Sunday, June 28

Week 208 - Stockpickers Secret Fishing Hole: Dividend Achievers with Improving Fundamentals

Situation: The 65-stock Dow Jones Composite Average (DJCA) typically outperforms the S&P 500 Index by about 1%/yr. It is composed of 30 Blue Chips, 20 Transports and 15 Utilities picked by the Managing Editor of the Wall Street Journal. The DJCA is a haven for "value" investors because the companies are long-standing members of mature industries and typically have predictable earnings. We call it the Stockpickers Secret Fishing Hole because total returns over 20 yrs are 1% greater than for the S&P 500 Index while bear market losses are 5% lower (see Table). Of the 65 companies, 29 are S&P Dividend Achievers (i.e., companies that have raised their dividend annually for at least the past 10 yrs, see Week 205). Now that the 2015 Barron’s 500 List has come out, we can check on Dividend Achievers and see which have improved their operations over the last 3 yrs.

Mission: Review the 2015 Barron's 500 List of the largest companies on the New York and Toronto stock exchanges to determine which of the 29 Dividend Achievers have moved up in rank compared to 2014. 

Execution: Barron’s uses 3 equally-weighted metrics to determine a company’s rank:   
   1) median 3-yr return on investment (ROIC),
   2) the most recent year’s ROIC relative to the 3-yr median, and
   3) revenue growth for the most recent fiscal year.
Each company’s 2015 rank is compared to its 2014 rank, and the highest rank is given a “1.” All 29 Dividend Achievers have high enough revenues to be included in the 2015 Barron’s 500 List. However, only 9 have a higher rank than in 2014 and only 5 of those have an S&P bond rating of BBB+ or higher and an S&P stock rating of B+/M or higher (see Table). One is a Blue Chip, Nike (NKE), meaning it is in the Dow Jones Industrial Average. Two companies are in the Dow Jones Utility Average, namely, Southern Company (SO) and NextEra Energy (NEE). Two companies are in the Dow Jones Transportation Average: Norfolk Southern Railroad (NSC) and Expeditors International of Washington (EXPD). 

Bottom Line: We occasionally revisit the Stockpickers Secret Fishing Hole to see if there’s a stock worth catching. Currently there are 5 but only two of those (NKE and NEE) look like “better bets” than the bond-hedged S&P 500 Index, i.e., the Vanguard Balanced Index Fund (VBINX).

Risk Rating: 5

Full Disclosure: I dollar-average into NKE and NEE.

NOTE: metrics highlighted in red indicate underperformance vs. VBINX. Metrics are current as of the Sunday of publication.

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