High Dividend 50: Medifast, Inc. - Sure Dividend

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High Dividend 50: Medifast, Inc.


Published on January 20th, 2023 by Josh Arnold

When looking for great dividend stocks to buy, investors tend to gravitate toward sectors like financials and consumer staples. That’s because these industries have produced strong income stocks for decades and continue to do so today. However, a narrow sector focus can miss out on terrific opportunities in dividend investing. One sector that is more volatile, but can produce stronger returns as a result, is consumer discretionary. In this article, we’ll look at one stock with a very high yield, which we also have a buy rating on.

That stock is Medifast, Inc. (MED), a company with a market cap of just over $1 billion but a very high yield and a respectable 7-year streak of raising its payout. In fact, the 5.6% current yield is more than three times that of the S&P 500 and is good enough to land the stock on our list of high-yield stocks.

This list contains about 200 stocks with yields of at least 5%, meaning they all yield at least three times that of the S&P 500.

You can download your free full list of all securities with 5%+ yields (along with important financial metrics such as dividend yield and payout ratio) by clicking on the link below:

 

Below, we’ll analyze the prospects of Medifast as an investment opportunity today.

Business Overview

Medifast is a company that primarily manufactures and distributes weight loss, weight management, and other consumable health and nutrition products in the US. The company offers a wide variety of bars, cereal, drinks, oatmeal, smoothies, and more under three brand banners: OPTAVIA, Optimal Health by Take Shape for Life, and Flavors of Home. Medifast sells its products directly to consumers via its digital properties and through retail points of distribution through its vendors.

The company was founded in 1980, generates about $1.6 billion in annual revenue, and trades with a market cap of $1.3 billion after a rough 2022.

Medifast posted third-quarter earnings on November 3rd, 2022, and not only resulted in relatively weak earnings, but management also cut guidance for the year. Adjusted earnings-per-share came to $3.32, while revenue fell almost 6% year-over-year to $390 million. Medifast attributed the weak revenue performance to lower sales productivity through its OPTAVIA brand, as average revenue per active Coach was $5,897, against $6,773 in the year-ago period. That was driven by a decline in the number of customers supported by each Coach, although the number of active earning Coaches rose from 61,000 last year to 66,200 in the most recent quarter.

Management said it had seen faster than anticipated improvement in customer retention rates back to historical norms. While this process is taking place, the company expects the fourth quarter to see soft spending trends for optimistic going forward for cash flow and earnings.

Gross profit was down 7.9% in Q3 to $283 million, reflecting the reduction in the number of customers supported by each Coach and increased product costs. This was due to higher raw ingredient costs and increased shipping and labor expenses. As a percentage of revenue, gross profit was 72.5%, down from 74.3% year-over-year.

Income from operations fell 12.7% to $48.2 million, or down 100 basis points as a percentage of revenue to 12.3%.

The company lowered guidance for 2022 to a new range of $1.51 billion to $1.59 billion in revenue 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. Management noted the outlook change was prompted by the impact of high inflation and economic uncertainties on new customer acquisition.

Growth Prospects

Medifast’s growth has been nothing short of extraordinary in the past decade. The company saw earnings in 2021 of more than 10X that of a decade prior to that, as earnings ramped steadily from 2016 and on. We think the very high base of earnings the company is likely to post for full-year 2022 results is going to be much harder to grow from, so despite the outstanding growth history, we estimate 3% earnings growth going forward.

We see revenue growth as limited from the current $1.6 billion, particularly given the guidance management provided with the Q3 update. However, the company is working through its variable costs and ensuring it is right-sizing for the revenue environment it finds itself in, so we think margins can reflate somewhat to help drive earnings-per-share growth. In addition, the company has been buying back stock, including a recent $100 million program that was good for a high-single-digit reduction in the share count. These factors combined should help offset any revenue weakness that may accrue and provide a least moderate earnings growth going forward.

Competitive Advantages

Medifast operates in a very competitive space, with numerous entrants and competitive advantages being derived mostly from branding. Given that consumers may struggle to understand the differences in various nutritional products – if there are any material differences – Medifast employs a commissioned sales force to move its products. It has worked for the company in the past, and we think it’s a key differentiator going forward as well. We note, however, that whatever competitive advantage Medifast enjoys can be fleeting in such a competitive field.

We note that recessions can be unkind to discretionary products, including health and nutritional products like what Medifast sells. However, revenue assumptions have already fallen based on a 2023 slowdown, so we see an additional potential impact as minimal.

Dividend Analysis

Medifast has paid a dividend for each of the past eight years and has raised the payout every year since inception of the dividend. Growth in the payout in just seven years has been outstanding as well, rising from the initial payment of 25 cents per share on a quarterly basis, to $1.64 most recently. That sort of dividend growth is extremely difficult to find in the market, although we do not expect anything like this pace of increases can be maintained. Still, we believe the company can support a per-share annual payment of more than $10 in the next five years, so there is ample room for continued raises.

The current payout ratio is under 50% of earnings, and given the company has no interest-bearing debt and continues to post high levels of earnings, we think the payout is very safe. It would take an extreme reduction in earnings to put the payout at risk. In addition, even at the $10+ projected dividend per share in five years, the payout ratio would still be quite reasonable at about two-thirds of earnings.

The current yield of 5.6% puts Medifast in a great spot compared to most other dividend stocks on pure yield, and given its growth potential and payout safety, we find it to be quite an attractive dividend stock today.

Final Thoughts

Medifast offers an excellent yield of 5.6% today, which is quite high by its own historical standards, in addition to being a great yield in comparison to the broader market. We think the payout is quite safe for the foreseeable future, and we believe it has dividend growth potential going forward.

The stock is down 42% over the past year, compared to a 14% decline for the S&P 500, so Medifast has been a relatively poor performer. However, the dividend is quite attractive, and we think earnings estimate reductions have taken into account potential weakness heading into 2023.

If you are interested in finding more high-quality dividend growth stocks suitable for long-term investment, the following Sure Dividend databases will be useful:

The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them regularly:

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