The Bottom Line:
- Global Payments (GPN) offers a 1% forward yield, trading at a 45% margin of safety with 60% upside according to Wall Street.
- GPN maintained its dividend during the Great Recession and has a dividend safety score of 70.
- MES International, similar to Hershey, has a 2.6% forward yield and a dividend safety score of 66.
- MES has consistently increased its free cash flow and dividends over the long term, despite some past cuts.
- Both GPN and MES show signs of undervaluation based on dividend yield theory and other key financial metrics.
Global Payments: A High-Potential Stock with a Solid Dividend
A Closer Look at Global Payments’ Financial Performance
Global Payments (GPN) has demonstrated inconsistent free cash flow increases over the past decade, with the metric more than doubling during this period. However, the company lacks the consistency in year-over-year growth that investors typically prefer. Looking ahead, free cash flow per share is expected to double to around $12.40 over the next 12 months, which is a positive sign for the company’s financial health.
In terms of sales growth, Global Payments has shown mixed results, with inconsistent increases over the past five years. However, the company has managed to triple its top line over the last decade, and it has achieved a 7% growth rate on a trailing 12-month basis.
Assessing Global Payments’ Dividend Safety and Valuation
Global Payments’ dividend safety score sits at 70, indicating that a dividend cut is unlikely. The company maintained its dividend during the 2007-2009 Great Recession, neither increasing nor cutting it, and it outperformed the S&P 500 during this period. While Global Payments hasn’t increased its dividend since 2021, it has been paying a dividend for the past 22 years without a reduction.
Dividend yield theory suggests that Global Payments is currently undervalued, as its current yield sits above the 5-year average. Additionally, the company’s forward P/E ratio of 7.7 is below both its 5-year rolling average of 14.8 and the financial sector average of 10.9, further indicating undervaluation.
Margin of Safety and Upside Potential for Global Payments Stock
Based on the valuation model, Global Payments’ intrinsic value is estimated at $167, while its current price is $92. Applying a margin of safety (MOS) level of 10%, the stock would be considered a buy up to $150. At its current price, Global Payments is trading at a significant 45% margin of safety.
Wall Street analysts have set a $147 price target for Global Payments over the next 12 months, indicating a potential upside of 60%. Seeking Alpha has given the stock its highest score of five out of five, making it a strong buy recommendation.
GPN’s Resilience and Dividend Safety During Economic Downturns
Global Payments’ Resilience During Economic Downturns
Global Payments (GPN) has demonstrated its ability to weather economic storms, particularly during the 2007-2009 Great Recession. During this challenging period, the company maintained its dividend, neither increasing nor cutting it, and managed to outperform the S&P 500. Global Payments achieved a 38% return, while the S&P 500 experienced a 55% decline. This resilience showcases the company’s financial strength and its potential to provide stability to investors’ portfolios during market turbulence.
Dividend Growth and Consistency
Although Global Payments hasn’t increased its dividend since 2021, the company has a track record of consistent dividend payments spanning 22 years without any reductions. Over the past five years, Global Payments has increased its dividend by an average of 90% per year, and over the last 20 years, the average annual increase has been 177%. While the company may not have a long streak of consecutive dividend increases, its commitment to maintaining and growing its dividend over the long term is evident.
Undervaluation Signals and Dividend Yield Theory
Several indicators suggest that Global Payments is currently undervalued. According to dividend yield theory, a company is considered undervalued when its current yield sits above the 5-year average. In Global Payments’ case, the current yield is higher than the 5-year average, providing the first signal of undervaluation. Additionally, the company’s forward P/E ratio of 7.7 is below both its 5-year rolling average of 14.8 and the financial sector average of 10.9, further reinforcing the notion that the stock is trading at a discount. However, it’s important to consider these undervaluation signals in conjunction with other factors and not rely on them in isolation.
MES International: A Dividend Stock with Long-Term Growth Potential
MES International’s Dividend Growth and Consistency
MES International has demonstrated impressive dividend growth over the past decade, with double-digit increases in the more recent years. Over the last five years, the company has increased its dividend by an average of 10% per year, while the 20-year average stands at a solid 5% annual increase. Although MES International experienced dividend cuts in 2011 and 2012, it has maintained a consistent record of dividend payments over the past 10 years.
Undervaluation Signals and Free Cash Flow Analysis
MES International exhibits undervaluation signals based on the dividend yield theory. The company’s current yield of 2.57% is higher than its 5-year average of 2.23%, indicating potential undervaluation. Additionally, the forward P/E ratio is below the sector average for consumer staples, further supporting the notion that the stock may be trading at a discount.
The company’s free cash flow has been growing over the long term, more than doubling in recent years. MES International has managed to keep its free cash flow payout below 70% for most of the past decade, with a payout of 61% in 2023 and an expected 57% over the next 12 months. This suggests that the company’s dividend is well-covered by its free cash flow, providing a measure of safety for income-oriented investors.
