Revealed on January twentieth, 2023 by Josh Arnold

When searching for nice dividend shares to purchase, traders are likely to gravitate towards sectors like financials and shopper staples. That’s as a result of these industries have produced robust revenue shares for many years and proceed to take action in the present day. Nonetheless, a slender sector focus can miss out on terrific alternatives in dividend investing. One sector that’s extra unstable, however can produce stronger returns consequently, is shopper discretionary. On this article, we’ll take a look at one inventory with a really excessive yield, which we even have a purchase ranking on.

That inventory is Medifast, Inc. (MED), an organization with a market cap of simply over $1 billion however a really excessive yield and a decent 7-year streak of elevating its payout. In actual fact, the 5.6% present yield is greater than 3 times that of the S&P 500 and is sweet sufficient to land the inventory on our record of high-yield shares.

This record incorporates about 200 shares with yields of not less than 5%, that means all of them yield not less than 3 times that of the S&P 500.

You possibly can obtain your free full record of all securities with 5%+ yields (together with essential monetary metrics comparable to dividend yield and payout ratio) by clicking on the hyperlink under:

 

Under, we’ll analyze the prospects of Medifast as an funding alternative in the present day.

Enterprise Overview

Medifast is an organization that primarily manufactures and distributes weight reduction, weight administration, and different consumable well being and vitamin merchandise within the US. The corporate presents all kinds of bars, cereal, drinks, oatmeal, smoothies, and extra beneath three model banners: OPTAVIA, Optimum Well being by Take Form for Life, and Flavors of House. Medifast sells its merchandise on to shoppers through its digital properties and thru retail factors of distribution by its distributors.

The corporate was based in 1980, generates about $1.6 billion in annual income, and trades with a market cap of $1.3 billion after a tough 2022.

Medifast posted third-quarter earnings on November third, 2022, and never solely resulted in comparatively weak earnings, however administration additionally lower steerage for the yr. Adjusted earnings-per-share got here to $3.32, whereas income fell nearly 6% year-over-year to $390 million. Medifast attributed the weak income efficiency to decrease gross sales productiveness by its OPTAVIA model, as common income per lively Coach was $5,897, towards $6,773 within the year-ago interval. That was pushed by a decline within the variety of clients supported by every Coach, though the variety of lively incomes Coaches rose from 61,000 final yr to 66,200 in the newest quarter.

Administration stated it had seen sooner than anticipated enchancment in buyer retention charges again to historic norms. Whereas this course of is going down, the corporate expects the fourth quarter to see smooth spending developments for optimistic going ahead for money stream and earnings.

Gross revenue was down 7.9% in Q3 to $283 million, reflecting the discount within the variety of clients supported by every Coach and elevated product prices. This was attributable to increased uncooked ingredient prices and elevated delivery and labor bills. As a share of income, gross revenue was 72.5%, down from 74.3% year-over-year.

Revenue from operations fell 12.7% to $48.2 million, or down 100 foundation factors as a share of income to 12.3%.

The corporate lowered steerage for 2022 to a brand new vary of $1.51 billion to $1.59 billion in income and adjusted earnings-per-share of $11.61 to $13.05. These are down from $1.58 billion and $1.66 billion, and $12.70 to $14.10, respectively. Administration famous the outlook change was prompted by the influence of excessive inflation and financial uncertainties on new buyer acquisition.

Development Prospects

Medifast’s development has been nothing in need of extraordinary up to now decade. The corporate noticed earnings in 2021 of greater than 10X that of a decade previous to that, as earnings ramped steadily from 2016 and on. We predict the very excessive base of earnings the corporate is prone to submit for full-year 2022 outcomes goes to be a lot tougher to develop from, so regardless of the excellent development historical past, we estimate 3% earnings development going ahead.

We see income development as restricted from the present $1.6 billion, notably given the steerage administration supplied with the Q3 replace. Nonetheless, the corporate is working by its variable prices and making certain it’s right-sizing for the income atmosphere it finds itself in, so we predict margins can reflate considerably to assist drive earnings-per-share development. As well as, the corporate has been shopping for again inventory, together with a latest $100 million program that was good for a high-single-digit discount within the share depend. These elements mixed ought to assist offset any income weak spot which will accrue and supply a least reasonable earnings development going ahead.

Aggressive Benefits

Medifast operates in a really aggressive house, with quite a few entrants and aggressive benefits being derived largely from branding. Given that customers could wrestle to know the variations in varied dietary merchandise – if there are any materials variations – Medifast employs a commissioned gross sales pressure to maneuver its merchandise. It has labored for the corporate up to now, and we predict it’s a key differentiator going ahead as properly. We be aware, nevertheless, that no matter aggressive benefit Medifast enjoys might be fleeting in such a aggressive subject.

We be aware that recessions might be unkind to discretionary merchandise, together with well being and dietary merchandise like what Medifast sells. Nonetheless, income assumptions have already fallen primarily based on a 2023 slowdown, so we see a further potential influence as minimal.

Dividend Evaluation

Medifast has paid a dividend for every of the previous eight years and has raised the payout yearly since inception of the dividend. Development within the payout in simply seven years has been excellent as properly, rising from the preliminary cost of 25 cents per share on a quarterly foundation, to $1.64 most just lately. That kind of dividend development is extraordinarily tough to search out out there, though we don’t count on something like this tempo of will increase might be maintained. Nonetheless, we consider the corporate can help a per-share annual cost of greater than $10 within the subsequent 5 years, so there’s ample room for continued raises.

The present payout ratio is beneath 50% of earnings, and given the corporate has no interest-bearing debt and continues to submit excessive ranges of earnings, we predict the payout may be very secure. It will take an excessive discount in earnings to place the payout in danger. As well as, even on the $10+ projected dividend per share in 5 years, the payout ratio would nonetheless be fairly cheap at about two-thirds of earnings.

The present yield of 5.6% places Medifast in an awesome spot in comparison with most different dividend shares on pure yield, and given its development potential and payout security, we discover it to be fairly a pretty dividend inventory in the present day.

Ultimate Ideas

Medifast presents a wonderful yield of 5.6% in the present day, which is kind of excessive by its personal historic requirements, along with being an awesome yield compared to the broader market. We predict the payout is kind of secure for the foreseeable future, and we consider it has dividend development potential going ahead.

The inventory is down 42% over the previous yr, in comparison with a 14% decline for the S&P 500, so Medifast has been a comparatively poor performer. Nonetheless, the dividend is kind of enticing, and we predict earnings estimate reductions have taken into consideration potential weak spot heading into 2023.

If you’re serious about discovering extra high-quality dividend development shares appropriate for long-term funding, the next Positive Dividend databases will probably be helpful:

The main home inventory market indices are one other strong useful resource for locating funding concepts. Positive Dividend compiles the next inventory market databases and updates them frequently: