Intuit Looks Like a Bargain After Hiking Its Dividend By 16%

Intuit Inc (INTU) reported strong fiscal full-year results (ending July 31) on Aug. 22 and hiked its dividend by 16%. It can afford this raise given its huge free cash flow. As a result, INTU stock still looks undervalued here, even though INTU stock tanked after the results.

INTU stock is trading at $624.44 on Tuesday, Aug. 27. That is down 6.90% from $670.49 on Aug. 21 before the earnings release. 

Moreover, given the company's strong results from its Turbo Tax, Quickbooks, MailChimp and Credit Karma brands, this is somewhat baffling. Maybe it's just a case of “sell on the news” after a recent runup in the price.

INTU - Barchart - Aug. 27, 2024

However, this provides a good opportunity for value investors. INTU stock could be worth over 21% more at $758.38 per share. This is based on a method that uses an average dividend yield and applies a 2.0% FCF yield metric. Let's look at this.

INTU Stock's Value Using Historic Dividend Yield

Since Intuit raised its dividend by 16% to $1.04 this quarter, its annual dividend per share (DPS) rate is at $4.16. This gives the stock a dividend yield of 0.666% (i.e., $4.16/$624.44).

However, in the past 5 years, its average dividend yield has been lower at 0.53%, according to Seeking Alpha. Morningstar reports that the average trailing dividend yield over the same period has been 0.59%. Yahoo! Finance says it has been 0.61%.

Therefore, using all these sites, the average yield for INTU stock is 0.5767%. Here is what that means.

Take today's annual DPS of $4.16 and divide it by 0.5767%. That results in a price target of $721.35 per share. This is 15.5% over today's price of $624.44.

In other words, it's reasonable to assume that the market will eventually push up INTU stock to the point where INTU has an average yield of 0.5767%.

Using FCF Yield to Value INTU Stock

Another way to value INTU stock is to use a free cash flow (FCF) yield metric. After all, free cash flow is the source of cash flow that funds dividends (as well as buybacks).

For example, in the last 12 months (LTM) ending July 31, Intuit generated $4.88 4 billion in cash flow from operating activities (CFOA). After deducting $250 million in capex spending, Intuit produced $4.634 billion in free cash flow (FCF). 

That FCF is “free” to be spent on dividends, buybacks, acquisitions, debt reduction or just accumulate on the balance sheet. It turns out that Intuit used about $1.034 billion to make dividend payments and another $2 billion to buy back its shares. 

Moreover, the $4.634 billion in FCF represents 2.689% of its existing market value of $172.54 billion. That means its FCF yield is 2.69% - much higher than its 0.667% dividend yield.

Let's see how we can use that to value INTU stock going forward. First, note that the $4.634 billion in FCF represents a 28.5% FCF margin on its $16.285 billion in sales. 

Next, analysts project that revenue next year will rise by 12% to $18.26 billion and $20.53 billion in 2026. So, sometime in the next 12 months (NTM) its run rate revenue will be $19.35 billion.

So, applying a 28.5% FCF margin results in a projected NTM FCF of $5.51 billion (i.e., 0.285 x $19.35b). As a result, we can use this to ascertain a future market valuation if this FCF forecast comes to pass.

For example, just like we divided the DPS by the dividend yield metric, let's divide the projected FCF by its existing FCF yield. So, $5.51 billion divided by 0.2.689% results in a market cap of $204.83 billion (i.e., $5.51b/0.02689 = $204.83b).

That is 18.7% over its existing market cap of $172.54 billion. Moreover, the market is likely to improve its FCF yield to at least 2.50%. That brings its projected market cap to $220.4 billion (i.e., $5.51b/0.025). This is 27.7% higher than today's price.

In other words, using an FCF yield method, INTU stock is worth 27.7% more, or $797.41 per share.

Price Targets

As a result, our analysis shows that using a dividend yield method, INTU is worth $721.35, and using an FCF yield method it's worth $797.41. That results in an average price target of $759.38. This is 21.6% higher than today's price.

Analysts tend to agree that INTU stock looks cheap here. For example, Yahoo! Finance reports that the average price target of 25 analysts is $720.72 per share. This is 15.4% higher than today's price. 

In addition, Barchart's survey of analysts shows a mean price of $717.12 per share, or 14.8% higher. Similarly, AnaChart, a new online sell-side analyst tracking site, shows that 24 analysts who've recently written on INTU stock have an average price target of $684.15.

So, on average using these surveys, analysts have a price target of $707.33. That represents an upside of over 13% from today's price. Although not as much as my target price, it still shows that INTU stock looks undervalued here.

On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.