3 Buy And Hold Forever Blue-Chips For A Rich Retirement

3 Buy And Hold Forever Blue-Chips For A Rich Retirement

(Source: imgflip)

There’s nothing I love more than helping prudent long-term investors achieve their financial goals, such as a prosperous retirement.



That’s not always easy when the stock market is notorious for its high short-term volatility.

Since 1980 the average intra-year peak decline in the S&P 500 has been 13.8%, basically equal to the average correction since 1945.

(Source: Guggenheim Partners, Ned Davis Research)

Of course, volatility isn’t actually the same as fundamental risk.

And properly harnessed volatility can be the greatest ally of the prudent long-term investor.

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As long as you own a diversified and prudently risk-managed portfolio, with proper cash, bond, and stock allocations, no matter what the economy or stock market does, volatility won’t cost you permanent losses.

Volatility… will offer the true investor more chance to make intelligent investment moves. He can be hurt by such volatility only if he is forced, by either financial or psychological pressures, to sell at untoward times.” – Warren Buffett (emphasis added)

Today the S&P 500 is in a pullback, down four of the last five weeks, due to rising concerns over stimulus gridlock, political uncertainty, and fears of a potential second wave in the winter, and a 25% probability of a double-dip recession.

(Source: Jeff Miller)

A recent survey of US CEOs revealed that 23% of them expected a double-dip recession in 2021. A recent survey of economists also put the odds of a double-dip recession, which JPMorgan’s (NYSE:JPM) economists estimate would cause a 22% decline in the S&P 500, at 25%.

However, I can’t stress enough how short-term volatility isn’t true risk, at least not to those with a properly constructed sleep well at night retirement portfolio.

Volatility is not a measure of risk… Risk comes from not knowing what you’re doing……if you understand the economics of the business in which you are engaged, and you know the people with whom you’re doing business, and you know the price you pay is sensible, you don’t run any real risk.” – Warren Buffett

Today the broader market is still highly overvalued, even with stocks pulling back 6.5% in the past month and earnings consensus expectations rising.

S&P 500 Valuation Profile

Year EPS Consensus YOY Growth Forward PE Blended PE Overvaluation (Forward PE) Overvaluation (Blended PE)
2020 $130.14 -20% 25.7 24.4 57% 44%
2021 $166.48 28% 20.1 22.9 22% 35%
2022 $190.41 14% 17.6 18.8 7% 11%
12-month forward EPS 12 Month Forward PE Historical Overvaluation PEG 20-Year Average PEG S&P 500 Dividend Yield 25-Year Average Dividend Yield
$155.98 21.5 30% 2.53 2.35 1.78% 2.06%

(Sources: Dividend Kings S&P 500 Valuation & Total Return Potential Tool, F.A.S.T. Graphs, FactSet Research, Brian Gilmartin, Reuters/Refinitiv/IBES/Lipper Financial, JPMorgan, Ed Yardeni, Multipl.com)

I define a potential bubble as when stocks or companies are 33+% historically overvalued, the level at which corrections and bear markets often historically begin.

S&P 500 Total Return Potential Profile

Year Upside Potential By End of That Year Consensus CAGR Return Potential By End of That Year

Probability-Weighted Return (CAGR)

2020 -31.5% -78.1% -58.9%
2021 -12.1% -9.8% -7.4%
2022 3.3% 1.5% 1.1%
2025 26.7% 4.8% 3.6%

(Sources: Dividend Kings S&P 500 Valuation & Total Return Potential Tool

Today the market’s probability-weighted expected returns are about 55% less than the market’s historical norm. They are not horrible unless you think 13.6% CAGR returns like we’ve seen over the past decade are normal.

Of course, some analysts, such as RIA Chief Strategist Lance Roberts, think stock returns over the long term, the next 10 and 20 years, will be far lower than my 4% to 6% CAGR estimates.

(Source: Lance Roberts)

RIA expects just 2% to 3% CAGR total returns from stocks over the next two decades.

That could be a retirement killer for many, basically matching the average returns realized by average investors, due to horrible market timing.

Moody’s is even more pessimistic, recently releasing its new long-term economic model that predicts a lost decade for stocks under its base case scenario.

Long-term interest rates will steadily increase from 2021 onward, with the 10-year rate reaching 4.1% by 2030. Unless there is significant compression of the equity risk premium, the fundamentals will then weigh on values over the decade.” – Moody’s (emphasis added)

What can prudent income investors do to avoid such potentially disastrous long-term returns?

Of the nearly 3,664 listed stocks with full-year 2020 returns, the median return (e.g. the 1832nd ranked return) is -14.75%.” – Ploutos

(Source: Ploutos) Data as of September 30th

At the end of September, there were 1,600 US-listed stocks currently in a bear market, 44% of the publicly traded companies in America.

This is the ultimate proof of my fellow Dividend King co-founder Chuck Carnevale‘s famous mantra “it’s a market of stocks, not a stock market.”

Of course, many of those companies are low quality, fundamentally weak, poorly run, and have deteriorating fundamentals. In other words, value/yield traps to avoid like the plague.

But the point is that high-quality blue-chips, SWANs, and Super SWANs are ALWAYS available, whatever your needs or risk tolerances.

So in this article, I want to highlight a powerful tool Dividend Kings just introduced to help our members find the most reasonable and prudent long-term blue-chip investing ideas for their specific needs, in any and all market conditions.

Wonderful Dividend Blue-Chips Are Always On Sale: Here’s How To Find Them

Using the Dividend Kings Automated Investment Decision Tool, I can in seconds find the best blue-chips for any given need or risk profile.

That’s how I came up with 3M (MMM), Prudential (PRU), and Amazon (AMZN), and three buy and hold long-term investment ideas that could be just what you need to fund a rich retirement.

Combining MMM, PRU, and AMZN creates a potentially exceptional super stock with the following fundamentals.

  • a 3.5% yield vs. 4% most “high-yield” mutual funds
  • 16.5% CAGR long-term growth consensus vs. 6.4% CAGR S&P 500 and 6.9% CAGR Dividend Aristocrats
  • 7.6% weighted long-term dividend growth forecast vs. 6.9% dividend aristocrats & 6.4% S&P 500
  • 4.7/5 very safe dividends (about 1.5% risk of a cut in this recession, 0.5% in a normal recession) vs. 4.5/5 average dividend aristocrat
  • 10.0/11 SWAN quality (vs. 9.7 average dividend aristocrat)
  • A+ stable credit rating (0.6% 30-year bankruptcy risk)
  • that’s 33% undervalued (potentially very strong buy)

Expected Long-Term Returns From This Super Stock

  • 5-year total return potential: 3.5% yield + 16.9% CAGR long-term growth + 8.3% CAGR valuation boost = 28.7% CAGR vs. 4.8% S&P 500
  • Risk-Adjusted Expected Return: 21.4% vs. 3.5% CAGR S&P 500 (5.9X market’s expected return)

I’m not pulling those future return estimates out of thin air, but using the most accurate long-term forecasting model ever devised, which is used by almost all asset managers.

  • BlackRock
  • Vanguard
  • Brookfield Asset Management (BAM)
  • Oaktree Capital
  • Ritholtz Wealth Management
  • Chuck Carnevale’s EDMP (earnings determine market price)
  • all the Dividend Kings

Investment Decision Score On MMM + PRU + AMZN

Goal MMM + PRU + AMZN Why Score
Valuation Potential Very Strong Buy 33% undervalued 4/4
Preservation Of Capital Excellent Average A+ stable credit rating, 0.6% long-term bankruptcy risk 7/7
Return Of Capital Exceptional 21.4% of capital returned over the next 5 year via dividends vs. 10.5% S&P 500 10/10
Return On Capital Exceptional 21.4% RAER vs. 3.6% S&P 500 10/10
Relative Investment Score 100%
Letter Grade A+ exceptional
S&P 73% = C (market-average)

(Source: Dividend Kings Manual Investment Decision Tool)

As I’ll show in this next video, the combination of these three SWAN companies is potentially the cure for your retirement income and total return needs when we could be facing a disappointment or even “lost decade” for the S&P 500 in the next 10 years.

Why 3M, Prudential and Amazon Might Be Just What Your SWAN Retirement Portfolio Needs To Achieve Your Financial Goals In The Next 10 Years

Now let’s take a closer look at each of these companies, which are not just 100% A+ potentially exceptional long-term investment ideas but are also owned by the Dividend Kings and myself in our portfolios.

My conviction about these buy and hold forever blue-chips is so great, that I also have limit orders set to potentially buy them at opportunistic prices should the market fall in the coming weeks or months.

Putting My Money Where My Mouth Is With These Three Buy and Hold Forever Blue-Chips

Deeper Looks Into These Potentially Exceptional Buy and Hold Investing Opportunities

3M: A 10/11 SWAN Dividend King With One Of The Highest Yields In The Last 25 Years

Additional Research

Business Summary

3M is a multinational conglomerate that has operated since 1902 when it was known as Minnesota Mining and Manufacturing.

The company is well-known for its research and development laboratory, and the firm leverages its science and technology across multiple product categories. As of 2019, 3M is organized into four business segments: safety and industrial, transportation and electronics, healthcare, and consumer.

About 60% of the company’s revenue comes from outside the United States, with the safety and industrial segment constituting most of the firm’s net sales. Many of the company’s 55,000-plus products touch and concern a variety of consumers and end markets.” – Morningstar

Business Update

After reviewing wide-moat-rated 3M’s latest second-quarter 2020 results, we slightly lower our fair value estimate by about 2% to $166 per share (from $170 previously).

