(Source: Imgflip)

For months, I and other analysts, such as RIA chief strategist Lance Roberts, have been warning investors about the market bubble that has been forming.

The recent 7% pullback was literally the average peak decline for pullbacks since 1945. It did little to alleviate the extremely high market valuations that will inevitably result in much lower returns than investors have come to expect over the past decade.

Many investors who were nervous when the Nasdaq fell into a correction over just three days are now breathing a sigh of relief after stocks have begun to recover.

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I’m a long-term bull on America’s economy and the stock market. That’s why I remain 100% fully invested in my retirement portfolio, where I keep 100% of my life savings.

However, that doesn’t mean that just because the current market pullback hasn’t turned into a March-style panic crash, this isn’t a bubble. In fact, one analyst thinks that the recent modest recovery in stocks might make the current bubble worse.

Andrea Cicione, head of strategy at independent investment research firm TS Lombard, said excessive leverage in the market really began in earnest in July. Cicione added that what was occurring in U.S. stocks wasn’t happening anywhere else in the world…

And while he’s seeing signs of a bubble, he thinks that if the selling doesn’t intensify, the bubble may reflate soon.

“The leverage accumulation so far may not be enough to burst the bubble just yet,” he writes. “If the recent selloff does not intensify further, the whole episode may end up simply emboldening the bulls to buy the dip and take even more risk.

– MarketWatch (emphasis added)

Market history agrees with Mr. Cicione, that normal pullbacks and corrections that fail to kill a bull market can lead to dangerous speculative excesses, including leverage, that can make for historic crashes later.

Between 1997 and 1998, the Nasdaq experienced three selloffs of at least 17%, only to emerge stronger and rise fourfold to the 2000 peak. “Leverage is a key characteristic of all bubbles, and almost invariably it is the mechanism that leads to their collapse. But there may not have been enough leverage for the dot-com 2.0 bubble to burst just yet,” he says.

The reason leverage is important in bursting bubbles is that it uniquely can lead to forced unwinding. “When faced with margin calls they cannot meet, investors may have to liquidate positions against their will. The resulting fall in prices can instill doubts in the mind of others, persuading them to sell,” he said.”

– MarketWatch (emphasis added)

All bubbles get inflated on the assumption that “this time is different,” for one reason or another, all of them plausible-sounding. Today, the biggest reason for momentum-chasing speculators to believe that stocks can keep rising is the record amount of monetary stimulus from the Fed.

The Fed has said it will do “whatever it takes” to prevent another financial crisis. Deutsche Bank estimates the Fed will ultimately do $5-12 trillion worth of QE to achieve that goal.

The Fed has just said it will keep interest rates at zero through at least the end of 2022, and most Fed members expect no rate hikes through the end of 2023.

(Source: FOMC)

With such historic accommodation from the Fed, plus $1.5 trillion in new stimulus expected from most economists, including Moody’s, why shouldn’t stocks just keep going up, like Dave Portnoy says they should?

(Source: Imgflip)

The only problem is that in the long term, meaning 10+ years, fundamentals and valuations are 10X as powerful as sentiment, driving 90% of total returns.

Time Frame (Years)

Total Returns Explained By Fundamentals/Valuations

1 Day 0.04%
1 Month 0.7%
3 Months 2%
6 Months 4%
1 8%
2 18%
3 26%
4 35%
5 44%
6 53%
7 62%
8 70%
9 79%
10+ 90% to 91%

(Sources: Dividend Kings S&P 500 Valuation & Total Return Tool, JPMorgan, Bank of America, Princeton, RIA)

In the short term, anything can happen on Wall Street, just like in a casino. Over the long-term probability, statistics and math ensure there is only one outcome, also like a casino, where the house always wins.

(Source: Lance Roberts’ full-time series since 1900)

This data from RIA is striking for one main reason. It shows that, since 1990, the S&P 500’s average and median forward P/E have both been 16.7.

Why does that matter? Shouldn’t stock multiples be permanently higher now that we have:

  • a more diversified and stable economy
  • far more people participating in the stock market
  • standardized accounting practices that make investing less risky

You would think so, and I thought so too. Specifically, that multiples would expand over time, thanks to a globalized world leading to more capital flowing into US equities.

