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Medifast's Expected 21.5% Annual Total Return Is Based On Its 8.1% Total Yield

Medifast's Expected 21.5% Annual Total Return Is Based On Its 8.1% Total Yield
Medifast's Expected 21.5% Annual Total Return Is Based On Its 8.1% Total Yield

About: Medifast, Inc. (MED)
Mark Hake CFA

Summary

Medifast stock has a 4.43% dividend yield and a 3.73% buyback yield, for an 81.6% total yield.

Medifast has grown its dividend per share over 52% over the past three years.

I estimate Medifast stock is worth $163.76. This is 60% higher than today and represents a CAGR of 17.1% and a total return of 21.5% over the next three years.

This idea was discussed in more depth with members of my private investing community, Total Yield Value Guide. Get started today »

Medifast Stock Has a Fast-Growing Dividend And A High Total Yield

Medifast, (MED), the weight loss and nutritional products company, is very profitable. Its EBITDA margin is about 13% and the free cash flow ("FCF") margin is 9.3%.

MED stock is cheap, trading at a 4.43% dividend yield and a 3.73% buyback yield. This gives it an 8.16% total yield for shareholders.

I estimate that MED stock is worth $163.76 per share, up 60.5% from its present price of $102.06 over the next three years. That represents an average annual price gain of 17.1% for the next three years. If you include the 4.43% dividend yield, assuming the yield stays at that level, MED stock's total expected return is 21.5% per annum.

This article will describe these points in more detail.

FCF And Dividend Growth Has Been High

MED is very dedicated to the concept of shareholder return of capital through dividends and buybacks. For example, its dividends per share have risen by over 52% in the past three years on a CAGR basis.

Source: Mark R. Hake, CFA

The source of the increase in dividends is the fast growth in free cash flow ("FCF") by Medifast:

Source: Mark R. Hake

Here is another point that is important. Because the company has started buying back stock in the past several years, the growth in dividends per share ("DPS") has been greater than dividends paid growth (in million $).

Source: Mark R. Hake, CFA

The point is that's because of its buyback activity to increase the growth rate in the dividends per share. This shows that DPS has grown 52.3% over the past three years, and the growth in actual dollars paid out by the company in millions of dollars has grown only 50.4%. The difference is due solely to less shares outstanding.

Another important point to see is that dividends paid out do not take up a large amount of the actual free cash flow generated. You can see this in the chart below that I prepared:

Source: Mark R. Hake, CFA

This shows that the dividends paid out in millions of dollars take up about 46% on average of the FCF generated by the company. With the latest increase in the dividend per share, I estimate that during 2020 the dividends will now take up about 66% of the FCF generated.

In other words, as FCF grows over the next three years, there is still room for the payout ratio to increase (assuming the buybacks stay the same). So there could be two sources of dividend per share growth - FCF growth and payout ratio growth.

Valuation Of Medifast Stock

One fairly easy method to value MED stock is to project the growth in FCF and then take today's FCF yield to determine the price in three years. Then the present value of the stock is determined. Lastly, the present value is divided by the new lower number of shares outstanding expected at that time.

Here is the model of how that works out:

Source: Mark R. Hake, CFA

This shows how I derived that valuation, as explained in the paragraph above. This model assumes that the trends in FCF growth, the FCF yield, and dividend payout stay the same. The bottom line is that MED stock is worth $163.76 per share, which represents a total return of 21.5% expected annually over the next three years.

Summary And Conclusion

I have shown that Medifast has had consistent growth in FCF, dividends and buybacks. The company is truly committed to returning capital it generates to its shareholders.

Here is my summary of how cheap the stock is at the present:

Source: Mark R. Hake, CFA

This shows that the stock has an 8.16% total yield. I have shown that the inherent true value of MED stock is 60% higher than today at $163.76. This price represents a total expected return to investors over the next three years, assuming its trends continue - especially its FCF growth and its dividend per share growth - of 21.5% per annum.

In short, this is a cheap and highly potential profitable investment opportunity.

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