Sunday, January 27

Month 91 - Food and Agriculture Companies - Winter 2019 Update

Situation: We all have to eat, so food is an essential good. Even in a commodity bear market, the valuations of food and agriculture companies will likely hold up better than the S&P 500 Index ETF (SPY - see Column D in this month’s Table). Which is amazing, given that grains and livestock account for 29% of the Bloomberg Commodity Index. Another way of saying this is that the volumes of food sold are inelastic, much like gasoline. This gives investments in food and agriculture companies a special, almost unique, competitive advantage. 

The most important development in recent years is that the sugar in corn kernels is being processed into ethanol for gasoline. And, to a lesser extent, soybean oil is being processed into diesel fuel (see Week 364). Two US companies are leaders in biofuels production, i.e., Valero (VLO) with a capacity of 1.4 billion gallons per year, and Archer Daniels Midland (ADM) with a capacity of 1.6 billion gallons per year. Animal feeds are an important by-product of ethanol production, marketed as dry and wet distiller grains, that capture 40% of the energy in a kernel of corn. 

Mission: Use our Standard Spreadsheet to highlight important metrics for listed companies in the Food and Agriculture sector.

Execution: see Table.

Administration: The 21 companies in the Table meet specific standards for quality, which are: S&P Bond Rating of BBB or better; S&P Stock Rating of B+/M or better; and trading records that extend for 16+ years to allow analysis by the BMW Method

Bottom Line: In the aggregate, common stocks of these companies look to be a good bet (see Line 23 in the Table). Don’t be fooled. Eight of the 21 stocks track the ups and downs of futures markets in raw commodities (see red highlighted companies at the bottom of Column D in the Table). To build a position in any of those stocks you’ll need to employ dollar-cost averaging. And, only the two companies at the top of the Table have clean Balance Sheets (see Columns N-Q in the Table). 

To invest successfully in this sector, you’ll need to do a lot of research on a continuing basis. For example, note that fertilizer companies and seed companies are missing from the Table. Why? Because of the recent wave of mergers and acquisitions. If you had been an investor in now extinct companies like Monsanto, duPont, Dow Chemical, Potash Corporation of Saskatchewan, and Agrium, you’ll have gained from the pain but also lost money.

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

Full Disclosure: I dollar-average into TSN, KO, CAT, UNP and WMT, and also own shares of HRL and MKC.

"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


Sunday, December 30

Week 391 - Members of “The 2 and 8 Club” in the FTSE Russell 1000 Index

THIS IS THE LAST WEEKLY ISSUE. FUTURE ISSUES WILL APPEAR MONTHLY.

Situation:The 2 and 8 Club” is based on the FTSE High Dividend Yield Index, which represents the ~400 companies in the FTSE Russell 1000 Index that reliably have a dividend yield higher than S&P 500 Index. Accordingly, a complete membership list for “The 2 and 8 Club” requires screening all ~400 companies in the FTSE High Dividend Yield Index periodically to capture new members and remove members that no longer qualify. This week’s blog is the first complete screen.

Mission: Use our Standard Spreadsheet to analyze all members of “The 2 and 8 Club.”

Execution: see Table

Administration: The requirements for membership in “The 2 and 8 Club” are:
1) membership in the FTSE High Dividend Yield Index;
2) a 5-Yr dividend growth rate of at least 8%;
3) a 16+ year trading record that has been quantitatively analyzed by the BMW Method;
4) a BBB+ or better rating from S&P on the company’s bond issues;
5) a B+/M or better rating from S&P on the company’s common stock issues.

In addition, the company cannot become or remain a member if Book Value for the most recent quarter (mrq) is negative or Earnings per Share for the trailing 12 months (TTM) are negative. Finally, there has to be a reference index that is a barometer of current market conditions, i.e., has a dividend yield that fluctuates around 2% and a 5-Yr dividend growth rate that fluctuates around 8%. The Dow Jones Industrial Average ETF (DIA) is that reference index. In the event that the 5-Yr dividend growth rate for that reference index moves down 50 basis points to 7.5% for example, we would use that cut-off point for membership instead of 8%.   

Bottom Line: There are 40 current members. Only 9 are in “defensive” S&P Industries (Utilities, Consumer Staples, and Health Care). At the other end of the risk scale, there are 12 banks (or bank-like companies) and 5 Information Technology companies; 13 of the 40 have Balance Sheet issues that are cause for concern (see Columns N-P). While the rewards of “The 2 and 8 Club” are attractive (see Columns C, K, and W), such out-performance is not going to be seen in a rising interest rate environment (see Column F in the Table). Why? Because the high dividend payouts (see Column G in the Table) become less appealing to investors when compared to the high interest payouts of Treasury bonds).

NOTE: This week’s Table will be updated at the end of each quarter.

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

Full Disclosure: I dollar-average into JPM, NEE and IBM, and also own shares of TRV, CSCO, BLK, MMM, CMI and R.

Caveat Emptor: If a capitalization-weighted Index of these 40 stocks were used to create a new ETF, it would be 5-10% more risky (see Columns D, I, J, and M in the Table) than an S&P 500 Index ETF like SPY. But the dividend yield and 5-Yr dividend growth rates would be ~50% higher, which means the investor’s money is being returned quite a bit more rapidly. That will have the effect of reducing opportunity cost.

"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