Sunday, August 7

Week 5 - Master List of Companies Meeting the ITR Criteria

Goal: To pin down which companies in the S&P 500 Index conform to the ITR selection criteria and detail the benefits and risks of owning stock in each over the past decade.

click here to open the Master List Spreadsheet

Legend for the ITR Master List:

Large S&P 500 Companies (n = 19): Stocks selected from the S&P 100 Index. Most of these are multinationals that derive 40-70% of sales from foreign countries.

Smaller S&P 500 Companies (n = 15): Stocks selected from the 400 smaller companies in the S&P 500 Index. Such companies typically have a focused business plan and a less hierarchical management style. These companies have fewer institutional impediments to innovation and can be more nimble in responding to market stresses caused by competition, obsolescence, and recession.

Ticker: Company symbol used for stock trading purposes. (Click on the ticker to view the "Investor Relations" page at the company's website.)

2000-10 TR: Annualized gross Total Return (reinvestment of dividends plus price appreciation) for a stock purchased at close of business (COB) 12/29/00 then sold at COB 12/31/10 (see discussion in Week 4 blog). Our benchmark, SPY, had an annualized gross total return of 1.3% for that 10 yr period. Returns are even lower when costs are subtracted - to calculate net total returns: trading commissions and fees amount to ~2% for each BUY or SELL order placed through a stock broker; inflation averaged 2.4%/yr over that 10 yr period (Inflation_Calculator); and tax rates on dividends and capital gains are set at 15%. To reiterate: fees, capital gains taxes, taxes on dividends, and inflation are not accounted for in calculating the gross Total Return (in Column 3).

Dividend: Current quarterly pay-out per share multiplied by 4 and divided by the recent stock price (expressed as %).

Ann Div Incr: consecutive annual dividend increases.

Stk Rating: "A" is S&P's highest stock rating, with relative benefit sometimes qualified with a "+" or "–" sign; L, M, and H denote a separate assessment of risk: low, medium, or high. Risk in this case represents the extent to which the stock’s value is likely to be impaired or improved during a bear or bull market, respectively.

Bnd Rating: Most companies are financed by both bonds and stocks. Bond ratings denote the risk of bankruptcy. AAA is S&P's highest bond rating, currently held by only 4 companies (ExxonMobil, Johnson & Johnson, Microsoft, and Automatic Data Processing). BBB- is the lowest “investment-grade” rating. BB+ and lower ratings are reserved for “junk status” bonds (also termed "high yield" bonds), which have odds of default greater than 1 in 20.

S&P Industries: S&P has 10 industry categories. Only the telecommunications industry is not represented on our Master List. It is obviously difficult to pigeonhole the major revenue source for a multinational company. Nonetheless, S&P analysts make an effort to do so because the fluctuation of stock prices and dividend payouts depend somewhat on the company's key industry, it is either moving into a new industry or has become an outlier in its historic industry.

5 yr Beta
: The variance of a stock’s price relative to the S&P 500 Index (Beta = 1.00) calculated each trading day over a 5 yr period and then averaged. For example, a Beta of 0.83 for 3M means that the price of 3M went up or down 83% as much as the S&P 500 Index over the 5 yrs before the current month. Barron’s Dictionary of Finance and Investment Terms (1998, Fifth Edition, Barron’s Educational Series, Inc.) ends its definition with this sentence: “A conservative investor whose main concern is preservation of capital should focus on stocks with low betas, whereas, one willing to take high risks in an effort to earn high rewards should look for high-beta.

Debt/Equity: Total debt divided by shareholder’s equity (total assets minus total liabilities). The Debt/Equity ratio for the S&P 500 Index is ~1.25. “Blue Chip” companies normally top out at 0.85 but may temporarily go higher to expand in support of strong revenues.

Bottom Line: 34 companies meet the ITR criteria for profitable long-term investment with acceptable risk. Of those 34, five (XOM, PG, MKC, NEE, UTX) stand out for providing steady returns (Mean Gross Total Return = 8.8%/yr) and good payouts (Mean Dividend = 2.8%) while maintaining a low S&P Risk Rating. Those 5 companies also issue bonds that carry an S&P rating of "A" (or better), and have very low price variance vs. S&P 500 Index (Average Beta of 0.53 vs. 1.00). For comparison, the annualized Total Return of the S&P 500 Index clunked along at 1.3% over the past decade, and it currently pays a dividend of 1.9%.

click here to continue to Week 6


  1. This stuff is great. We currently have all our Roth funds in Invesco/AIM mutual funds. Any pointers on how to go about setting up an account where we can move our funds into a self-directed Roth DRIP?
    -Eric B.

  2. Reply: Most of the national banks have a wealth-management subsidiary that handles self-directed IRAs. A "depository bank" (e.g. Northern Trust, State Street) would be a good place to call for advice about reputable wealth-management financial services in your locality. You will find that Invesco/AIM mutual funds offer a diversified (both US government and US corporations) intermediate term, investment-grade bond fund. Per our Goldilocks Allocation recommendations, 25% of your assets would be in that type of mutual fund. Another 17% would be in an international, intermediate term, investment-grade bond fund and Invesco/AIM may offer one. If so, it should be compared to the leading international bond fund (with respect to both performance and risk), which would be the T. Rowe Price offering (RPIBX). Yahoo Finance and are good resources for comparing mutual funds online.


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