GFP: Reassessing Benchmarks for Valuation, Quality and Dividends (NASDAQ: PFM)


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Invesco Dividend Achievers ETF (NASDAQ: PFM) has a US-centric dividend growth strategy that revolves around consistent DPS growth.

The last time I covered this DGI wallet was in November 2021, giving it a Hold rating, because the combination of the factors PFM had at the time were insufficient to turn it into a buy. Today I would like to provide a comprehensive overview of the fund’s valuation, quality and dividend credentials to come to a conclusion as to whether this investment vehicle is attractive at current levels after a decline of nearly 11% since the start of the year. Let us dig.

PFM total return
Data by YCharts

Investment Strategy Summary

To recap, PFM’s investment mandate is to track the modified, market-cap-weighted NASDAQ US Broad Dividend Achievers Index, which is replenished annually in March. To qualify for the cohort, a stock in the US benchmark NASDAQ must have a history of regular dividend growth of at least 10 years. Those that meet this criterion while possessing certain liquidity characteristics are selected, with individual stock weightings capped at 4%. More details can be found in the methodology.

Factor #1: Valuation

Since my November 2021 rating, PFM has posted a negative total return of 7.7%, which is better than the nearly 16% drop in the S&P 500. Separately, the portfolio was replenished in March. Overall, since November, 44 stocks (~8.9% weight, including Amgen (AMGN)) have been added and 21 stocks (~2.6% weight, including Valero Energy (VLO)) have been added. been deleted. The soft performance and recalibration of the portfolio together raise the question of whether a change in its valuation profile can be observed upon close inspection.

Since PFM tracks a modified market-cap-weighted index, I must caution value-oriented investors that this vehicle is likely to remain relatively expensive even during market turbulence. That is, even when excesses are squeezed out from all corners of the market, the fund will still be overweight in the mega/large cap echelon, with all the inherent valuation issues.

When it comes to Quant Valuation ratings, we see only 11% allocated to stocks with a B- or better score. Unfortunately, the share has even decreased compared to November 2021, when PFM had over 17% allocation to these names. More than 59% are overvalued as their D- and worse ratings suggest, down from ~52% in November.

Below is the Quant data table with PFM’s top 25 holdings; as you can see, only two stocks in this group have attractive prices, Pfizer (PFE) and Cisco (CSCO).

Top 25 PFM Holdings

Created by author using data from Seeking Alpha and fonds

To add a little more color, I calculated FCF returns for PFM holdings outside of the financial and real estate sectors. For these 191 stocks with a positive FCF, the median return was 4%. Is this acceptable? Generally yes, for a strategy that only targets dividend growth and ignores quality and value indicators. But for better context, the Cambria Shareholder Yield ETF (SYLD), a value-seeking fund I covered recently, has a median FCFE return of around 12.6% for non-financial stocks.

Factor #2: Quality

To quickly assess whether a US-centric portfolio has hidden quality issues, I primarily use Quant Profitability scoring. PFM is no exception today.

In terms of profitability (encompassing a plethora of metrics from net margin to cash flow and total return on capital), there is little to no criticism. Although only 253 of the 374 holdings have a B- rating, they represent nearly 95% of net assets. Mid and small caps only have around 2.6% weight, and mega caps represent 60%. As I constantly repeat in my ETF articles, larger market capitalization means better quality in most cases. The characteristics of PFM once again reinforce this point.

A group of 25 stocks with the highest profitability ratings (A+) are shown below. As my dear readers can see, the quality factor here is inversely correlated to growth and value.

Top 25 GFP actions

Created by author using data from Seeking Alpha and fonds

As an additional screen of dividend quality/sustainability, this time I calculated FCF margins for stocks outside of the financials and real estate sectors and also compared them to net income margins, where applicable. I discovered that only 65 (~38% weight) have an FCF (net CFFO minus capex; acquisitions are not taken into account) greater than or equal to net profit, mainly companies in the healthcare sector (11% weight, like Abbott (ABT )) and IT (~8.4%, like IBM (IBM)).

The scatter plot below compares NI and FCF margins:

NI and FCF margins

Created by author using data from Seeking Alpha and fonds

The reasons why net profit is higher than FCF can vary from a temporary build-up of working capital (fluctuations in working capital eat away at FCF, although this is not necessarily an indication of an impending collapse of a company) to more complicated navigation such as margin compression due to competition or inability to adjust prices to inflation, etc.

But temporary or not, stocks whose FCF/net income ratio is less than 1 present a risk of a drop in the dividend, especially in the event of a recession.

Factor #3: Equity Securities

PFM’s holdings have an unsurprising combination of SA dividend grades for a market-cap-weighted mix focused on dividend consistency and growth.

  • Nearly 82% have a solid security rating (B- and above).
  • A similar amount of net assets is allocated to those with attractive DPS growth stories, 81%.
  • Meanwhile, only 35% sport an attractive performance rating. No chance for a mix ignoring the value factor.
  • Finally, more than 91% have a high consistency score, such as Microsoft (MSFT).

It should be noted that PFM’s dividend compound annual growth rates have improved significantly since my previous article, with a 3-year CAGR increasing from 3.85% to 9.91% and a 5-year CAGR of 4, 82% to 7%. While this is an inspiring development, I believe that alone is not enough to turn the ETF into a buy.

GFP dividend

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The verdict

PFM is built around a relatively simplistic US large cap dividend growth strategy. This vehicle offers a nice option to express a bullish view on the league of kings and aristocrats, while maintaining broad exposure to shorter dividend growth stories for the sake of diversification.

The main drawback is that PFM’s portfolio is full of risky-valued stocks, partly due to its strategy favoring mega-caps and also due to the IT (19.5%) and healthcare sectors. (16.2%) occupying the first two positions. Mainly due to valuation, the fund’s return of 2.1% is only marginally better than the iShares Core S&P 500 ETF (IVV) 1.5%.

The last time PFM offered a yield close to 3% was during the March 2020 market sell-off.

Data by YCharts

That said, its Invesco High Yield Equity Dividend Achievers ETF (PEY) ETF (PEY) might be a better option for income-oriented investors. It is worth mentioning that the PEY portfolio, which focuses on financials and utilities, has fared much better this year than the PFM portfolio, generating a slightly negative total return.

PFM ETF return prices
Data by YCharts

More importantly, when it comes to valuation, the ETF has a clear advantage over PFM as 63% of its net assets are allocated to stocks with at least a B- valuation rating.

There are strong positives on the quality side, but I see no good reason to hold PFM solely for exposure to highly profitable companies. A similar quality blend can be found in IVV, for example. Finally, its spend rate of 0.53% is quite high; this is also the case with PEY. In summary, it is unattractive.


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