Comparison to Hershey and Market Performance
MES International shares some similarities with Hershey, another company in the consumer staples sector that has been affected by rising cocoa prices. However, MES International’s dividend safety score of 66 is lower than Hershey’s score of around 80, indicating a slightly higher risk profile.
Over the past year, MES International’s stock has declined by approximately 10%, underperforming the broader market. However, long-term shareholders have enjoyed a 78% return over the past decade, highlighting the company’s ability to generate value for investors over extended periods. Despite the recent challenges, MES International’s strong dividend growth, consistent payments, and attractive valuation metrics make it a compelling option for income-focused investors seeking long-term growth potential.
Analyzing MES’s Free Cash Flow and Dividend History
Examining MES’s Free Cash Flow Trends
MES International has demonstrated impressive free cash flow growth over the long term, with the metric more than doubling in recent years. The company has consistently increased its free cash flow, maintaining double-digit growth rates in the more recent years. This positive trend is a strong indicator of MES’s financial health and its ability to generate cash for dividend payments and other corporate activities.
Looking at the free cash flow payout ratio, MES International has managed to keep it below 70% for most of the past decade. In 2023, the payout ratio sits at 61%, and it is expected to further decrease to 57% over the next 12 months. A payout ratio below 70% suggests that the company’s dividend is well-covered by its free cash flow, providing a measure of safety for income-oriented investors.
Dividend Safety and Growth History
MES International’s dividend safety score stands at 66, indicating that a dividend cut is unlikely. While this score is lower than Hershey’s score of around 80, it still suggests a relatively stable dividend. The company maintained its dividend during the 2007-2009 Great Recession, although it did experience dividend cuts in 2011 and 2012. Despite these setbacks, MES International has maintained a consistent record of dividend payments over the past 10 years.
In terms of dividend growth, MES International has shown impressive increases, particularly in the more recent years. Over the last five years, the company has increased its dividend by an average of 10% per year, while the 20-year average stands at a solid 5% annual increase. This track record of dividend growth demonstrates MES International’s commitment to rewarding shareholders and sharing its success.
Undervaluation Signals and Market Performance
Several indicators suggest that MES International may be undervalued. According to the dividend yield theory, the company’s current yield of 2.57% is higher than its 5-year average of 2.23%, signaling potential undervaluation. Furthermore, MES International’s forward P/E ratio is below the sector average for consumer staples, reinforcing the notion that the stock may be trading at a discount.
Over the past year, MES International’s stock has declined by approximately 10%, underperforming the broader market. However, long-term shareholders have enjoyed a 78% return over the past decade, highlighting the company’s ability to generate value for investors over extended periods. Despite the recent challenges, such as rising cocoa prices, MES International’s strong fundamentals and attractive valuation metrics make it a compelling option for investors seeking a combination of income and long-term growth potential.
Identifying Undervaluation in GPN and MES Using Dividend Yield Theory
Dividend Yield Theory Signals Undervaluation for GPN and MES
Both Global Payments (GPN) and MES International are showing signs of undervaluation according to dividend yield theory. GPN’s current yield sits above its 5-year average, and its forward P/E ratio of 7.7 is below both the 5-year rolling average of 14.8 and the financial sector average of 10.9. Similarly, MES International’s current yield of 2.57% is higher than its 5-year average of 2.23%, and its forward P/E ratio is below the consumer staples sector average. While these undervaluation signals are noteworthy, it’s essential to consider them alongside other factors and not rely on them in isolation.
Free Cash Flow Analysis Supports Dividend Safety
An examination of free cash flow metrics provides insight into the dividend safety of GPN and MES International. GPN has seen its free cash flow more than double over the past decade, although the growth has been inconsistent. The company is expected to double its free cash flow per share to around $12.40 over the next 12 months, which bodes well for its financial health. MES International has also demonstrated impressive free cash flow growth, consistently increasing it and maintaining double-digit growth rates in recent years. Both companies have managed to keep their free cash flow payout ratios below 70% for most of the past decade, suggesting that their dividends are well-covered by free cash flow.
Resilience During Economic Downturns and Dividend Growth History
GPN and MES International have shown resilience during economic downturns, particularly during the 2007-2009 Great Recession. GPN maintained its dividend during this period, outperforming the S&P 500 with a 38% return compared to the index’s 55% decline. The company has been paying a dividend for 22 years without a reduction, although it hasn’t increased its dividend since 2021. MES International also maintained its dividend during the Great Recession, despite experiencing cuts in 2011 and 2012. The company has a consistent record of dividend payments over the past 10 years and has shown impressive dividend growth, with double-digit increases in recent years and a 5% average annual increase over the past 20 years.
