Bear markets are the best friend of an income-oriented, long-term investor. This is because investors are able to stretch their dividend income further with new purchases than would otherwise be the case.
With the S&P 500 index getting hammered 22% so far in 2022, there are tons of stocks that have been unfairly cut in half or more this year. And the nutrition and weight loss stock Medifast (MED -1.77%), down 53% year to date, is arguably one of those stocks that has been unjustly punished.
Let's take a look at why the stock's monstrous 6.4% dividend yield and obscenely cheap valuation could prove to be a great buy for the long run.
The long-term growth outlook remains bright
Medifast is a weight management and nutrition company best-known for its Optavia weight-loss coaching program. What sets the company apart from others in its space?
Unlike programs that prioritize fad diets, Optavia recognizes that healthy, lifelong habits are the best path to weight loss and lasting weight management. And Optavia also has over 68,000 active, empathetic coaches who were once in the shoes of clients. Combining a sound approach to weight loss with the human element has been a winning formula for the company; Medifast has impacted more than 2 million lives since its formation in 1981.
And don't let the poor stock performance year to date fool you: Sure, Medifast is facing difficulty this year with demand due to elevated inflation and a deteriorating economic outlook. This is why analysts are expecting an 11.6% decline in non-GAAP (adjusted) diluted earnings per share (EPS) to $12.28 in 2022.
But the good news is that the tailwinds that have led to 45.9% annual adjusted diluted EPS growth over the last five years are largely intact. Of the 175 million Americans who are looking to lose weight and consider dieting, more than half (95 million) are interested in the coaching services and meal plans offered by Medifast, according to the company.
And as successful as Medifast has become over the years, its 1 million-plus customers barely scratch the surface of its full potential. That's precisely why analysts are anticipating 20% annual adjusted diluted EPS growth over the next five years from the company.
A massive dividend at low risk of being cut
Medifast's 6.4% dividend yield is nearly quadruple the S&P 500 index's 1.8% yield. And while it isn't often that you would expect an outsize dividend yield to be safe from being cut, the company's dividend does look to be viable.
This is because Medifast's dividend payout ratio is expected to come in just under 52% in 2022. Under normal circumstances, this is a payout ratio that builds in an ample margin of safety for a downturn in profitability. And it also gives Medifast the capital needed to expand its business and repurchase shares.
But what makes the payout ratio even better is that as the company's earnings likely rebound in 2023 and beyond, the payout ratio should also dip below 50%, even with double-digit-percentage hikes to the dividend.
The stock is dirt cheap
Medifast's near-term challenge to profitability and resulting stock weakness appears to have set the table for long-term investors.
This is because the stock's forward price-to-earnings (P/E) ratio of 6.6 is a steal for a company whose earnings are still projected to grow at a double-digit clip over the medium term. That's probably why the average analyst 12-month price target is $278, which implies 171% upside from the current $102 share price. This amounts to a P/E-to-growth (PEG) ratio of just over 0.3, which is what makes the high-yield, rapid growth stock a no-brainer buy.