In today’s uncertain investing world, I believe it is extremely important to first and foremost focus on safety and quality. Since my primary investment focus is now on dividends and dividend growth, safety to me is primarily about valuation along with dividend coverage and predictability. Most long-term followers of mine know me as Mr. Valuation, and as a result, they also know that I believe that attractive valuation is one of the best risk mitigator’s at the prudent investor’s disposal.
As it relates to dividends and dividend safety, a strong balance sheet (cash on hand), cash flows and a safe payout ratio engender confidence. Although these factors have always been important to me, in today’s uncertain economic environment (thanks to COVID-19), they have taken on an even more important role than ever. Consequently, I have been searching for companies that can provide me confidence that the current dividend will not be cut and should be expected to grow in the future.
As a result, the current market climate has motivated me to step-up my research efforts with a renewed focus on dividends and dividend safety. Not only am I looking for attractive opportunities as I normally do, I am also looking to discover replacements for holdings that might need to be replaced due to exposure to the virus. This renewed strategy is partially related to how difficult it was to find attractive valuations in the long running bull market we were experiencing prior to the recent crisis.
In short, I am seeing more attractively valued stocks of all kinds currently available that I had not seen in quite a long time. Therefore, I would consider it imprudent to not re-examine my holdings. One of the great things about investing in liquid assets like common stocks is that it is analogous to a horse race but with the advantage of being able to change horses anytime you want. However, I believe this strategy should only be applied when extraordinary circumstances require extraordinary actions. In other words, the prudent principal supporting long-term investing should not be easily disregarded.
NetApp: Dividend Safety – Attractive Valuation – High-Yield
When examining high-quality dividend growth stocks currently available, the enterprise data management and storage solutions provider NetApp (NTAP) stood out. As I alluded to in the title, NetApp is on the Dividend Kings Master Valuation/Total Return Potential List. At the Dividend Kings marketplace service on Seeking Alpha, our co-founder Dividend Sensei classifies dividend growth stocks based on dividend safety and overall quality.
NetApp earns a quality score of 10 out of 11, and a dividend safety score of 5 out of 5. Additionally, NetApp’s dividend free cash flow payout ratio stands out at 43% compared to the technology sector industry safe payout ratio guideline of 60%. On the other hand, the company’s debt to capital ratio of 54% is a little high in comparison to the industry safe debt to capital guideline of 40% (see screenshot below). However, as I will elaborate later, I believe this company possesses a fortress balance sheet that significantly overcomes the debt to capital deficiency.
NetApp: Company Overview – Courtesy Zacks Investment Research:
“Headquartered in Sunnyvale, CA and founded in 1992, NetApp Inc. provides enterprise storage and data management software and hardware products and services. The company’s product line comprises two storage platforms – FAS storage platform and E-Series platform.
FAS Storage Platform is based on the NetApp Data ONTAP operating system, which combines storage efficiency, data management and data protection. The FAS product line includes FAS6200, FAS3200 and FAS2000 series. The E-series platform helps in the deployment of Hadoop Big Data infrastructure. The E-series product line comprises EF540 Flash Array and EF550.