And surely, persistently lower long-term rates, which economists expect to average 2.0-2.6% post-pandemic, would mean higher P/Es for the S&P 500, right?

S&P 500 Historical P/E Over The Last 20 Years

(Source: F.A.S.T. Graphs, FactSet Research)

Actually, over the past 10 years, when 90% of market returns were a function of fundamentals and valuation, the S&P averaged a P/E of 17.0.

In the modern era of low rates and Fed QE, the market has averaged a 16.5 to 17.5 P/E.

  • Since 1900, average and median P/E: 16.7
  • Modern era: 17.0

According to Goldman Sachs and UBS, the average equity risk premium (earnings yield = 10-year Treasury yield) has been 3.8% over the last five years and 3.7% over the last 20. In other words, the market’s equity risk premium has been stable.

And given that the 16 most accurate economists out of 45 tracked by MarketWatch, Moody’s, the Congressional Budget Office, and the Fed expect 10-year yields to average 2.0-2.6% over the next decade, guess what that means economists expect the stock market’s future-forward P/E to return to?

10-Year Treasury Yield Historical Fair Value Earnings Yield (3.7% Risk Premium) Interest Rate Adjusted Fair Value Forward P/E
3.0% 6.7% 14.93
2.6% 6.3% 15.87
2.5% 6.2% 16.13
2.0% 5.7% 17.54
1.5% 5.2% 19.23
1.0% 4.7% 21.28
0.5% 4.2% 23.81
0.3% 4.0% 25.32
0.1% 3.8% 26.32
0.0% 3.7% 27.03
-0.5% 3.2% 31.25
-1.0% 2.7% 37.04
-1.5% 2.2% 45.45
-2.0% 1.7% 58.82
-2.5% 1.2% 83.33
-3.5% 0.2% 500.00
-3.69% 0.01% 10,000.00

(Sources: Goldman Sachs, UBS)

16-17.5, basically the same historical norm seen over

  • the last 10 years
  • the last 20 years
  • the last 120 years

(Source: Imgflip)

For the next year or even the next five, investors could potentially drive themselves into a leverage (via options heavily favored by the Robinhood crowd)-fueled bubble to rival, or potentially even surpass, the tech mania that ended spectacularly in 2000.

But while no one can know when the current tech bubble will end, we just know that it eventually will. And bubbles of this magnitude seldom deflate slowly and in an orderly fashion.

Fortunately, even in this sea of speculative bubbles and insane valuations (Snowflake (SNOW) just IPOed at 66X sales and soared to 175X sales at one point on the first day of trading), there are plenty of quality blue-chips retirees and other conservative income investors can safely buy.

Fighting Bubbles With Anti-Bubble Blue-Chips: The Story Of Realty Income (O)

You might think that in a bubble nothing good is on sale. My fellow Dividend King co-founder, Chuck Carnevale, Seeking Alpha’s “Mr. Valuation,” likes to remind us that “It’s a market of stocks, not a stock market.”

That’s even true in the top of the most spectacular bubble in US history when the S&P 500 hit a peak forward P/E of 27.2 in March 2000.

Stocks were 66% historically overvalued, with some tech stocks trading at between 100X and 500X earnings (and many had no earnings at all, nor plans for ever generating them).

Realty Income, the quintessential SWAN REIT, was trading at a very safe 11% yield, 7X FFO, and a 50% historical discount at the peak of the tech mania.

During the epic tech crash, with the Nasdaq falling 75% and some tech stocks 93%, BRK, which was also 50% undervalued in early 2000, went up 19%. Realty Income, went up 100%, doubling despite the 3rd worst market crash in US history at the time.

From 7X Cash Flow And a 50% Discount, Realty Income Outperformed The S&P 500 By 4.4X Over The Next 15 Years

(Source: Portfolio Visualizer)

In March 2000, many people thought Realty Income was a bad company.

“How can a stock fall during the greatest market rally in history!?” The prudent long-term investor was not buying the most popular tech darlings at 100X-500X earnings but blue-chips like Realty Income at single-digit cash flows and safe yields as high as 11%.

