Updated on December 15th, 2020 by Bob Ciura
Kevin O’Leary is Chairman of O’Shares Investments, but you probably know him as “Mr. Wonderful”.
He can be seen on CNBC as well as the television show Shark Tank. Investors who have seen him on TV have likely heard him discuss his investment philosophy.
Mr. Wonderful looks for stocks that exhibit three main characteristics:
- First, they must be quality companies with strong financial performance and solid balance sheets.
- Second, he believes a portfolio should be diversified across different market sectors.
- Third, and perhaps most important, he demands income—he insists the stocks he invests in pay dividends to shareholders.
You can download the complete list of all of Mr. Wonderful’s O’Shares Investment Advisor 13F filing stock holdings, along with quarterly performace, by clicking the link below:
OUSA owns stocks that display a mix of all three qualities. They are market leaders with strong profits, diversified business models, and they pay dividends to shareholders. The list of OUSA portfolio holdings is an interesting source of quality dividend growth stocks.
This article analyzes the fund’s top largest holdings in detail.
Table of Contents
The top 10 holdings from the O’Shares FTSE U.S. Quality Dividend ETF are listed in order of their weighting in the fund, from lowest to highest.
- Honeywell International (HON)
- Cisco Systems (CSCO)
- Apple Inc. (AAPL)
- Pfizer Inc. (PFE)
- Verizon Communications (VZ)
- Merck & Co. Inc. (MRK)
- Procter & Gamble (PG)
- Home Depot (HD)
- Johnson & Johnson (JNJ)
- Microsoft Corporation (MSFT)
No. 10: Honeywell International (HON)
Dividend Yield: 1.8%
Percentage of OUSA Portfolio: 2.62%
Honeywell International is a diversified industrial company. The company has four divisions: Aerospace, Honeywell Building Technologies, Performance Materials & Technologies and Safety & Productivity Solutions. More than 40% of sales come from international markets. The company generates $32 billion in annual revenues.
In the 2020 third quarter, revenue declined 14.2% to $7.8 billion. Adjusted earnings-per-share were lower by 25% to $1.56, but were $0.07 better than expected. Organic sales decreased 14%, but this was an improvement from the 18% decline in the previous quarter.
Source: Investor Presentation
As with the previous quarter, much of the decline was due to the COVID-19 pandemic. However, each segment performed better than in the previous quarter.
Organic sales for Aerospace were down 25% as double-digit gains in defense and space weren’t enough to overcome weak demand for commercial aerospace. Offsetting this was Safety & Productivity Solutions which grew by 8% as demand for the Intelligrated business, personal protective equipment and productivity solutions and services were strong. The company achieved an addition $450 million of cost savings in addition to the $500 million announced in the second quarter.
Honeywell International expects adjusted EPS of $1.97 to $2.02 for the fourth quarter. Using the midpoint of guidance, we expect the company to earn $7.03 per share in 2020, up from $7.01 previously. We also expect the company to grow EPS by 9% per year.
Industrial companies tend to perform very well when the economy is strong, but struggle in weak economic climates. However, we still expect long-term growth due to the company’s leadership position in the industrials sector. Honeywell International divested two lower margin businesses in the form of spin offs last October.
This should allow the company to focus on its higher margin businesses, particularly in Aerospace, where military products and aftermarket services should see growth as well. We see Honeywell’s strong position in these markets as its competitive advantage.
Despite these advantages, shares appear overvalued. Honeywell stock has a P/E ratio of 30.5, nearly double our fair value (also called intrinsic value) estimate of 16. As a result, total returns are expected at negative 1.3%, making the stock a sell on valuation.
No. 9: Cisco Systems (CSCO)
Dividend Yield: 3.2%
Percentage of OUSA Portfolio: 3.02%
Cisco is a global technology leader. The company’s routers and switches allow networks around the world to connect to each other through the internet.
Cisco is one of the younger dividend paying stocks in O’Leary’s top 10 list as the company has only paid a dividend since 2011. Since then, its dividend is 12x what it was nine years ago. After increasing its dividend by 2.9% for the 4/22/2020 payment, Cisco is now a Dividend Achiever.
With an expected payout ratio of 46% for fiscal 2021, Cisco will likely continue growing its dividend closer to its earnings growth rate going forward.
