Avoid This 166-Year-Old Dividend Payer
Over the last couple months, I’ve shown you stocks to avoid…
Stocks to consider buying…
And some of the best stocks related to the coming Internet of Things… Which you can find linked further below.
All these recommendations are to help you either avoid pain and terrible stocks. Or to help you find potentially great stocks to invest in during this pandemic.
If you do both well, it helps you earn higher than average investment returns and build wealth.
Because the fewer investment losses you have the more capital you keep. And the more capital you keep the faster you compound your money.
To help you figure out how to protect your retirement portfolio in these uncertain times, today I want to tell you why to Avoid This 166-Year-Old Dividend Payer.
Levi Strauss (LEVI) is one of the United States most famous clothing companies.
It owns several well-known brands including…
- Levi Strauss
And it’s mainly focused on casual and work clothing including its famous denim pants.
Because of its brand power and every day use for its clothing, its stock is up 86.3% in the last year. Even during the pandemic.
But this is all in the past…
Today, I want to help you figure out whether it’s a great buy now for your retirement portfolio after this huge gain in the last year.
It’s based in San Francisco California. It has a $10.56 billion market cap. And it pays you a 0.93% dividend. Which is reason #1 to consider buying its stock.
Levi’s 0.93% Dividend
The 166-year-old Levi went public on March 19th, 2019 after 34 years of being a private company.
But its financials go back to 2014.
Since 2019 though it’s paid out a total of $0.31 per share in dividends.
While small, this number will grow over time as the company continues to grow its revenues, profits, and cash flows.
These dividend payments help you earn cash if you take the money out. Or allow you to buy more shares over time if you reinvest the dividends.
These regular payments will help you earn more money for your retirement. And the solid, stable, and growing dividends will help in any kind of prolonged economic issues like we’re dealing with today.
It can do this because it earns large profits. Which is reason #2 to consider buying Levi stock.
Levi Earned Large Profits – Before Covid
Between 2014 and 2019 Levi earned an average operating income margin of 9.7% per year.
I look for anything above 10% on a consistent basis so this is great.
However, due to Covid and all the store closures in the last year this dropped to 1.8%.
Another way to show its profitability is with its free cash flow to sales ratio (FCF/Sales). Between 2014 and 2019 this averaged 4.6% per year.
I call this the “Cash Machine” metric.
I look for anything above 5% on a consistent basis for the same reasons as I look for high operating profit margins above. If a company surpasses both thresholds it makes it a great operating business that is safe and ultra-valuable.
Both metrics fall just below what I require for an investment before Covid hit.
This metric rose to 7.6% in 2020 due to debt issuances.
Not great here. But also, not a deal breaker yet. Especially since Levi should get back to large profits as we exit this pandemic.
What about its debt levels?
Levi Has Okay Debt Levels
As of this writing LEVI has $2.07 billion in cash compared to $3.17 billion in debt.
As a percentage of its balance sheet total liabilities make up 77.4%.
Debt makes up 30% of its market cap.
And its debt-to-equity ratio is 2.25.
While not terrible, these are all higher than what I look for.
As one example, I look for debt to equity ratios to be below 1.
Still not a deal breaker for Levi though due to its large profits before Covid hit… That I expect it to get back to.
Now to the final point, is it even cheap enough to buy?
Levi IS NOT Cheap…
With the markets at or near all-time highs you’d expect what was a great stock like Levi to be selling at an enormous valuation.
Unfortunately, it is.
As of this writing its P/E is 14.3.
Its P/CF is 30.
Its forward P/E is 28.4.
And its enterprise value to operating income – EV/EBIT is an absurdly high 175.8.
On all three metrics at the top, I look to buy investments below 20 to consider them undervalued.
And on EV/EBIT I look to buy stocks below 8.
These metrics combined show that Levi is massively overvalued right now.
And this means owning its stock does not give you a large margin of safety in investing terminology.
When you invest in stocks that have a margin of safety it makes the investment safer. And it also means you should expect to earn higher returns owning it in the coming years.
The inverse of this is also true…
When you invest in a stock without a margin of safety it makes the investment riskier. And it also means you should expect to earn less owning its stock going forward.
With Levi being overvalued right now, its stock does not offer you a large margin of safety… Even if it gets back to its pre covid profitability levels.
This means you should avoid its stock until its cheaper.
If you’re looking for a solid, safe, dividend paying, stable, and enormously profitable investment to buy to earn high and safe returns for your portfolio – consider investing in one of the stocks below.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.