Nothing materially changes in our long-term outlook. That said, a couple of items caused us to adjust our near-term outlook. We slightly lowered our top-line assumptions to $31.6 billion from $32.0 billion. While the tweaks were broad-based, one item we call out is oral care, which has been hit hard given coronavirus’ impact on elective procedures. Clearly, given pandemic-related closures, global dental offices were frequently closed during the second quarter and have yet to fully recover based on some informal channel checks in the United States.

That said, oral care has never been a big part of our thesis, and it’s possible this is a business division that could eventually be spun out (we suspect this is a price competitive business given the number of portfolio sales from other competitors). Portfolio reviews are a part of 3M’s strategy, and the company has acted to sell most of the drug delivery and other business divisions over the past year.

Margins, however, were a bigger driver of our fair value decrease. Specifically, we did lower our healthcare segment margins materially by approximately 500-basis points for full-year 2020, though admittedly we were slow-footed to do so last quarter. We were clearly way off in our original assessment. While we anticipated the dilutive effects of the Acelity acquisition, which was baked into our forecast, we did not fully appreciate the effect of loss volumes on margins in that segment (management pointed out that net-net, the mix had very little to do with the margin headwinds). Health care margins fell a resounding 10 percentage points year over year to 16.8% on a reported basis. About a third of that quantity was related to the Acelity acquisition, with the remaining two related to a decline in organic sales.” – Morningstar (emphasis added)

3M Consensus Short-Term Consensus Growth Forecast

Metric 2020 consensus growth 2021 consensus growth

2022 consensus growth

Dividend 2% (official) 5% 0%
EPS -7% 10% 9%
Owner Earnings (Buffett smoothed out FCF) -2% 14% 32%
Operating Cash Flow -9% 7% 9%
Free cash flow -26% 33% 24%
EBITDA -2% 4% 7%
EBIT (pre-tax profit) -7% 9% 9%

(Source: F.A.S.T. Graphs, FactSet Research)

After a modestly poor 2020 (S&P 500 EPS consensus is -18%), 3M is expected to return to far stronger growth in the coming two years.

The one penny decrease in the 2022 dividend that is the current analyst consensus is not one I actually expect to occur since 3M will achieve a 63-year dividend growth streak in 2021 and its FCF payout ratio is expected to be 55% in 2022, below the 60% non-recessionary safety guideline.

How accurate are the 18 analysts who cover 3M at forecasting its growth rates over time?

3M Analyst Scorecard

Over the last 20 years, analysts have missed 3M’s two-year growth forecasts outside of a reasonable margin of error just 9% of the time.

Over the past 11 years, those margins of error have been 30% to the downside and 20% to the upside.

  • 5.6% to 6.4% CAGR long-term analyst growth consensus range
  • the margin of error adjusted long-term analyst consensus growth range: 4% to 8% CAGR
  • management long-term guidance (pre-pandemic): 8% to 11% CAGR

(Source: F.A.S.T. Graphs, FactSet Research)

4% to 8% CAGR is well within the company’s historical growth rates outside of economic and industrial recessions.

3M Market-Determined Historical Fair Value

Metric Historical Fair Value Multiple (19 Years) 2020 2021 2022
5-Year Average Yield 2.68% $219 $230 $230
13-Year Median Yield 2.47% $238 $250 $249
25-year Average Yield 2.51% $234 $246 $245
Earnings 19.0 $156 $172 $188
Owner Earnings (Buffett smoothed out FCF) 17.6 $164 $187 $246
Operating Cash Flow 15.0 $165 $176 $192
Free Cash Flow 19.6 $133 $178 $221
EBITDA 10.9 $157 $164 $175
EBIT (pre-tax profit) 13.2 $147 $161 $176
Average $179 $196 $214
Current Price $160.36

Discount To Fair Value

11% 18% 25%
Upside To Fair Value 12% 22% 33%

Annualized Total Return Potential

57% 17% 14%

(Source: F.A.S.T. Graphs, FactSet Research) MMM’s average 2021 fair value is currently $192 because the 5% analyst consensus 2021 dividend hike isn’t expected until February 2021

3M is currently about 17% undervalued for 2021’s consensus estimates, making it a potentially good buy for any safe high-yield seeking investors who are comfortable with its risk profile.

