Week 16 - Revised Master List (Fall 2011)

Situation: It has been 3 months since we published the ITR Master List (Week 5), and it’s been quite a ride. The S&P 500 Index fell 11%. When prices fall, the dividend yield increases even though the dividend amount remains unchanged. So the yield on the Index went from 1.8% to 2.2% (which is more than an 11% increase because over 50 companies also increased their dividend). We thought this week’s blog would be a good time to update our Master List and discuss changes that have occurred.

Goal: Explain changes to the ITR Master List.

<Click here> to view the updated Master List spreadsheet. There are four new columns that have been added: P/E, Price/Book, EV/EBITDA, and EV/Revenue. These have been added to help explain the difference between what is considered a “growth stock” vs. those that are “value stocks” (which will be the subject of next week’s blog).

After reviewing the numbers, we decided that six companies had to be removed from the Master List because their yields were below 2.2% and no longer exceeded the S&P 500 Index. These companies are:
   IBM
   HRL
   PX
   SHW
   VFC
   GWW

[In addition, ITT was also removed because it was broken into 3 companies as of 10/11.]

Three months ago, all six of these companies had a yield near the cutoff of 1.8% but since then have not fallen in price as much as the S&P 500 Index (11%). IBM and VFC actually increased in price during that market correction. So the yields of these six companies didn’t rise along with that of the Index. In other words, all six enjoy better earnings prospects than the Index as a whole. We expect that promise in growth potential will be reflected in forthcoming dividend increases, which makes it likely they will be returned to our Master List at some point over the next two years.

As some companies have been removed, five new companies have been added to the Master List because they now exceed the S&P 500 Index:
   MDT
   WAG
   LLTC
   TROW
   DOV

Medtronic (MDT) is in the health care industry and produces surgical equipment; S&P rates its stock at A/M and bonds at AA-. Walgreens (WAG) is a consumer staples company classified as a drug retailer; S&P rates its stock at A+/L and bonds at A. Linear Technology Corporation (LLTC) is in the information technology industry producing integrated circuits; S&P rates it’s stock at A/M but doesn’t offer a bond rating since the company has been retiring debt rapidly. T. Rowe Price (TROW) is in the financial services industry specializing in asset management; S&P rates its stock at A-/M but doesn’t offer a bond rating because the company carries no debt. Dover (DOV) produces industrial machinery such as elevators; S&P rates its stock at A/H and bonds at A.

Bottom Line: The Master List needs to be updated quarterly to remain useful as a planning and investment guide.

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