Cisco brings in annual revenues of nearly $52 billion and is a high margin business. Cisco has positioned itself into more of a reoccurring revenue business over the past few years by focusing on subscriptions.
Source: Investor Presentation
Cisco reported earnings results for the first quarter of fiscal year 2021 on 11/12/2020. Revenue fell 9.4% to $11.9 billion, but was $74 million ahead of expectations. Adjusted earnings-per-share of $0.76 was lower by 9.5% from the previous year, but $0.06 above estimates.
Shares of Cisco have a forward price-to-earnings ratio of 14.3, which is below our target multiple of 15x earnings. Expanding to our target price-to-earnings ratio would add annual returns by 1.0% over the next five years. Adding in a current dividend yield of 3.2% and expected EPS growth of 6% per year, Cisco is expected to offer a total annual return of 10.2% over the next five years.
No. 8: Apple (AAPL)
Dividend Yield: 0.6%
Percentage of OUSA Portfolio: 3.09%
Apple is the largest company in the world by market capitalization. Considering that Mr. Wonderful prefers companies that return capital to shareholders, this weighting might be a surprise.
Apple is the youngest dividend paying stock on this list, having only distributed income to shareholders since 2012. Since then, the dividend has grown more than 8x in a very short amount of period. This is in addition to the massive number of shares that have been repurchased over the years.
Apple’s dividend below 1.0%, however, is the lowest yield among the top 10 largest holdings, but investors likely approve of this trade off in income for an 86% return over the last year.
This type of return shouldn’t come as a surprise to shareholders of the company, as Apple has regularly beaten the market.
Apple’s future continues to be bright. In the most recent quarter Apple generated revenue of $64.7 billion, representing a 1.0% increase compared to the same quarter last year. Product sales were down 2.7%, as gains in Mac, iPad and Wearables were more than offset by a 20.7% decline in iPhone sales, which made up about 41% of total sales. Service sales increased 16.3% and made up 22% of all sales in the quarter. Earnings-per-share equaled $0.73 versus $0.76 prior.
Earnings growth and dividend yield will be offset by a significant headwind from valuation reversion as the stock trades with a multiple of 32.6x earnings compared to our target multiple of 17x earnings.
Total returns are expected to be -2.6% over the next five years, the lowest projected return on this list.
No. 7: Pfizer Inc. (PFE)
Dividend Yield: 4.0%
Percentage of OUSA Portfolio: 3.42%
Pfizer Inc. is a global pharmaceutical company that focuses on prescription drugs and vaccines. It is a mega-cap stock with a market cap of $215 billion. You can see our complete list of mega-cap stocks here.
Pfizer’s new CEO completed a series of transactions in 2019 significantly altering the company structure and strategy. Pfizer formed the GSK Consumer Healthcare Joint Venture with GlaxoSmithKline plc (GSK), which will include Pfizer’s over-the-counter business. Pfizer owns 32% of the JV.
Pfizer also completed a $11 billion deal acquiring ArrayBioPharma. The spinoff of the Upjohn segment was announced as well. Pfizer’s top products include Eliquis, Ibrance, Prevnar 13, Enbrel (international), Chantix, Sutent, Xtandi, Vyndaqel, Inlyta,and Xeljanz. The company had revenue of $51.8 billion in 2019.
In the 2020 third quarter, revenue declined 4% while adjusted earnings-per-share declined 3%. Biopharma revenue increased 4% operationally last quarter.
Source: Investor Presentation
Pfizer’s current product line is expected to produce top line and bottom line growth out to 2025 as a result of acquisitions and R&D investmnets. Currently, Eliquis (cardiovascular), Ibrance (oncology) and Xlejanz (rheumatoid artacritis) are all posting robust sales growth. New launches of Vyndaqel and Inlyta are growing rapidly as well.
Growth will come from increasing U.S. and international sales for approved indications and extensions. On the other hand, growth is offset by patent expirations and also competition for Enbrel and Prevnar 13. Going forward Pfizer has a strong pipeline in oncology, inflammation & immunology, and rare diseases. We are expecting 6% EPS growth each year.
Pfizer also pays a solid 4.0% dividend. In all, we expect 13.6% annual returns over the next five years, making Pfizer an attractive dividend stock to buy now.
No. 6: Verizon Communications (VZ)
Dividend Yield: 4.2%
Percentage of OUSA Portfolio: 4.12%
Verizon is a telecommunications giant. Wireless contributes three-quarters of all revenues, and broadband and cable services account for about a quarter of sales. The company’s network covers ~300 million people and 98% of the U.S. Verizon has now launched 5G Ultra-Wide band in several cities as it continues its rollout of 5G service. Verizon was the first of the major carriers to turn on 5G service.
Verizon released earnings results for the third quarter on 10/21/2020. Revenue fell 4.1% to $31.5 billion, missing estimates by $100 million. Adjusted earnings-per-share of $1.25 matched last year’s result, but was $0.03 higher than expected.
Source: Investor Presentation
Verizon had a total of 553K retail postpaid net additions, including 428K postpaid smartphone net additions, compared to estimates of 311K postpaid net additions. Churn remains very low. Wireless retail postpaid churn was 0.89% while retail postpaid phone churn was 0.69%. Consumer revenue decreased 4.3% to $21.7 billion due to a severe decline in wireless equipment revenue as a result of lower customer activity. Wireless service revenue increased 0.7% to $13.4 billion.
Revenues for the Media segment decreased 7.4% to $1.7 billion. COVID-19 has impacted search and advertising revenue, but Verizon noted that this segment continues to see increased customer engagement on its digital properties. Verizon now expects adjusted EPS growth of 0 to 2% compared to its previous forecast of down 2% to up 2%.
One of Verizon’s key competitive advantages is that is often considered the best wireless carrier in the U.S. This is evidenced by the company’s wireless margins and very low churn rate. Its reliable service allows Verizon to maintain its customer base as well as give the company an opportunity to move customers to higher-priced plans. Verizon is also in the early stages of rolling out 5G service, which will give it an advantage over weaker carriers.
We expect 4% annual EPS growth over the next five years. The stock also has a 4.2% dividend yield. In addition to a small bump from an expanding P/E multiple, we expect total returns of ~8% per year for Verizon stock.
No. 5: Merck & Co. (MRK)
Dividend Yield: 3.2%
Percentage of OUSA Portfolio: 4.18%
Merck is one of the largest healthcare companies in the world. Merck manufactures prescription medicines, vaccines, biologic therapies, and animal health products. Merck generates annual revenues of $49+ billion.
On 2/5/2020, Merck announced that it was spinning off its women’s health, legacy brands and biosimilar products into a separate company. These businesses represent ~$6.5 billion of revenues. The transaction should be completed in the first half of 2021.
Merck released third-quarter earnings results on 10/27/2020. Revenue increased 1.2% to $12.6 billion, topping estimates by $340 million. Adjusted earnings-per-share increased 15.2% to $1.74 and was $0.31 better than expected. Currency exchange reduced revenue results by 1% for the third quarter. Merck estimates that the COVID-19 pandemic reduced pharmaceutical revenue by $475 million for the quarter and $2.1 billion year-to-date.
Still, Pharmaceutical revenues increased 2% to $11.3 billion. Oncology once again led the way for Merck.
Source: Investor Presentation
Keytruda, which treats cancers such as melanoma that cannot be removed by surgery and non-small cell lung cancer, continues to grow as sales were up 21% to $3.7 billion. U.S. sales were up 24%. Keytruda continues to receive new approvals for treatment in both the U.S. and Japan.
Merck’s HPV vaccine Gardasil had a sales decline of 10% due to weaker demand stemming from school closures in the U.S., though volumes remains robust in China and Europe. Sales for Januvia/Janumet, which treats diabetes and is Merck’s second highest grossing product, improved 1% due to higher demand in international markets even as pricing pressure continues in the U.S.
Animal Health sales improved 9% to $1.2 billion due to higher demand in animal vaccines and parasitic control. Merck has two COVID-19 vaccine trials in place as well as a novel antiviral candidate.
Merck once again raised its guidance for the year. The company expects revenue in a range of $47.6 billion to $48.6 billion from $47.2 billion to $48.7 billion previously. Adjusted earnings-per-share are now expected in a range of $5.91 to $6.01, up from $5.63 to $5.78previously. The midpoint for both ranges is above consensus estimates.
Merck’s key competitive advantage is that it is seeing strong growth rates in key product areas.While generic competition is putting pressure on certain pharmaceuticals, we find Keytruda’s growth rate and peak sales expectations very appealing. We expect 5% annual EPS growth through 2025.
Merck also pays a dividend which yields 3.2%, while we find the stock to be slightly undervalued at the current share price. We estimate total returns to reach nearly 10% per year.
No. 4: Procter & Gamble (PG)
Dividend Yield: 2.3%
Percentage of Portfolio: 4.25%
Procter & Gamble is a stalwart among dividend stocks. It has increased its dividend for the past 64 years in a row. This makes the company one of only 30 Dividend Kings, a list of stocks with 50+ years of rising dividends.
It has done this by becoming a global consumer staples behemoth. It sells its products in more than 180 countries around the world with annual sales of more than $65 billion. Some of its core brands include Gillette, Tide, Charmin, Crest, Pampers, Febreze, Head & Shoulders, Bounty, Oral-B, and many more.
These products are in high demand regardless of the state of the economy, making the company rather recession proof. Many of these product categories have seen solid organic growth rates in the first half of fiscal 2020. And due to the company’s portfolio restructuring, renewed efficiency has resulted in accelerating organic growth over the past several quarters.
Source: Investor Presentation
Procter & Gamble released third quarter results in October (10/20/20). Organic sales rose by 9% year-over-year, driven in large-part by strong performance in the fabric and home care unit thanks to COVID-19 driven demand for hygiene projects and inventory increases. Revenue increased by 8.5% year-over-year to $19.32 billion while GAAP earnings-per-share came in at $1.63. The company raised its FY 2021 outlook for organic sales growth to 4%-5% from 2%-4%.
Procter & Gamble is seen as delivering 2% earnings growth going forward. However, the stock is also overvalued at the current level, trading for a P/E ratio of 24.6 compared with our fair value estimate of 20. If shares were to revert from the present price-to-earnings ratio to our target of 20, then valuation would be a ~4% headwind to annual returns over the next five years.
In all, Procter & Gamble is estimated to return just 0.2% per year for the next five years, making the stock a sell on valuation.
No. 3: Home Depot (HD)
Dividend Yield: 2.3%
Percentage of OUSA Portfolio: 4.64%
Home Depot was founded in 1978, and since that time has grown into the leading home improvement retailer with almost 2,300 stores in the U.S., Canada, and Mexico. In all, Home Depot generates annual revenue of approximately $110 billion.
Home Depot reported third-quarter earnings on November 17th. The company recorded third quarter sales of $33.5 billion, a 23.2% increase year-over-year. Comparable sales increased 24.1%, and 24.6% specifically in the U.S. Net earnings of $3.4 billion for the quarter were up 23.9% from $2.8 billion YoY. On a per diluted share basis, $3.18 for the quarter increased 25.7% from the same period a year ago.
Home Depot’s most compelling competitive advantage is its leadership position in the home improvement industry. Not only is demand for home improvement products growing at a high rate in the U.S., but the industry is highly concentrated with just two major operators (Home Depot and Lowe’s) taking the vast majority of market share.
Home Depot has also proven to be extremely resilient to recessions, including the coronavirus pandemic, which has arguably helped Home Depot as consumers spend much more time at home. Home Depot has a projected 2020 dividend payout ratio just above 50%, which indicates a safe dividend.
Home Depot has generated strong earnings growth in the past decade, as it has successfully capitalized on the housing and construction boom that ensued following the Great Recession of 2008-2010. E-commerce is another growth catalyst for Home Depot, as the company has invested heavily to expand its digital footprint.
Home Depot stated that sales leveraging its digital platforms increased approximately 100% last quarter. We see five-year annual earnings growth of 7.0%, consisting of comparable sales in the mid-single digits, a low single-digit tailwind from buybacks, and a steady, boost from operating margin expansion.
The combination of EPS growth, valuation changes, and the 2.3% dividend yield lead to expected returns of ~9% per year through 2025.
No. 2: Johnson & Johnson (JNJ)
Dividend Yield: 2.7%
Percentage of OUSA Portfolio: 4.84%
Johnson & Johnson is one of the most well-known dividend stocks in the marketplace, so it should come as no surprise that it is a top holding for OUSA.
Johnson & Johnson is a healthcare giant with a market capitalization of nearly $400 billion. It has very large businesses across healthcare, including pharmaceuticals, medical devices, and consumer health products. The company has annual sales in excess of $81 billion.
Johnson & Johnson announced third-quarter earnings results on October 13th. Revenue increased 1.7% to $21.1 billion, topping estimates by $930 million. Adjusted earnings-per-share of $2.20 topped estimates by $0.22, and increased nearly 4% increase from the same quarter last year. Global pharmaceutical sales grew 5%, while consumer sales grew 1.3%.
Source: Investor Presentation
Johnson & Johnson’s key competitive advantage is the size and scale of its business. It invested over $11 billion in R&D last year to grow its market share. J&J is a worldwide leader in a number of healthcare categories, with 26 individual products or platforms that generate over $1 billion in annual sales. J&J’s diversification allows it to grow each year. It has increased its adjusted operational earnings for 36 consecutive years.
It is also one of the most recession-resistant businesses investors will find. In the Great Recession, earnings-per-share grew by 10% in 2008, and 1% in 2009, at a time when many other companies were struggling. This resilience gives J&J steady profits, even during recessions, which allows it to continue increasing its dividend each year.
We expect 6% annual earnings-per-share growth over the next five years. The company’s pharmaceutical pipeline is a major growth catalyst. For example, last quarter Darzalex sales increased over 40%, while Imbruvica revenue increased 12%. New products such as these will continue to fuel J&J’s future growth.
J&J is a Dividend King, and it has an excellent balance sheet to help maintain its dividend growth. It has a AAA credit rating from Standard & Poor’s. The combination of valuation changes, EPS growth, and the 2.7% dividend yield lead to total expected returns of ~6% per year over the next five years.
No. 1: Microsoft Corporation (MSFT)
Dividend Yield: 1.1%
Percentage of OUSA Portfolio: 4.98%
Microsoft Corporation, founded in 1975 and headquartered in Redmond, WA, develops, manufactures and sells both software and hardware to businesses and consumers. Its offerings include operating systems, business software, software development tools, video games and gaming hardware, and cloud services.
On October 27th, 2020 Microsoft reported Q1 fiscal year 2021 results for the period ending September 30th, 2020. For the quarter, the company generated revenue of $37.2 billion, representing a 12.4% increase compared to Q1 2020. The growth was across the board with Productivity and Business Processes, Intelligent Cloud and Personal Computing growing 11%, 20% and 6% respectively.
Azure, Microsoft’s high-growth cloud platform, grew by 48% year-over-year, Earnings-per-share equaled $1.82 compared to $1.38 previously. Microsoft also provided a Q2 fiscal 2021 outlook, anticipating revenue to be in the $39.5 billion to $40.4 billion range.
Microsoft’s cloud business is growing at a rapid pace thanks to Azure, which has been growing tremendously for a few years. Microsoft’s Office product range, which had been a low-growth cash cow for many years, is showing strong growth rates as well after Microsoft has changed its business model towards the Office 365 software-as-a-service (SaaS) system. Buybacks are an additional factor for earnings-per-share growth,
Microsoft has a great moat in the operating system & Office business units and a strong market position in cloud computing. It is unlikely that the company will lose market share with its older, established products, whereas cloud computing is such a high-growth industry that there is enough room for growth for multiple companies. Microsoft has a renowned brand and a global presence, which provides competitive advantages. The company is relatively resilient against recessions, and like J&J has a AAA credit rating.
Unfortunately, Microsoft stock appears overvalued, with a P/E ratio 31.6. Our fair value estimate is a P/E ratio of 22. Expected EPS growth of 8% and the 1.1% dividend yield will boost returns, but overall total returns are estimated at just ~2% per year.
Kevin O’Leary has become a household name due to his appearances on the TV show Shark Tank. But he is also a well-known asset manager, and his investment philosophy aligns very closely with ours. Specifically, Mr. Wonderful typically invests in stocks with large and profitable businesses, with strong balance sheets and consistent dividend growth every year.
Not all of these stocks are currently rated as buys in the Sure Analysis Research Database, which ranks stocks based on expected total return due to a combination of earnings per share growth, dividends, and changes in the price-to-earnings multiple.
However, several of these 10 stocks are valuable holdings for a long-term dividend growth portfolio.