Sunday, May 1

Month 130 - 11 Bedrock DRIPs: Dividend Achievers in the Dow Jones Composite Average - May 2022

Situation: This is an update of last April’s blog about dollar-cost averaging (Month 118). Those 10 Dividend ReInvestment Plans were chosen on the basis of fundamental metrics. Since then, I’ve decided to place more emphasis on safety than fundamentals. (When the price of a stock collapses, you might give up on the idea of automatically buying more shares each month.) 

If safety is what’s needed to keep you from giving up on dollar-averaging, how is that achieved? Let’s confine our stock-picking inside a Venn diagram of three safe fences: 1) the 65-stock Dow Jones Composite Average, 2) Vanguard Group’s list of Dividend Achievers (VIG), and 3) companies that issue bonds rated A- or higher by S&P. 

Mission: Apply our Standard Spreadsheet to a core list of companies that warrant automatic investment by using these restrictions.

Execution: see Table of 11 DRIPs. Note that 7 of those were on last year’s list of 10 DRIPs (UNP, MSFT, NEE, JNJ, KO, JPM, WMT).

Analysis: Warren Buffett’s favorite metric is addressed in Column R of the Table: Return on Tangible Capital Employed. He thinks anything over 20% for the last fiscal year (lfy) is a good number, and 4 companies meet that standard: MSFT, PG, JNJ, UPS. His second point (that the company is “run by able and honest managers”) is addressed in Morningstar reports (see Column AM) and is negatively impacted by the degree to which managers capitalize their company by issuing long-term bonds instead of common stock (see Column W). Only one company (MSFT) has a BUY rating from Morningstar but 5 have a Debt:Equity ratio less than 1.0 (NKE, MSFT, PG, JNJ, WMT). Mr. Buffett has also stated that a high Free Cash Flow Yield (Column I) reflects good management because Retained Earnings allow the company to expand (or pay down debt) at zero cost. 10 companies (NKE, UNP, MSFT, PG, JNJ, KO, JPM, WMT, UPS, CAT) have Free Cash Flow remaining after dividends. His third point (that the stock be available “at a sensible price”) is addressed by the 1-yr and 5-yr Forward PEG ratios (see Columns M and N): Only one company has PEGs under 2.0 at both time points (CAT). MSFT is cited 4 times.

Bottom Line: Dollar-cost averaging, over time, prevents you from either overpaying or underpaying for building a position. It does this by forcing you to buy shares when to do so appears unwise. By doing so, you get a larger number of shares for your monthly investment than would otherwise be the case.

Risk Rating: 5 (where 10-yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)

Full Disclosure: I dollar-average into all 11 companies.

"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.

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Tuesday, April 26

Month 129 - 26 A-rated Non-financial Companies in the iShares Top 200 Index - April 2022

Situation: In order to “corral” a group of companies for close attention, investors have to work from a theme or Central Thought. I did this recently (Month 126) by focusing on A-rated non-financial companies in the S&P 100 Index. Now I’ve doubled the catchment population and improved the definition of A-rated. Stocks that S&P rates B/M and B/L are now included (MRK, KO, WMT, CAT, QCOM). Companies that are capitalized by issuing long-term loans valued at more than 2.5 times equity are now excluded (HD, AMGN, CL, IBM).

Mission: analyze companies on the newly updated list.

Execution: see Table.

Analysis: Warren Buffett’s favorite metric is addressed in Column R of the Table: Return on Net Tangible Capital Employed. He thinks anything over 20% for the last fiscal year (lfy) is a good number, and 13 companies meet that standard: LLY, MRK, CSCO, PG, TXN, JNJ, PEP, ETN, LMT, UPS, ITW, MMM, QCOM. His second point (that the company is “run by able and honest managers”) is addressed in Morningstar reports (see Column AO) and is negatively impacted by the degree to which managers capitalize their company by issuing long-term bonds rather than common stock (see Column W). Five companies (MRK, ADP, APD, INTC, CMCSA) have a BUY rating from Morningstar, and 14 companies have Debt:Equity ratios of less than 1.0 (MRK, ADP, PFE, CSCO, PG, TXN, APD, JNJ, INTC, ETN, WMT, CMCSA, RTX, GD). Mr. Buffett has also stated that a high Free Cash Flow Yield (Column I) reflects good management because Retained Earnings allow the company to expand (or pay down debt) at zero cost. 24 companies (LLY, MRK, ADP, PFE, CSCO, WM, PG, TGT, TXN, JNJ, KO, INTC, PEP, ETN, LMT, WMT, CMCSA, RTX, UPS, ITW, CAT, GD, MMM, QCOM) have Free Cash Flow remaining after dividends have been paid. His third point ( that the stock be available “at a sensible price”) is addressed by the 1-yr and 5-yr Forward PEG ratios (see Columns M and N): 10 companies have PEGs under 2.0 at both time points (MRK, PFE, TGT, APD, ETN, CMCSA, UPS, ITW, CAT, QCOM). 3 companies are cited 4 times (MRK, ETN, CMCSA).

Bottom Line: The stock market will be experiencing turbulence for some time. Merck (MRK) and Comcast (CMCSA) appear most likely to weather the storm.

Risk Rating: 7 (where 10-yr Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10).

Full Disclosure: I dollar-average into MRK, NEE, PFE, CSCO, PG, TXN, JNJ, KO, INTC, LMT, WMT, RTX, UPS, CAT, and also own shares of APD, CMCSA, GD and MMM.

"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.

Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com