3 Defensive Dividend Stocks With Outperformance Potential

Summary

• According to a GuruFocus backtesting study, stocks with higher GF Scores tend to outperform those with lower GF Scores.
• These defensive stocks have high dividend yields, low valuations and GF Scores that indicate outperformance potential.

When the Covid-related stock market bubble began to deflate near
near
the end of 2021, it was tempting to snap up shares of businesses deemed to be “recession-proof,” such as those in the consumer defensive and utility spaces. However, even though many of these businesses have held up well despite the struggling economy, their share prices still had room to adjust
just
downward due to overvaluation.

With inflation beginning to slow down and the S&P 500 Index staying in the same range since about a year ago, many defensive stocks have continued growing at faster rates than their share prices, which has pushed valuation multiples down and dividend yields up. Thus, using the GuruFocus All-in-One Screener, a Premium feature, I screened the market for stocks in the consumer defensive space that have dividend yields of at last 2.5%, trade below GF Value and have solid outperformance potential as demonstrated by a GF Score of at least 90 out of 100.

The GF Score is a unique ranking system developed by GuruFocus that has been found to strongly correlate with the long-term performances of stocks, according to backtesting from 2006 to 2021. Historically, stocks with higher GF Scores have averaged better returns than those with lower GF Scores.

According to the screener results, three stocks that could present defensive dividend value opportunities are Target
TGT
Corp. (TGT, Financial), Mowi ASA (OSL:MOWI, Financial) and The North West Co. Inc. (TSX:NWC, Financial).

Target

Target (TGT, Financial) is an American grocery retail company that sells a wide variety of everyday necessities, including food, beverages, clothes, toiletries, home goods, furniture, electronics and more. It strikes a balance between Walmart’s
WMT
(WMT, Financial) bargain strategy and more expensive grocery retailers with a focus on quality at an affordable price.

According to its GF Value chart, Target is modestly undervalued as of April 5 at a share price of around $165.15.

The dividend yield stands at 2.53% and has been growing at a rate of 15.1% per year for the past three years. With over 50 years of dividend growth, Target is one of the rare companies that qualifies as a Dividend King.

Target’s GF Score is 90 out of 100. The GF Value rank of 10 out of 10 is the strongest contributor to its GF Score, while the financial strength rank of 6 out of 10 is the weakest link
link
, though the company is still well-equipped to manage its debt with an interest coverage ratio of 8.05.

Mowi

Formerly known as Marine Harvest, Mowi (OSL:MOWI, Financial) is a Norwegian seafood company primarily focused on sustainable fish farming, especially salmon, in Norway, Canada, Chile and several other countries around the world. With products ranging from whole fish to fillets, salmon burgers, tartars and more, the company estimates it provides about 6 million meals per day.

The GF Value chart rates Mowi as modestly undervalued at its April 5 share price of around 189.80 Norwegian kroner ($18.16).

The company’s dividend yield is still a respectable 3.76%, even after reducing its dividend by an average of 13.9% per year over the past three years. Investors should note the company’s dividend is highly irregular, even though its earnings and revenue are both positive and growing. This is because the company aims for its dividend to be at least 50% of quarterly earnings per share, which is excellent for yields but not so good for consistency.

Mowi has an excellent GF Score of 96 out of 100, driven by perfect 10 out of 10 ranks for profitability, growth and GF Value. The company’s return on invested capital (ROIC) is significantly higher than its weighted average cost of capital (WACC), showing strong shareholder value creation.

North West

North West (TSX:NWC, Financial) is a Canada-based grocery retailer operating in northern and western Canada, Alaska and Hawaii as well as several countries and U.S. territories in Oceania and the Caribbean. The company focuses on underserved markets and adapts its product mix to each remote, difficult-to-reach location it operates in.

At Monday’s share price of around 36.46 Canadian dollars ($27.07), which is just below the fair value estimate, the GF Value chart rates North West as fairly valued.

The company’s dividend yield is 4.11%, which is significantly higher than the industry median of 2.52%. The three-year dividend growth rate is 4.5%, and the company has been raising its dividend payments since 2012.

North West has a GF Score of 94 out of 100. The company scores 10 out of 10 on its ranks for profitability, growth and momentum, but its GF Value rank is just 5 out of 10. According to GuruFocus’ backtesting, stock performance has more correlation to profitability and growth than it does to valuation, which is why the GF Score is still so high despite the middling GF Value rank.

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours.