Sunday, July 1

Week 52 - 2012 Master List (Quarterly Update)

Situation: Since the last quarterly update (Week 39), 11 companies have fallen off the ITR Master List: CNI, LOW, CB, JNJ, CHRW, MCD, NSC, PEP, PG, GPC, MKC. The stock price for Canadian National Railroad (CNI) has had good appreciation but less growth in its dividend, thus its dividend yield is no longer as high as that of the S&P 500 Index (2.1%). Lowe’s (LOW) and Chubb (CB) don’t meet our requirement for a 10% return on investment (ROI). The other 8 stocks have cash flow issues that are probably temporary and related to the economic crisis in the EuroZone.

Mission: To date, our blog has avoided analyzing or recommending derivatives, those financial instruments that bundle or otherwise capture the value of stocks, bonds, mortgages, rents, precious metals, collectibles, currencies, or fee income. Bond mutual funds are our only exception. For the 50% of assets we suggest you allocate to equities, we recommend you start with small amounts of a stock and add money to that position regularly (while automatically reinvesting dividends). That can be done at very low cost by using online dividend re-investment plans (DRIPs). The companies that we follow are those that:
   a) issue stock with an A- or better S&P rating,
   b) issue bonds with a BBB+ or better rating,
   c) have a dividend payout that equals or exceeds the dividend payout of the S&P 500 Index,
   d) have at least a 10 yr history of increasing their dividend annually.

For most companies, i.e., those that aren’t a state-regulated utility, we have additional requirements:
    e) no more than 45% of total capitalization comes from bonds (cf. pg 3 of the company’s S&P analysis),
    f) have a free cash flow (as defined by
wsjonline) that at least covers the current dividend, and
    g) have a return on investment (ROI) of at least 10% (cf. “stockfinder tool” at

The accompanying Table lists stocks in order of decreasing Finance Value (reward minus risk). We quantitate Finance Value as the annualized total return since 7/1/02 minus the 2007-09 “bear market” total return. Not surprisingly, the top half of the list (n = 11) has an average 5 yr Beta of 0.62 and the bottom half (n = 12) has a 5 yr Beta of 1.23. In other words, stocks in the bottom half move up or down in price twice as far as those in the top half in response to changes in the S&P 500 Index. This is a point we’ve tried to make in past blogs, i.e., that risk expresses itself as volatility. The main sources of risk are an over-reliance on debt financing and a fall-off in cash flow.

Five of those 11 companies in the top half were discussed  in our Stockpickers Secret Fishing Hole blog (Week 29) highlighting the Dow Jones Composite Index: Wal*Mart (WMT), NextEra Energy (NEE), Southern Company (SO), Chevron (CVX), and ExxonMobil (XOM). If you’re just getting started with long-term investing through regular additions to a DRIP, we recommend taking a close look at these companies. This will introduce you to our goal for retirement investing, which is to avoid uncertainty.

Bottom Line: Stock markets are going to be uninspiring (and sometimes scary) while the world is paying down its debts. In the meantime, enjoy dividend income that just keeps growing.

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