Sunday, April 1

Week 39 - Master List Update - 1st Quarter 2012

Situation: The stock market is now fully valued but future projections of growth appear cloudy on the horizon. China is trying to deflate an overheated economy, Europe is full into a recession with 3 Eurozone countries at or near default (Greece, Portugal, Italy). And while emerging markets hope to pull out from a terrible year (down 20% in 2011), they can’t do so if the US, Europe, and China aren’t growing. The US appears to be continuing in the pattern of the last two years of grow for the first six months followed by a rough patch. In this week’s blog, we are updating the ITR Master List (Week 27). In this report, no companies have been removed but 4 more have been added: Microsoft (MSFT), CH Robinson Worldwide (CHRW), Canadian National Railway (CNI), and Wisconsin Electric (WEC). 

The companies comprising the ITR Master List meet 6 criteria as we’ve explained in earlier blogs (see Week 27): 
a) S&P stock rating of A- or better, associated with low or medium risk (i.e., A-/M or better);
b) S&P bond rating of BBB+ or better (i.e., 3 steps above “junk bond” rating);
c) dividend payout as high (or higher) than the S&P 500 Index’s pay line (currently 2%);
d) dividend payout that increased every year for at least 9 yrs;
e) Long-term (LT) debt accounts for no more than 45% of total capitalization;
f) Free Cash Flow (FCF) is at least 1.5X the dividend payout for the most recent fiscal year.

In the attached Table, note that the regulated electric utilities (NEE & WEC) have too much LT debt and insufficient FCF/div, and therefore are highlighted in red. But these problems are not germane to our company analysis because a state government (Florida and Wisconsin, respectively) guarantees debts and revenues.

If you’re a disciplined DRIP investor, you can start a DRIP at any point using “dollar cost averaging”; it is not necessary to wait and “buy low”. This is because dollar-cost averaging buys fewer shares when the stock price is high but then buys more shares when the price is low (discussed in Week 6). We categorize companies as “temporarily safe” or “relatively safe” for dollar-cost averaging over 10 yrs (see Week 31). “Temporarily safe” means we can’t find any clear evidence that a company will continue doing well in the next economic downturn. In other words, it’s tangible book value (TBV) probably won’t keep chugging higher. If the attached Table contains an XXX in column “K”, that company has been given a grade of “pass” for what we have dubbed The Buffett Buy Analysis (BBA in Week 30). By this we mean the company has a “durable competitive advantage” and is projected to grow core earnings at 8+% over the next 10 yrs. We feel that makes it “relatively safe” for the long haul. So if you choose 6 DRIPs from this Master List, you’ll sleep more comfortably in the future if at least 3 are “relatively safe”.

Bottom Line: We expect the world’s financial markets will spend the next 10 yrs “climbing a wall of worry”. While the US has 4% of the world’s population it accounts for an amazing 40% of the world’s GDP. Ten yrs from now, it is projected that the US will have 3% of the world’s population and account for less than 25% of its GDP. Our first quarterly update for the 2012 Master List includes many companies that have strong international sales and can be expected to reward the investor with continued growth of dividends during this difficult transition.

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