3M Fundamentals

  • quality score: 10/11 SWAN
  • dividend safety score: 4/5 above average (2% to 4% dividend cut risk in this recession, 1% in a normal recession)
  • Max portfolio risk cap recommendation: 7% or less
  • yield: 3.7% vs. 2.5% 13-year median
  • current price: $160.36
  • Potential good buy price: $173 or less
  • 2021 average historical fair value: $192 ($161 to $238 range, Morningstar 2020 fair value estimate $166, uncertainty “medium,” I also consider the uncertainty medium based on the narrow 40% fair value range)
  • approximate discount to fair value: 17%
  • DK rating: potentially good buy
  • historical fair value: 18 to 20 PE
  • current blended PE: 19.1 (17.7X 2021 consensus)
  • Earnings yield (Chuck’s “essence of valuation”): 5.2% vs. 6.7% recommended
  • Growth priced into stock: about 5.3% CAGR according to Graham/Dodd fair value formula
  • Growth priced in according to historical PEG ratio: 6.4% CAGR
  • long-term growth consensus: 6.4% CAGR
  • the margin of error adjusted analyst long-term consensus growth forecast: 4% to 8% CAGR
  • 5-year total return potential: 8% to 13% CAGR (analyst consensus 11.5% CAGR)
  • PEG ratio: 2.76 vs. 3.00 historical vs. 2.53 S&P 500 vs. 2.35 historical S&P 500

3M Investment Decision Score

I never recommend a company, much less put my own money at risk without first knowing exactly how prudent a potential investment it is relative to the S&P 500, most people’s default alternative.

The investment decision score is based on valuation and the three core principles of all successful long-term investors.

Goal Scores Scale Interpretation
Valuation 4 Good Buy MMM’s 17% discount to fair value earns it a 4-of-4 score for valuation timeliness
Preservation of Capital 7 Excellent MMM’s S&P credit rating, A+, implies a 0.60% chance of bankruptcy risk and earns it a 7-of-7 score for Preservation of Capital
Return of Capital 10 Exceptional MMM’s 21.9% vs. the S&P’s 10.59% 5-year potential for return via dividends earns it a 10-of-10 Return of Capital score
Return on Capital 10 Exceptional MMM’s 7.9% vs. the S&P’s 3.6% 5-year risk-adjusted expected returns earns it a 10-of-10 Return on Capital score))
Total Score 31 Max score of 31
Investment Score 100%
Investment Letter Grade A+ Exceptional
S&P’s Score 73/100 = C(Market Average)

(Source: Dividend Kings Automated Investment Decision Tool)

3M is one of the most reasonable and prudent long-term high-yield blue-chip investments conservative income investors can make regardless of whether or not Moody’s is right about a lost decade for stocks.

Deeper Look Videos On 3M

Quality & Safety Analysis: Why 3M Is A 10/11 SWAN Quality Dividend King

Valuation, Future Return Potential & Investment Decision Score: Why 3M Is One Of The Most Reasonable And Prudent Blue-Chips You Can Buy Right Now

Historical Return, Volatility & Future Risk Analysis

Prudential Additional Research

Prudential Business Summary

Prudential Financial is a large, diversified insurance company offering annuities, life insurance, retirement plan services, and asset management products. While it operates in a number of countries, the vast majority of revenue is generated in the United States and Japan. Prudential is the second-largest life insurance company in the U.S…

Prudential Financial, like other life insurers, is operationally leveraged to capital markets. Low interest rates have been an ongoing headwind in recent years. It’s unlikely that interest rates return to pre-financial crisis levels and thus we expect Prudential to continue to face this headwind for the foreseeable future.

Prudential generates over half of its operating income from outside the United States, but the bulk of this is from Japan, which faces even steeper headwinds than the U.S. in terms of interest rates and market growth. To this end, management is focused on growing its international book from growing markets such as Latin America.

Given the headwinds facing life insurance companies, managing expenses is unsurprisingly a big focus for life insurers and Prudential is no exception. During its 2019 Investor Day, management outlined a $500 million in run-rate cost savings by 2022 through a combination of process, talent, and technology changes. In addition, Prudential has made technology investments, most notably acquiring AssuranceIQ in October 2019.

AssuranceIQ is a technology platform that sells a variety of insurance products directly to the consumer. We think the deal has strategic merit as it expands Prudential’s direct-to-consumer reach to less affluent customers and AssuranceIQ’s fee-based revenue has limited exposure to capital markets. At an upfront cost of $2.3 billion (with a $1.15 billion earnout), AssuranceIQ was not cheap but we expect modest earnings accretion in 2021 and beyond.

One bright spot for Prudential has been its investment management (PGIM) business that has benefited from market appreciation. Returns on equity and operating margins in this segment are higher than the firm overall. In addition, performance on Prudential’s funds have been good, as measured by the number of funds outperforming their benchmarks. That said, PGIM only accounts for just over 10% of its operating profit and thus the life insurance business dominates Prudential’s overall results.