Over the next 15 years, the S&P 500 delivered 4.1% CAGR total returns and Realty Income 18% CAGR, outperforming the faster-growing S&P 500 by 4.4X.

Today, Realty Income isn’t an anti-bubble, of course, but the case study of how one of the highest-quality blue-chips could be so badly mispriced is a great lesson to all of us to avoid speculative manias.

(Source: Imgflip)

2 High-Yield Anti-Bubble Blue-Chips Retirees Will Love

The Dividend Kings Master List has 468 companies on it, including

  • all Dividend Champions (companies with 25+ year dividend growth streaks)
  • all Dividend Aristocrats (S&P companies with 25+ year dividend growth streaks)
  • all Dividend Kings (companies with 50+ year dividend growth streaks)
  • all 11/11 quality Super SWANs (5/5 safety + 3/3 wide-moat businesses + 3/3 excellent management quality/dividend cultures, basically as close to a perfect company as exists on Wall Street)

Of those 468 companies, 288 are 9/11 blue-chip quality or better.

  • 281 have 4+/5 above-average dividend safety or better

Safety Score Out of 5 Approximate Dividend Cut Risk (Average Recession) Approximate Dividend Cut Risk This Recession
1 (unsafe) over 4% over 24%
2 (below average) over 2% over 12%
3 (average) 2% 8% to 12%
4 (above-average) 1% 4% to 6%
5 (very safe) 0.5% 2% to 3%

Of those, 218 have investment-grade credit ratings, meaning an 11% or lower probability of bankruptcy over the next three decades.

Credit Rating 30-Year Bankruptcy Probability
AAA 0.07%
AA+ 0.29%
AA 0.51%
AA- 0.55%
A+ 0.60%
A 0.66%
A- 2.5%
BBB+ 5%
BBB 7.5%
BBB- 11%
BB+ 14%
BB 17%
BB- 21%
B+ 25%
B 37%
B- 45%
CCC+ 52%
CCC 59%
CCC- 65%
CC 70%
C 80%
D 100%

(Sources: Dividend Kings Investment Decision Tool, S&P, Saint Petersburg State University)

How many of them are anti-bubble stocks? To answer that, let’s turn to Ben Graham, the

  • father of securities analysis
  • founder of value investing
  • Buffett’s mentor
  • one of the greatest investors in history (20% CAGR total returns from 1934 to 1956 vs. 12% S&P 500

The Graham/Dodd fair value formula says that a company expected to grow at 0% forever is worth about 8.5X earnings or cash flow.

Thus, any company trading at below 8.5X is priced for negative growth. As long as such a company grows at 0%+, investors literally can’t lose money over time.

This is the definition of an anti-bubble stock. What Warren Buffett calls a “fat pitch” investment.

  • 13 anti-bubble blue-chips with above-average dividend safety and investment-grade credit ratings are currently priced for negative growth.

Their average P/E?

  • 7.4 pricing in -0.6% long-term growth, according to the Graham/Dodd fair value formula
  • actual long-term analyst growth consensus: 4.3% CAGR

It’s from this group of 13 anti-bubble blue-chips that I present two high-yield names for your consideration.

Metlife (MET): 9/11 Quality Blue-Chip That’s 34% Undervalued

Business Summary

MetLife – once a mutual company before the 2000 demutualization – is the largest life insurer in the U.S. by assets and provides a variety of insurance and financial services products. Outside the United States, MetLife operates in Japan and more than 40 countries in Latin America, the Asia-Pacific region, Europe, and the Middle East.”

– Morningstar

Business Update

We expect interest rates to remain lower, which will weigh on investment income. In addition, the lack of sensitivity to equity markets (either from on-balance-sheet or third-party asset management) means that MetLife doesn’t benefit much from the equity market rebound.

To recap the firm’s second-quarter financial results, MetLife reported adjusted earnings declining 43%. In the U.S. segment, adjusted earnings declined 29% as variable investment income, which includes private equity returns, decreased. In addition, adjusted premiums declined as a result of lower pension risk transfer, structured settlement, and institutional income annuity sales. While volumes and expenses were favorable in Asia, lower variable investment income resulted in a decline of adjusted earnings. Constant-currency adjusted earnings in Latin America and adjusted earnings at the firm’s property and casualty unit increased from favorable underwriting. Lower variable investment income also weighed heavily on the MetLife Holdings segment, which houses the firm’s discontinued books of business.

Looking ahead to the third quarter, the company’s best estimate is for private equity returns to return to mid-single-digit positive levels. With face-to-face sales remaining challenging, sales are likely to remain under pressure. We also believe the low-interest-rate environment makes the pricing on pension risk transfers tougher for potential clients. Given the challenging environment, we expect management to continue to focus on reducing operating expenses.”

– Morningstar

Financials are suffering right now, to be sure, and low rates aren’t going away anytime soon.

MET Short-Term Growth Consensus

Metric 2020 consensus growth 2021 consensus growth

2022 consensus growth

Dividend 5% (already raised this year) 4% 6%
EPS -9% 9% 6%
EBITDA -13% 4% 2%
EBIT (pre-tax profit) -21% 4% 25%

(Source: F.A.S.T. Graphs, FactSet Research)

But MET is hardly a dying company, according to the 12 analysts who cover it and collectively know it better than anyone except management.

Due to a cyclical business model, the analyst margins of error on MET are 45% to the downside and 15% to the upside.

MET Long-Term Growth Profile

  • FactSet 2022 medium-term growth consensus (factoring in current recession): 2.0% CAGR
  • FactSet long-term growth consensus (looking beyond recession): 6.6% CAGR
  • YCharts long-term growth consensus: 6.7% CAGR
  • Reuters 5-year growth consensus (factoring in the recession): 2.4% CAGR
  • 20-year rolling growth rates: 0-25% CAGR

(Source: F.A.S.T. Graphs, FactSet Research)

In the last decade, low interest rates and higher financial regulations haven’t kept the company from growing its earnings or its dividend.

  • 10-year EPS growth 7.9% CAGR
  • 10-year dividend growth: 10.2% CAGR

Could analysts be wrong about MET’s long-term growth rate? Absolutely. Chuck Carnevale likes to say, “the only thing I know about analyst consensus forecasts is they are wrong.”

So let’s apply the analyst historical margin of error to the long-term 6.6-6.7% CAGR analyst growth range.

  • Expected growth rate: 3-8% CAGR (in-line with historical growth in modern low-rate/high regulatory era)

MET Valuation Matrix

Metric Historical Fair Value (10 years) 2020 2021 2022
5-Year Average Yield 3.56% $52 $53 $56
13-Year Median Yield 3.00% $61 $63 $67
Earnings 9.4 $52 $57 $61
EBITDA 7.9 $61 $63 $65
EBIT (Pre-Tax Profit) 7.8 $52 $54 $68
Average $57 $59 $65

(Source: F.A.S.T. Graphs, FactSet Research)

MET is worth between $52 and $61 in 2020, based on consensus estimates. In 2021, it’s worth about $59, with a fair value range of $53-63.

I’m now using 2021 consensus estimates except for dividend yield fair values, which are always based on the current dividend.

MET Fundamentals

  • Yield: 4.9%
  • Dividend safety: 5/5
  • 2021 fair value: $57
  • Current price: $37.63
  • Discount to fair value: 34%
  • DK rating: Potentially Strong Buy

What kind of returns can investors expect from a 34% undervalued Metlife that’s likely to grow at a modest 3-8% CAGR over time?

MET 2022 Consensus Return Potential

(Source: F.A.S.T. Graphs, FactSet Research)

MET 2025 Consensus Return Potential

(Source: F.A.S.T. Graphs, FactSet Research)

How about 17% CAGR consensus returns over the next five years?

S&P 2025 Consensus Return Potential

(Source: F.A.S.T. Graphs, FactSet Research)

Now compare that to the five-year 4.4% CAGR consensus return potential for the S&P 500.

