multiple and that
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fair price is 177 dollars using the
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trailing multiple of 18x we get a fair
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price of 212
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the stock trades for around 184 today so
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it's above the 15x multiple but below
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the 18x multiple so let's do a five year
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forecast for lows and see how things
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will shake out the cash from operations
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increased by 11.61 per year during the
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last decade capex rose at 4.84 and the
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diluted shares outstanding shrunk by 5.4
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percent if we use the same growth
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assumptions we get a cash flow per share
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of 28.6 in 2027. at the 15x multiple
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this would imply a fair price of 429
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dollars and a price of 515 dollars at
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the 18x multiple based on today's price
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this would give us a low range
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annualized return of about 18 percent
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and a high range return of about 22
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percent pretty solid rates of return
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even if they prove to be overly
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optimistic i would say the stock is
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fairly valued today and could slide down
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more if the market continues to decline
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in the coming months but from a
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long-term perspective each of these
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three dividend stocks should offer above
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average returns the first two also offer
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pretty attractive dividend yields and
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low's dividend yield of about 1.75 is on
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the lower end i own all three companies
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and i've been buying more best buy and
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hero i've purchased some lows recently
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but i honestly think the first two are
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priced a little more attractively today
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and should therefore prove to be better
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investments i'm curious if you also use
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the price to free cash flow multiple in
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your analysis if you do let me know in
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the comments below and if not what is
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your favorite multiple or valuation
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measure if you enjoyed the video please
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give it a like and subscribe to the
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channel thank you for watching and see
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you next time
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