Sunday, October 22

Week 329 - Capitalization-weighted Index of “The 2 and 8 Club”

Situation: You would like a “safe and effective” way to own stocks and match total returns for the S&P 500 Index over time. There is no such way, if you define a “safe” stock portfolio as one with long-term price volatility that compares favorably with that of the S&P 500 Index. See, for example, red highlights in Column M of any of our Tables. Those denote unsafe stocks. You have to choose whether to prioritize safe or effective. Since insider trading is illegal, the only way you can beat the S&P 500 Index is by embracing more risk. 

The 2 and 8 Club” is our program for success using more risk (see Week 327). Those 16 large companies are all in the S&P 100 Index, whose members are required to have efficient price discovery through robust trading in put and call options on the Chicago Board of Options Exchange. Companies in The 2 and 8 Club are required to pay a predictably growing above-market dividend, i.e., yield over 2%/yr and dividend growth of over 8%/yr (over the past 5 yrs). They also have to have S&P bond ratings of A- or better and S&P stock ratings of B+/M or better. Finally, there need to be 16+ years of trading records to enable statistical analysis by the BMW Method

Why do we measure growth using 5 years of dividends instead of 5 years of earnings? Earnings have to be reported by using Generally Accepted Accounting Principles (GAAP). Those are a mish-mash of offsets that can be manipulated by CEOs. So, earnings can look good when they really aren’t. Dividend growth is a product of steady growth in free cash flow, which is Operating Earnings minus Capital Expenditures to grow the company through additions to property, plant, and equipment. Boards of Directors must approve the dividend checks that are sent out to shareholders, which is money that might instead have remained with the company. Remember what Warren Buffett says: “Writing a check separates a commitment from a conversation.

1) Enlarge the pool of companies by extending The 2 and 8 Club concept beyond the S&P 100 Index to embrace qualified companies in the Barron’s 500 Index.
2) Add a column in the Table to show Market Capitalization for each company relative to Market Capitalization of all companies in the Table. Rank companies by Market Capitalization.

Execution: see Table.

Administration: Rules for extending the list of qualified companies (beyond the original 16 found in the S&P 100 Index) are as follows:
   1. Include S&P 100 Companies that are in the reference data set, i.e., the FTSE High Dividend Yield Index but have seen either a recent price accumulation that takes their dividend yield under 2%/yr or slightly less than 8%/yr dividend growth. There are two such companies: Raytheon (RTN) and Coca-Cola (KO).
   2. Include companies in both the reference data set (FTSE High Dividend Yield Index) and the current Barron’s 500 List. That produces 6 additional companies: WEC Energy Group (WEC), Automatic Data Processing (ADP), Air Products & Chemicals (APD), VF (VFC), Archer Daniels Midland (ADM) and Travelers (TRV). 

Bottom Line: The extended version of “The 2 and 8 Club” has 24 companies (see Table), with relative Market Capitalizations being shown in Column AC. Past performance of the aggregate is remarkably high, e.g. see Columns E and K, while risk (in proportion to that outperformance) is acceptable (see Columns I and M). You, of course, want to capture some of that outperformance going forward. To do so, you’ll need to focus on buying stock in the companies most responsible, i.e., those with the largest market capitalization, such as Microsoft (MSFT) and JP Morgan Chase (JPM).  

Risk Rating: 6 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold = 10)

Full Disclosure: I dollar-average into NEE, KO, JPM, MSFT and IBM. I also own shares of MMM, CAT, TRV, AMGN, and TXN.

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Sunday, October 15

Week 328 - Precision Agriculture

Situation: Production Agriculture has created its own problems. Worldwide supply has exceeded demand for years. In early 2017, the USDA projected that farm income would fall for a 4th straight year. But it hasn’t turned out to be that bad, since crop prices have coalesced near last year’s levels, and sales volumes have risen. Much of the oversupply results from technological improvements in farming, starting with the buildout of center-pivot irrigation in the 70s and 80s. Weather prediction started improving in the 1990s, and the National Oceanic and Atmospheric Administration (NOAA) now has a number of online tools available to farmers at no cost. 

To integrate weather information with soil characteristics on a given farm, we now have professional agronomists who provide specific advice on the use of seeds, fertilizer, water, insecticides, herbicides and fungicides. Agronomists are sometimes employed by equipment or seed vendors, who offer Wi-Fi connections that link information collected on tractors to agronomists. More often, Agronomists are employed on retainer by farmers. Many have university degrees, and others with less training work under supervision for an agronomy service, such as Servi-Tech, Inc

The application of Global Positioning Systems to agriculture began with patent approval in 1998. Increasingly, agronomists encourage farmers to adopt GPS-based services addressing their entire set of specific needs, a tactic called “Precision Agriculture.” For example, satellite imagery and soil sampling can be used for variable rate seeding and watering. Results at harvest time are analyzed using Wi-Fi linked to a crop-yield computer program on GPS equipped combines. Trimble, Inc. (TRMB) is a leader in this technology, and new combines are increasingly equipped with Trimble receivers.

Mission: Present a table of publicly-traded companies that provide precision agriculture equipment, and explain in the Administration section the specific offerings of each company in the Table.

Execution: see Table.


* Provides a variety of digital tools through strategic collaborations with 1) Lindsay Corporation (manufacturer of center-pivot irrigation systems) to match soil and seed characteristics with water needs; 2) Ag Connections to present a complete range of farm management software in a digital platform.  
* Recently purchased Blue River Technology, because it makes “tractor-towed robots that can analyze crops and apply fertilizer and pesticides plant-by-plant.
* Has started using its experience with thousands of corn seed varieties in various soil conditions in “self-teaching algorithm” to predict how a particular seed variety will perform after a farmer plants it. But the key to Monsanto’s emerging dominance of precision farming is due to a subsidiary: The Climate Corporation. It’s FieldView Platform is mounted on tractors and provides software for integration of various planting and harvesting inputs. 
* Has purchased Precision Planting LLC, which had been part of a Monsanto subsidiary--The Climate Corporation, and is licensed to retain connectivity with The Climate Corporation’s FieldView Platform.
* Has developed the AgSense software app for optimal GPS-managed control of variable center-pivot irrigation systems.
* Provides daily information and analytic tools essential for precision agriculture planning, augmented by its recent purchase of the Agrible news service.
* Precision agriculture is increasingly dependent on GPS systems and images of farmland generated by orbiting satellites. Detailed images of quarter sections of farmland are now available, using satellites designed to transmit different types of information with specific uses in farming. Agriculture research has been a specific mission of NASA since 2015. IBM owns “The Weather Channel” and has worked with NOAA since 1996 to improve weather forecasting at a “hyper-local” level. IBM provides most of the hardware and software that makes this possible, and has started applying this to precision agriculture, specifically in Brazil.
* Is a pioneer in field navigation equipment and tractor-mounted computers. Its product line has been successful with farmers and is being upgraded almost annually.

Bottom Line: Precision Agriculture is in its early years, but the consolidation phase is well underway. We’ve presented the leading publicly-traded companies above, along with investor information (see Table). These are powerful tools in the hands of the farmer, and will no doubt improve the efficiency and scope of crop production worldwide.

Risk Rating: 8 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, gold = 10)

Full Disclosure: I dollar-average into MON and IBM, and also own shares of CAT and RAVN.

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