MET Risk-Adjusted Expected Return Calculator

Company MET
5-Year Consensus Annualized Total Return Potential 16.8%
Conservative Margin Of Error Adjusted Annualized Total Return Potential 8.40%
Bullish Margin Of Error Adjusted Annualized Total Return Potential 25.20%
Conservative Probability-Weighted Expected Annualized Total Return 5.04%
Bullish Probability-Weighted Expected Annualized Total Return 20.16%
Mid-Range Probability-Weighted Expected Annualized Total Return Potential 12.60%
Ratio vs S&P 500 3.82
Bankruptcy Risk 2.50%
Probability Of No Bankruptcy 97.5%
Risk-Adjusted Expected Total Return 12.29%
Ratio vs S&P 500 3.72

(Source: Dividend Kings Investment Decision Tool)

Even when we adjust for margins of error for five-year forecast periods (based on research from JPMorgan and Chuck Carnevale), and the 20-40% probability (Peter Lynch, John Templeton, and Howard Marks) that analysts are wrong about how fast any given company will grow, we get 12.6% CAGR 5-year mid-range probability-weighted expected returns from MET.

When we adjust for the 2.5% long-term probability of bankruptcy (S&P credit rating is A- stable), we get a 12.3% CAGR risk-adjusted expected return.

MET Investment Decision Score

I never recommend a company, much less put my own money at risk, without first knowing exactly how prudent a potential investment it is relative to the S&P 500, most people’s default alternative.

The investment decision score is based on valuation and the three core principles of all successful long-term investors.

Goal MET Why Score
Valuation Potentially Strong Buy 34% undervalued 4/4
Preservation Of Capital Excellent A- stable outlook credit rating = 2.5% 30-year bankruptcy risk 7/7
Return Of Capital Exceptional 29.2% of capital returned over the next 5 year via dividends vs. 10.3% S&P 500 10/10
Return On Capital Exceptional 12.3% RAER vs. 3.3% S&P 500 10/10
Relative Investment Score 100%
Letter Grade A+ Exceptional
S&P 73% = C (market-average)

(Source: Dividend Kings Investment Decision Tool)

Metlife is as close to a perfect high-yield blue-chip as you can find in this market bubble.

It’s an anti-bubble stock that is priced for far less growth than is actually likely once the recession has passed and long-term interest rates return merely to their 10-year average of 2-2.6%.

British American Tobacco (BTI): 7.7%-Yielding Blue-Chip Trading At The Lowest Valuation In At Least 20 Years

Business Summary

Following the acquisition of Reynolds American, British American Tobacco is neck-and-neck with Philip Morris International to be the largest listed global tobacco company – slightly larger than PMI on net revenue, but slightly smaller on volumes. British American’s Global Drive Brands are Dunhill, Kent, Pall Mall, Lucky Strike, and Rothmans, and it also owns Newport and Camel in the U.S. The firm also sells vapor e-cigarettes, including its Vype brand, heated tobacco, with Glo, as well as roll-your-own and smokeless tobacco products. The company holds 31% of ITC Limited, the leading Indian cigarette-maker.”

– Morningstar

Business Update

British American Tobacco, or BAT, disclosed in a preclose trading update that the first half is tracking more or less in line with our expectations. The only surprise was a slightly stronger performance in the United States, where BAT has taken share. Emerging markets appear to be very challenged, however, and we are tweaking our estimates lower to account for the potential of a temporarily higher cessation rate in certain markets. Accordingly, we are lowering our fair value estimate to GBX 4,300 from GBX 4,500. Nevertheless, we continue to see significant upside to BAT and in tobacco generally, and we think both the wide moat rating and business model remain intact.

BAT lowered its guidance range for full-year organic revenue growth to 1%-3% from 3%-5% and said it expects mid-single-digit EPS growth (previously high single-digit). We are moving our estimate from the high end of the new range to the low end. Management has delayed its target of GBP 5 billion in revenue from next-generation products, or NGPs, by up to two years, and now expects to achieve that figure in 2025. As NGPs are likely to cannibalize cigarettes at a lower margin, we do not consider this to be a bad thing. In cigarettes, much of the downward revision is being caused by weakness in emerging markets. This is not surprising, given South Africa has banned sales of tobacco during the lockdown period. While much of the missed volume is likely to have shifted into illicit channels, there is a slight risk that the cessation rate is elevated temporarily.

