In 2017, Target's dividend yield approached 5% as investors worried about the long-term fate of big-box retailers in the age of Amazon. The company's same-store sales had started declining as more shopping migrated online, and Target's margins dipped as management invested in a digital-focused turnaround plan. Despite these bumps in the road, Target always maintained a Safe Dividend Safety Score, reflecting the company's reasonable payout ratio, consistent cash flow generation, and healthy balance sheet. Today we are upgrading Target's Dividend Safety Score to Very Safe as the firm has materially improved its key fundamental metrics and demonstrated further traction with its turnaround plan. Target reported earnings on August 19 and delivered the company's strongest ever comparable sales growth of 24%, fueled by the pandemic.

The pandemic has caused significant disruption for Churchill Downs' business. The firm's flagship event, the Kentucky Derby, was delayed from early May to September, hurting its horse racing operations (28% of 2019 adjusted EBITDA). Meanwhile, casinos (58%) were forced to close temporarily. And although the online gaming business (14%) has continued growing, Churchill Downs' second-quarter revenue fell more than 60% and the company operated at a loss. When we looked at the business in March, we decided to take a wait-and-see approach with the firm's Dividend Safety Score since the firm's overall financial health seemed to hinge on whether or not the Derby would take place, and what it might look like. Since Churchill Downs pays an annual dividend, usually [...]

Solar Senior Capital is an externally managed business development company that invests primarily in loans of private middle market firms to generate income. The company's portfolio is valued at around $500 million and diversified across 215 borrowers in over 115 industries, with an average issuer exposure of less than 0.5% of the portfolio. No industry accounts for more than 25% of the portfolio either. Diversified financial services represents 22.5% of Solar's investments, followed by healthcare providers (18%), professional services (9.3%), insurance (8.6%), and communications equipment (5.4%). Solar has had a Very Unsafe Dividend Safety Score for years, reflecting the firm's high payout ratio and small size, as well as the generally risky nature of business development companies' operations.

BHP is the largest mining company in the world. The firm extracts and processes iron ore (63% of EBITDA), copper (20%), petroleum (10%), and coal (9%). Commodity businesses generally have little control over the selling price of their products and must invest heavily to secure and extract new resources. Coupled with their high fixed costs and operating leverage, firms such as BHP can experience major swings in earnings from one year to the next, making it harder for them to pay predictable dividends. In 2016, BHP acknowledged these challenges by implementing a flexible dividend policy tied to the performance of its business. Specifically, BHP targets a minimum dividend of 50% of underlying profits. The board can also return additional cash [...]

In July, Analog Devices announced plans to acquire semiconductor company Maxim for more than $20 billion. Assuming the deal gains approval from regulators and shareholders, it is expected to close by the summer of 2021. From a dividend safety perspective, Analog Devices plans to maintain its existing dividend policy and will continue targeting 7% to 15% annual dividend growth. This guidance, coupled with our review of the combined company's financial health, leads us to reaffirm Analog Devices' Safe Dividend Safety Score.  From a strategic perspective, Analog Devices and Maxim are complementary businesses. Maxim designs and builds analog chips with a focus on serving the automotive and data center markets. Power management applications are a key focus area.

Shares of Cisco fell more than 11% on Thursday following the company's latest earnings release. Sales declined 9% last quarter, slightly better than expected, but management is not seeing a V-shaped recovery. CEO Chuck Robbins said the environment feels "very much like it felt 90 days ago" and provided guidance for a somewhat steeper revenue decline of 9% to 11% in the firm's current fiscal quarter, which runs through October. Cisco has spent the last few years shifting its business to emphasize more recurring software and services offerings, which accounted for 51% of revenue in fiscal 2020. However, more work is needed to better insulate the firm from cyclical swings in IT spending. Cisco's Infrastructure Platforms division (55% of sales), which [...]

On Tuesday, a federal appeals court issued Qualcomm a favorable ruling, reversing a May 2019 victory for the U.S. Federal Trade Commission which had accused the chipmaker of charging excessive royalty rates for its patents. The 2019 ruling threatened to disrupt the lucrative licensing practices that historically generated over 70% of the company's operating profits. As we discussed in December 2019, an unfavorable ruling had potential to harm Qualcomm's ability to pay dividends and invest in future technologies such as 5G. This week's news officially removes a worst-case outcome for Qualcomm's core licensing business model, stabilizing the firm's cash flow outlook going forward. In addition to its legal victory, Qualcomm in July resolved its royalty rate dispute with Huawei, the largest seller of smartphones in the world, [...]

PPL's stock rallied 5% today after the firm announced plans to initiate a process to sell its U.K. operations. PPL's U.K. utility business generated 52% of the company's 2019 segment earnings but faced an uncertain longer-term outlook. The current regulatory framework driving PPL's U.K. electricity distribution business ends in 2023, and Britain's energy regulators appear eager to reduce allowed returns at that time. This overhang, coupled with Brexit-related political instability and currency volatility, weighed on PPL's stock performance in recent years. Since 2017, PPL has seen its P/E ratio fall from an average near 16 to about 11 today. For context, the utility sector's average P/E ratio is about 17.5. Management believes they can create immediate shareholder value by fetching a sale price for [...]

UGI Corporation has a dividend yield nearly twice its historical five-year average.  Naturally, this is leading some investors to question the safety of UGI’s dividend. So, what’s weighing on the stock?  The biggest concern appears to be the timing of increased leverage shortly before an economic crisis brought upon by an unexpected global pandemic. In 2019 UGI completed a merger with AmeriGas, a propane distribution company, and acquired the Columbia Midstream Group, a midstream services business.   These deals totaled over $3.7 billion in value.  For context, UGI’s market cap is about $7 billion. This spending led to a significant jump in leverage by year-end.  UGI’s debt had reached its highest level in the past decade.

AT&T reported earnings on July 23, providing a more complete look at how its expansive business is performing during this economic downturn. For the most part, there were no big surprises. Revenue declined by about 9% and EBITDA dipped 6%, driven by a steep pandemic-related slump at WarnerMedia. Content production and theaters were shut down, and the lack of sports hurt advertising sales. Pay-TV subscriber losses also remained elevated, amplified by some hotels and restaurants canceling their services. However, as we've discussed before, AT&T also has a number of less cyclical businesses. For example, wireless services and equipment account for over 40% of the firm's revenue and have remained fairly steady.