Overall, Prudential’s GAAP return on equity has been in the high single digits, and we expect this to continue over the next five years in our base forecast.” – Morningstar

Prudential Business Update

Prudential Financial reported a decent quarter, but lower interest rates will undoubtedly continue to weigh on the firm. Adjusted earnings per share of $1.85 beat the CapIQ consensus estimate of $1.72. Looking ahead, management expects adjusted EPS of $2.63 in the third quarter, which would be down about 18% year over year. Earnings per share in the second quarter saw a $0.66 drag from assumption updates. We will be maintaining our no-moat rating and $78 fair value estimate.

Prudential’s business performance was mixed. In the U.S., adjusted operating income was $455 million, a decrease of $420 million from the year-ago period. Of the $420 million decrease, $182 million was from the firm’s annual review and update of assumptions, with the remainder due to lower net investment spreads and lower net fee income. On the positive side, longevity came in better versus previous quarter expectations. Internationally, the firms saw an adjusted operating income of $693 million, down $97 million as unfavorable assumption changes more than offset growth. The firm’s investment management unit, PGIM, was the bright spot of the quarter with adjusted operating income increasing 23% to $324 million. Assets were up 9% and the firms saw positive third-party net inflows. Given the interest rate environment, we expect Prudential to reprice products more quickly and focus on less interest rate sensitive products.

Given the operating environment, we expect Prudential to focus on controlling expenses. Management is on track to achieve its $140 million in cost savings goal for 2020 and we expect further efficiency initiatives will be emphasized beyond 2020.” – Morningstar

Prudential Consensus Short-Term Consensus Growth Forecast

Metric 2020 Growth Consensus 2021 Growth Consensus

2022 Growth Consensus

Dividend 10% (official) 5% 5%
EPS -20% 23% 14%
EBITDA 6% 18% 7%
EBIT (pre-tax profit) 7% 20% 20%

(Source: F.A.S.T. Graphs, FactSet Research)

Prudential, even with low-interest rates expected to persist for the short term, is expected to grow at a very robust pace, certainly not the negative rates that would justify its current valuation, which is at a 10-year low.

Prudential Analyst Scorecard

Outside of the Financial Crisis, which I verify every week in the Dividend Kings Recession updates is extremely unlikely to reoccur, analysts are very accurate at forecasting PRU’s growth rates.

The analyst margin of error is 20% to the downside and 15% to the upside.

  • long-term analyst consensus growth range: 3.8% to 9.0% CAGR
  • the margin of error adjusted analyst consensus growth range: 3% to 11% CAGR

Again, PRU is priced for negative growth, which the 12 analysts who collectively know this business better than anyone but management itself, consider highly unlikely. Management, bond investors, and rating agencies also don’t expect negative growth from Prudential.

Prudential Historical Market-Determined Fair Value

Metric Historical Fair Value (6 years) 2020 2021 2022
5-Year Average Yield 3.69% $119 $125 $131
13-Year Median Yield 2.77% $159 $167 $175
25- Year Average Yield 2.90% $152 $159 $167
Earnings 9.3 $87 $107 $122
EBITDA 7.3 $104 $122 $130
EBIT 7.6 $100 $121 $145
Average $120 $134 $145
Current Price $63.88

Discount To Fair Value

47% 52% 56%
Upside To Fair Value 88% 109% 127%

Annualized Total Return Potential

1149% 81% 44%

(Source: F.A.S.T. Graphs, FactSet Research) Note PRU’s 2021 average fair value is $130 until a 5% dividend hike that is expected in February 2021

Let me be clear that anyone buying Prudential for the long term, as many prudent income investors are doing right now, should not care about the stock performance of the next year or so.

What I care about is that Prudential’s dividend is very safe, its balance sheet is a fortress, and analysts, management, and rating agencies expect strong historical growth in the future.

In other words, PRU, whose 2022 consensus fundamentals are worth about $145, offers about 127% upside to fair value in 2022, a 44% CAGR total return potential that is on par with the greatest investors in history.

Prudential Fundamentals

  • quality score: 9/11 blue-chip
  • dividend safety score: 5/5 very safe (1% to 2% dividend cut risk in this recession, 0.5% in a normal recession)
  • Max portfolio risk cap recommendation: 7% or less
  • yield: 6.9% vs. 2.77% 13-year median (low rate/high regulatory environment)
  • current price: $63.88
  • Potential good buy price: $110 or less
  • 2021 average historical fair value: $130 ($107 to $159 range, Morningstar 2020 fair value estimate $78, uncertainty “high,” I consider it medium based on the 49% fair value range)
  • approximate discount to fair value: 51%
  • DK rating: potentially ultra-value/anti-bubble/Buffett style “fat pitch” buy
  • historical fair value: 9 to 9.5 PE
  • current blended PE: 6.4 (5.6X 2021 consensus)
  • Earnings yield (Chuck’s “essence of valuation”): 15.6% vs. 6.7% recommended
  • Growth priced into stock: about -1.0% CAGR according to Graham/Dodd fair value formula
  • Growth priced in according to historical PEG ratio: 4.2% CAGR
  • long-term growth consensus: 8.3% CAGR
  • the margin of error adjusted analyst long-term consensus growth forecast: 3% to 11% CAGR
  • 5-year total return potential: 18% to 25% CAGR (analyst consensus 22.1% CAGR)
  • PEG ratio: 0.67 vs. 1.51 historical vs. 2.54 S&P 500 vs. 2.35 historical S&P 500

If PRU does grow at 7% to 9% CAGR over time, as most analysts expect, and how fast it’s grown during the last decade when 10-year yields averaged 2.0%, then anyone buying it today will be locking in 14% to 16% CAGR long-term total returns.

(Source: NAREIT)

Or to put another way, if Prudential grows as the experts who know its business model best expect it to, it is 91% likely to crush the S&P 500 and Nasdaq over the coming 10+ years.

(Source: imgflip)

Prudential Investment Decision Score

Goal Scores Scale Interpretation
Valuation 4 Ultra-Value Buy PRU’s 51% discount to fair value earns it a 4-of-4 score for valuation timeliness
Preservation of Capital 7 Excellent PRU’s S&P credit rating, A, implies a 0.66% chance of bankruptcy risk and earns it a 7-of-7 score for Preservation of Capital
Return of Capital 10 Exceptional PRU’s 43.0% vs. the S&P’s 10.5% 5-year potential for return via dividends earns it a 10-of-10 Return of Capital score
Return on Capital 10 Exceptional PRU’s 16.5% vs. the S&P’s 3.6% 5-year risk-adjusted expected returns earns it a 10-of-10 Return on Capital score))
Total Score 31 Max score of 31
Investment Score 100%
Investment Letter Grade A+ Exceptional
S&P’s Score 73/100 = C(Market Average)

(Source: Dividend Kings Automated Investment Decision Tool)

Prudential trading at half its average 2021 historical fair value is one of the best investments any investor could potentially make today.

Whether you’re looking for safe yield, fast growth, a sky-high margin of safety, or just market-smashing long-term total return potential, Prudential has all these goals covered, in spades.

Deeper Look Videos On Prudential

Quality & Safety Analysis: Why Prudential Is A 9/11 Quality Blue-Chip

Prudential Valuation, Future Return Potential & Investment Decision Score: Why Prudential Is A Classic Buffett Style “Fat Pitch”

Prudential Historical Return, Volatility & Future Risk Analysis: One Of The Most Volatile Stocks On Wall Street So Use Prudent Position Sizing & Sound Risk Management

Amazon Additional Research

Business Summary

Amazon is among the world’s highest-grossing online retailers, with $281 billion in net sales and approximately $365 billion in estimated physical/digital gross merchandise volume (GMV) in 2019. Online product and digital media sales accounted for 50% of net revenue in 2019, followed by commissions, related fulfillment and shipping fees, and other third-party seller services (19%), Amazon Web Services’ cloud computing, storage, database, and other offerings (13%), Prime membership fees and other subscription-based services (7%), product sales at Whole Foods and other physical store retail formats (6%), and advertising services and co-branded credit cards (5%). International segments constituted 27% of Amazon’s non-AWS sales in 2019, led by Germany, the United Kingdom, and Japan.” – Morningstar

Business Update

The announcement of Amazon Halo–a healthcare monitoring subscription service–won’t immediately move the needle on our valuation assumptions, but it joins Haven Healthcare (the healthcare joint-venture between Amazon, Berkshire Hathaway, and J.P Morgan) and PillPack as another pillar to wide-moat Amazon’s broader healthcare aspirations while giving us greater conviction in our longer-term cash flow assumptions.

We see three primary benefits to Amazon Halo. First, the service–which will cost $99 upfront and $4 per month after six months and includes a wearable Amazon Halo Band–unlocks a new service to drive subscription revenue per Prime member higher, which is key to our longer-term assumptions. We estimate that the average Prime member spent more than $140 in subscription fees the past 12 months, and this service (coupled with other content services like Amazon Music, Audible, and Amazon Channels) could help take this metric north of $200 over time and bolster margins. Second, the service opens the door to new third-party monetization opportunities. While we don’t have the specifics on economics between initial partnerships with WW, John Hancock Vitality, and Cerner, we see the underpinnings of an Amazon Halo third-party healthcare service marketplace, which should be margin-accretive (much like Amazon’s third-party seller marketplace). In addition, we believe the service could also potentially allow AWS to upsell its current users (including Cerner) or target new medical, dental, and veterinary Amazon Business customers. Third, we would be surprised if PillPack, Haven, and other services aren’t integrated into the Halo platform, which could allow the company to develop new Halo pricing tiers and subscription offerings.

There is no change to our $3,500 fair value estimate–which assumes 22% average annual revenue growth and operating margins approaching 10% over the next five years–and we see shares as slightly undervalued.” – Morningstar

Amazon Short-Term Growth Consensus

Metric 2020 Growth Consensus 2021 Growth Consensus

2022 Growth Consensus

EPS 37% 34% 43%
Owner Earnings 121% -4% NA
Operating Cash Flow 39% 19% 32%
Free Cash Flow 21% 47% 38%
EBITDA 73% 25% 26%
EBIT 38% 39% 41%

(Source: F.A.S.T. Graphs, FactSet Research)

Amazon is one of the greatest growth stories of our age, and analysts expect that to continue in 2020, 2021, and 2022. Impressively, consensus estimates have been rising robustly in recent weeks, steadily increasing intrinsic value estimates for the company.

Amazon Analyst Scorecard

Despite a highly complex business and a famous penchant from Bezos of reinvesting most profits into growing the business, analysts are highly accurate at forecasting Amazon’s growth rates.

Over the last 20 years, analysts have missed operating cash flow growth estimates just 20% of the time within reasonable margins of error.

  • analyst long-term growth consensus range: 35.2% to 38.4% CAGR
  • the margin of error adjusted long-term analyst growth consensus range: 26% to 50% CAGR

(Source: F.A.S.T. Graphs, FactSet Research)

Amazon’s historical growth rates over the past 20 years have been spectacular and highly consistent, indicating the analyst growth consensus of 36.0% CAGR is realistic, and so is the margin of error-adjusted 26% to 50% CAGR consensus range.

Amazon Historical Market-Determined Fair Value

Metric Historical Fair Value (18-year timeframe) 2020 2021 2022
Earnings 137.0 $4,331 $5,824 $8,319
Owner Earnings ( Buffett Smoothed Out FCF) 28.0 $4,706 $4,499 NA
Operating Cash Flow 25.1 $2,663 $3,167 $4,181
Free Cash Flow 47.1 $2,442 $3,590 $4,970
EBITDA 37.6 $3,940 $4,944 $6,223
EBIT (Pre-tax profit) 85.2 $3,433 $4,687 $6,481
Average $3,586 $4,452 $6,035
Current Price $3,125.00

Discount To Fair Value

13% 30% 48%
Upside To Fair Value 15% 42% 93%

Consensus Annualized Total Return Potential

75% 33% 34%

(Source: F.A.S.T. Graphs, FactSet Research)

If analysts are right and AMZN grows at 36% CAGR over time then there is no reason to believe its historical multiples (generated during a period of 35% CAGR growth) would compress.

Based on the historical multiples on all relevant fundamentals that billions of investors have paid for Amazon over the past 20 years, the company’s approximate fair value for 2020 and 2021 appears to be about $3,586 and $4,452, respectively.

This means that Amazon could generate about 33% CAGR total returns through the end of 2021 if it grows as expected and not be overvalued.

Strong returns from Amazon, which makes up approximately 4% of the S&P 500, is one reason I am not as pessimistic as Moody’s about the returns of the S&P 500 over the next decade. My version of the Gordon Dividend Growth Model estimates about 5% CAGR total returns for the S&P 500 over the next decade, which is far below the 7% to 9% CAGR normal level, but certainly better than the -1.2% CAGR that Moody’s base-case economic forecast expects.

Amazon Fundamentals

  • quality score: 11/11 SWAN quality
  • balance safety score: 5/5 very safe, AA- stable credit rating = 0.55% 30-year bankruptcy risk
  • Max portfolio risk cap recommendation: 7% or less
  • yield: NA, not a dividend stock
  • current price: $3,125
  • Potential good buy price: $4,229 or less
  • 2021 average historical fair value: $4,452 ($3,167 to $5,824 range, Morningstar estimate $3,500 (2020 estimate), uncertainty “high,” I concur based on the 60% fair value range)
  • approximate discount to fair value: 30%
  • DK rating: potentially very strong buy (based on 2021 consensus estimates)
  • historical fair value: 24 to 26X operating cash flow
  • current blended P/OCF: 32.2 (24.8X 2021 consensus)
  • cash flow yield (Chuck’s “essence of valuation”): 3.1% vs. 6.7% recommended
  • Growth priced into stock: about 11.9% CAGR according to Graham/Dodd fair value formula
  • Growth priced in according to historical PEG ratio: 29.9% CAGR
  • long-term growth consensus: 36.0% CAGR
  • the margin of error adjusted analyst long-term consensus growth forecast: 26% to 50% CAGR
  • 5-year total return potential: 19% to 35% CAGR (analyst consensus 24.8% CAGR)
  • PEG ratio: 0.69 vs. 0.83 historical vs. 2.53 S&P 500 vs. 2.35 historical S&P 500