BAT is less exposed to emerging markets than Philip Morris International, so should weather the storm fairly well. In fact, developed markets seem to be performing well, in part due to border closures limiting the mobility of illicit tobacco. The U.S. appears to be performing particularly well, with industry volumes down around 4%, slightly less than we had feared, and BAT taking share. This is a net-neutral readthrough to Altria in our view.”

– Morningstar

Yes, BTI is struggling with the pandemic lockdown effects, as are most companies, even consumer staples giants like Coca-Cola (KO).

(Source: F.A.S.T. Graphs, FactSet Research)

The Last Time BTI Was Even Close To This Undervalued, It Delivered 23% CAGR Total Returns Over The Next 15 Years

(Source: Portfolio Visualizer)

Even more baffling/amazing/thrilling for potential high-yield investors? The fact that even after management updated analysts on earnings guidance, the company’s fundamentals are not expected to collapse this year, as you’d imagine was the case if its falling share price were justified by fundamentals.

BTI Short-Term Growth Consensus

Metric 2020 Growth Consensus 2021 Growth Consensus

2022 Growth Consensus

Dividend 4% (already announced) 6% 8%
EPS 4% 6% 8%
Owner Earnings (Buffett smoothed out FCF) 25% 4% 8%
Operating Cash Flow 39% 5% 5%
Free cash flow 11% 13% 2%
EBITDA 19% 5% 5%
EBIT (pre-tax profit) 23% 5% 6%

(Source: F.A.S.T. Graphs, FactSet Research)

Not a single fundamental metric this year is expected to see a decline.

In fact, through 2022, not a single metric is expected to decline, and earnings growth is expected to accelerate in the next two years, with dividend growth matching it per management’s 65% payout ratio policy.

Note that 85% is a safe payout ratio for tobacco companies, and BTI is far below that.

The analyst margins of error on forecasting earnings over the last 11 years are 35% to the downside and 10% to the upside.

BTI Long-Term Growth Profile

  • FactSet 2022 medium-term growth consensus (factoring in current recession): 7.1% CAGR
  • FactSet long-term growth consensus (looking beyond recession): 4.9% CAGR
  • YCharts long-term growth consensus: 6.3% CAGR
  • Reuters 5-year growth consensus (factoring in the recession): 5.6% CAGR
  • 20-year rolling growth rates: 2.5-9.0% CAGR
  • The margin of error analyst consensus range: 3-7% CAGR

BTI is not a dying company but a steadily growing one. And it happens to be one of the most undervalued blue-chips in America.

BTI Valuation Matrix

Metric Historical Fair Value (13 years) 2020 2021 2022
5-Year Average Yield 4.59% $58 $65 $71
10-Year Median Yield 3.98% $67 $75 $82
25-year Average Yield 4.29% $62 $70 $76
Earnings 15.0 $65 $69 $75
Owner Earnings 18.0 $88 $91 $98
Operating Cash Flow 12.5 $73 $76 $80
Free Cash Flow 14.5 $61 $69 $71
EBITDA 10.4 $82 $86 $90
EBIT 11.4 $84 $88 $93
Average $71 $77 $82

(Source: F.A.S.T. Graphs, FactSet Research)

If BTI achieves its consensus estimates for 2021, it would be worth between $65 and $91, based purely on the average multiples real investors risking real money have paid for a company growing at 6% CAGR per year.

BTI Fundamentals

  • Yield: 7.7%
  • Dividend safety: 4/5 above-average (4% to 6% risk of a cut in this recession, 1% in a normal recession)
  • 2021 fair value: $74 (dividend hasn’t been raised yet)
  • Current price: $34.81
  • Discount to fair value: 53%
  • DK rating: Potentially ultra-value/anti-bubble/Buffett “fat pitch” buy

What kind of total returns can high-yield, blue-chip investors expect from a steadily growing blue-chip yielding a safe 8% and that’s trading at the lowest valuation in decades?

BTI 2022 Consensus Return Potential

(Source: F.A.S.T. Graphs, FactSet Research)

BTI 2025 Consensus Return Potential

(Source: F.A.S.T. Graphs, FactSet Research)

If BTI grows as analysts expect and returns to market-determined historical fair value, then 45% CAGR total returns are possible over the next two years and 24% CAGR total returns over the next five years.

