Sunday, March 05, 2017 3:34:02 PM
Beware of "Bubble" in Safe Stocks
WD-40: A Case Study of the Bubble in “Safe” Stocks
One of the biggest risks in the market today comes from investors overpaying for conservative, income-generating companies
Mirror image of 1999 Dot-Com bubble, when investors overpaid for high risk, non-yielding stocks; today is characterized by eye-popping valuations for “safe” assets from bonds to the most conservative sectors of the stock market
WD-40 (NASDAQ: WDFC) is a case study of a seeming “safe” company whose valuation has been bid up so high by investors that it now represents a very risky bet on a perpetual continuation of today’s abnormal valuations
WD-40:
Maker of ubiquitous household product people use to make things stop squeaking; very solid company and found in over 80% of US households; higher penetration than Coca-Cola and Gillette razors; no meaningful competition and healthy returns on capital
Limited growth opportunity and limited reinvestment opportunity, so high payout ratio
Slow growth opportunities can make for great investments when they command strong returns on invested capital to return capital to shareholders in addition to producing modest growth
For instance, from 2001 to 2007, stock price appreciated 6.6%/yr while generating 3.2% returns from dividends (9.8%/yr total return; compared to 5.3% S&P returns)
This is exactly what made dividend yield-focused investing attractive
2001-2007 period began and ended with 10-yr treasury yields of about 5%; using this as proxy for risk-free rate, generally stable attitudes towards low-risk assets
WDFC traded for 15-20x during the period
From 2001 to 2016, dividend generating power is essentially unchanged, demand or competitive landscape has unchanged, growth expectations are no different – but today, investors are paying 34x, or twice as much for each dollar of earnings
Seeing similar willingness with 10-year treasury yield with yield falling from 5% in 07, 3% in 13, and 1.5% today – this is equivalent to PE ratio on the treasury going from 20x in 07, 33x in 13, and 67x today
For context, at the peak of 1999 Dot-Com bubble, S&P was trading at PE ratio of 30x
High appreciation of WDFC has brought dividend yield to just 1.4%
Over the next decade, if you assume dividend growth of 5% per year, dividend contribution to total return will be just 1.7%; and if PE ratio stays constant, total annual return will be just 6.7%
What if PE ratio returns to the 17.5x pre-crisis average? Then assuming the same 5% earnings growth rate, the stock will end the next 10-years at a price of $93, down over 20% from today’s price of $117 – total return will be a terrible -0.6% per year
When investors overpay for these characteristics, they turn a safe company into a risky stock
Idea that WDFC’s PE ratio to be cut in half may sound outrageous; but given how low the dividend yield has gotten today, if the stock price is cut in half today, dividend yield is still only 2.8% (this happens to be the average dividend yield that prevailed in 01-07 time period)
WDFC is not an outlier; quality, dividend paying companies of all sorts are trading at abnormally high valuations
Great summary of Case Study and perils of current market valuation: https://investoralmanac.com/2017/01/04/beware-of-bubble-in-safe-stocks/
Recent WDFC News
- Costco Hikes Membership Fees; ON Semiconductor Stock Drops 3%; WD-40 Soars 13% on Strong Q3 Earnings • IH Market News • 07/11/2024 10:17:26 AM
- Form 10-Q - Quarterly report [Sections 13 or 15(d)] • Edgar (US Regulatory) • 07/10/2024 08:16:44 PM
- Form 8-K - Current report • Edgar (US Regulatory) • 07/10/2024 08:07:55 PM
- WD-40 Company Reports Third Quarter 2024 Financial Results • Business Wire • 07/10/2024 08:05:00 PM
- U.S. Index Futures Climb; Oil Prices Recover • IH Market News • 07/10/2024 10:43:12 AM
- WD-40 Company Announces Planned Director Retirement • Business Wire • 06/18/2024 08:11:00 PM
- WD-40 Company Declares Regular Quarterly Dividend and Schedules Third Quarter 2024 Earnings Conference Call • Business Wire • 06/18/2024 02:27:00 PM
- Form 4 - Statement of changes in beneficial ownership of securities • Edgar (US Regulatory) • 05/10/2024 09:45:58 PM
- Delta Generates US$37 Million Profit in Q1, Google and Intel Unveil Cutting-Edge AI Chips, and More News • IH Market News • 04/10/2024 11:13:48 AM
- WD-40 Company Reports Second Quarter 2024 Financial Results • Business Wire • 04/09/2024 08:05:00 PM
- U.S. Futures Show Mixed Movement, Crude Oil Prices Inch Up • IH Market News • 04/09/2024 10:42:21 AM
- U.S. Futures Dip Ahead of Key Inflation Data and Q1 Earnings Season Kickoff, Oil Prices Decline • IH Market News • 04/08/2024 11:19:03 AM
- WD-40 Company Declares Regular Quarterly Dividend and Schedules Second Quarter 2024 Earnings Conference Call • Business Wire • 03/19/2024 04:08:00 PM
- Form 8-K/A - Current report: [Amend] • Edgar (US Regulatory) • 03/07/2024 09:14:14 PM
- WD-40 Company Acquires Current Brazilian Marketing Distributor • Business Wire • 03/04/2024 03:36:00 PM
- Form 8-K - Current report • Edgar (US Regulatory) • 03/04/2024 03:31:43 PM
- Form SC 13G/A - Statement of acquisition of beneficial ownership by individuals: [Amend] • Edgar (US Regulatory) • 02/12/2024 07:33:01 PM
- Form SC 13G/A - Statement of acquisition of beneficial ownership by individuals: [Amend] • Edgar (US Regulatory) • 02/07/2024 10:26:09 PM
- Form SC 13G/A - Statement of acquisition of beneficial ownership by individuals: [Amend] • Edgar (US Regulatory) • 01/22/2024 08:52:11 PM
- Wall Street Highlights: Tesla Launches Restyled Model 3, VinFast Unveils Pickup Prototype, and More • IH Market News • 01/10/2024 11:21:31 AM
- Form 10-Q - Quarterly report [Sections 13 or 15(d)] • Edgar (US Regulatory) • 01/09/2024 09:18:27 PM
- Form 8-K - Current report • Edgar (US Regulatory) • 01/09/2024 09:13:08 PM
- WD-40 Company Reports First Quarter 2024 Financial Results • Business Wire • 01/09/2024 09:05:00 PM
- Wall Street Highlights: HPE and Juniper Networks in Negotiations, Elliott Invests $1 Billion in Match Group, and More • IH Market News • 01/09/2024 11:12:25 AM
- Form 8-K - Current report • Edgar (US Regulatory) • 12/18/2023 09:02:10 PM
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