Amazon Investment Decision Score

Goal Scores Scale Interpretation
Valuation 4 Very Strong Buy AMZN’s 30% discount to fair value earns it a 4-of-4 score for valuation timeliness
Preservation of Capital 7 Excellent AMZN’s S&P credit rating, AA-, implies a 0.55% chance of bankruptcy risk and earns it a 7-of-7 score for Preservation of Capital
Return of Capital NA #N/A AMZN’s 0% vs. the S&P’s 10.59% 5-year potential for return via dividends earns it a NA-of-10 Return of Capital score
Return on Capital 10 Exceptional AMZN’s 18.5% vs. the S&P’s 3.6% 5-year risk-adjusted expected returns earns it a 10-of-10 Return on Capital score))
Total Score 21 Max score of 21
Investment Score 100%
Investment Letter Grade A+ Exceptional
S&P’s Score 73/100 = C(Market Average)

(Source: Dividend Kings Automated Investment Decision Tool)

Amazon is the best hyper-growth blue-chip conservative investors can buy right now, combining Super SWAN quality with a fortress balance sheet, brilliant management, attractive valuation, and the fastest long-term growth consensus on the 470 company Dividend Kings Master List.

Deeper Look Videos On Amazon

Amazon Quality & Safety Analysis: As Close To A Perfect Hyper-Growth Company As Exists On Wall Street

Amazon Valuation, Future Return Potential & Investment Decision Score: The Single Best Hyper-Growth Blue-Chip You Can Buy Today

Amazon Historical Return, Volatility & Future Risk Analysis: Higher Volatility + Hyper-Growth + Supreme Quality = Retirement Making Risk-Adjusted Expected Long-Term Returns

Bottom Line: 3M, Prudential and Amazon Are 3 Buy and Hold Forever Blue-Chips That Can Help You Achieve A Rich Retirement

I can’t tell you what the stock market will do over the short term, no one can. In the short term, the market literally is a casino, with 92% of 12-month returns a function of luck, sentiment, and momentum, not fundamentals or valuations.

(Source: imgflip)

But over the long term, the stock market is also like a casino, where probability, statistics, and math ensure just one possible outcome.

The same is true for individual companies, where fundamentals drive 91% of long-term returns over 10+ year periods.

(Source: imgflip)

This is why I am so fanatical about quality first and prudent valuation and risk management always.

Volatility can only hurt you if your risk management is weak and not suitable for your personal risk profile. If your risk management is rock solid, and the companies you own high-quality, and your dividends safe, then you can and should ignore short-term market volatility as we’ve seen this year.

(Source: imgflip)

3M, Prudential, and Amazon represent three buy and hold forever blue-chips that are all trading at attractive to very attractive valuations based on their 2021 consensus fundamental estimates.

Together these three companies offer a 3.5% very safe yield, double that of the S&P 500.

They also offer 17% CAGR long-term growth consensus estimates, about 3X that of the S&P 500.

They offer 7.6% CAGR long-term dividend growth forecasts, superior to both the S&P 500 and the dividend aristocrats.

They are collectively about 33% undervalued, vs. a 10% overvaluation for the aristocrats and 30% overvaluation for the S&P 500.

What happens when you combine objectively superior quality with a much higher yield, superior valuation, and much faster expected growth?

You get 21.4% CAGR risk-adjusted expected returns or 6X more than the S&P 500 over the next five years.

Over the long term, 10+ years there is a 91% probability that these three buy and hold forever blue-chips will not just outperform the aristocrats and S&P 500, but smash their far lower expected future returns.

If Moody’s is right (it’s one of the 16 most accurate economists in the world), then the S&P 500 might be in for a lost decade, generating -1.2% CAGR total returns through 2030.

Those are retirement dream killing returns that are far from guaranteed, but something no prudent income investor (such as retirees) should ignore.

(Source: AZ Quote)

But with 44% of US stocks trading in bear markets right now, you never have to settle for mediocre future returns from the broader market.

Good long-term investors accept uncertainty and tolerate the market’s high historical volatility.

Great long-term investors embrace uncertainty and harness short-term volatility for their benefits.

With 3M, PRU, and AMZN you have the opportunity to lock in both mouth-watering, very safe, and steadily growing income to meet your goals in the short term as well as the market-crushing likely returns that are 90% likely over the coming decade.

These three buy and hold forever blue-chips represent the kind of potentially exceptional long-term investments that are always available if you know where to look.

They represent the kind of quality, safe, and high-probability/low-risk opportunities that rich retirements are made of.

Disclosure: I am/we are long AMZN, MMM, PRU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Dividend Kings own AMZN, MMM, and PRU in our portfolios.


Originally published on Seeking Alpha

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