BTI’s Rolling Returns After 2000 Bear Market Lows (It Was Slightly Less Undervalued Then)

(Source: Portfolio Visualizer)

Here’s the proof of the power of deep value, anti-bubble, blue-chip investing.

Similar returns are currently possible buying BTI, who has continued to steadily grow earnings, cash flow, and dividends throughout its current bear market.

(Source: Imgflip)

Of course, there are no certainties on Wall Street, which speaks just three languages.

  • Probabilities
  • Margin of safety
  • Risk management

BTI Risk-Adjusted Expected Return Calculator

Company BTI
5-Year Consensus Annualized Total Return Potential 23.9%
Conservative Margin Of Error Adjusted Annualized Total Return Potential 11.95%
Bullish Margin Of Error Adjusted Annualized Total Return Potential 35.85%
Conservative Probability-Weighted Expected Annualized Total Return 7.17%
Bullish Probability-Weighted Expected Annualized Total Return 28.68%
Mid-Range Probability-Weighted Expected Annualized Total Return Potential 17.93%
Ratio vs S&P 500 5.43
Bankruptcy Risk 5.00%
Probability Of No Bankruptcy 95.0%
Risk-Adjusted Expected Total Return 17.03%
Ratio vs S&P 500 5.16

(Source: Dividend Kings Investment Decision Tool)

When adjusting for all the uncertainties surrounding how long its bear market will last, how fast it will grow, and the 5% probability the company will go bankrupt within five years, I “only” expect BTI to deliver about 17% CAGR total returns over the next five years.

Which is more than 5X the risk-adjusted expected returns of the S&P 500.

BTI Investment Decision Score

Goal BTI Why Score
Valuation Potentially Ultra-Value/Anti-Bubble/Buffett “fat pitch” buy 53% undervalued 4/4
Preservation Of Capital Above-Average BBB+ stable outlook credit rating = 5% 30-year bankruptcy risk 5/7
Return Of Capital Exceptional 45.4% of capital returned over the next 5 year via dividends vs. 10.3% S&P 500 10/10
Return On Capital Exceptional 17.0% RAER vs. 3.3% S&P 500 10/10
Relative Investment Score 94%
Letter Grade A Excellent
S&P 73% = C (market-average)

(Source: Dividend Kings Investment Decision Tool)

British American Tobacco is yet another potentially excellent high-yield, blue-chip opportunity available in this sea of speculative bubbles.

Bottom Line: Even In A Market Bubble, Blue-Chip Bargains Will Always Be Available

(Source: Seeking Alpha)

Tech bubble 2.0 has a new king of insane speculative excess. Snowflake closed on its first day of trading at:

  • $71 billion market cap
  • 142X sales
  • it’s not even profitable

There is a 90-91% probability this will end badly those who bought it today (it gapped open even higher).

But guess what? Even in a market gone mad for growth at any price, there are still incredible values to be found. Not in non-profitable tech IPOs (five of them are scheduled for the next few weeks, including SNOW), but in blue-chip, quality, high-yield companies. Companies with strong balance sheets and dividends that are steadily growing, even in this recession, and that are very well-covered by earnings and cash flow.

Let the gamblers party on, at least until the music stops. Prudent long-term investors know the fundamental truths of Wall Street.

Those who follow a sound long-term strategy built on quality first and prudent valuation & risk management always never have to fear bubbles, corrections, or bear markets.

Unlike gamblers, who must pray for their luck to hold, long-term investors make their own luck.

(Source: AZ quotes)

Even in the second-most overvalued stock market in US history, there are anti-bubble blue-chips that, within a diversified and prudently risk-managed portfolio, can help you achieve your long-term financial goals.

I can’t promise you they will follow Realty Income’s lead and soar when the tech bubble finally pops. But what I can promise you is that if you follow a prudent long-term strategy with discipline and patience, you’re very likely to enjoy the kind of income and wealth compounding that prosperous retirement dreams are made of.

—————————————————————————————-Dividend Kings helps you determine the best safe dividend stocks to buy via our Valuation Tool, Research Terminal, Phoenix Watchlist, and Daily Blue-Chip Deal Videos.

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Disclosure: I am/we are long BTI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Dividend Kings owns BTI in our portfolios.