Week 299 - “Basic Materials” And “Energy” Companies That Are Dividend Achievers

Situation: A Retirement Portfolio may benefit from some exposure to commodity-related Energy and Basic Materials companies. Yes, I know. During the 4.5 year Housing Crisis (from April 2007 to October 2011), stocks in the Basic Materials index fund (XLB) lost more than the S&P 500 Index, and stocks in the Energy index fund (XLE) didn’t do much better (see Column D in the Table). So let’s confine our attention to companies that kept increasing their dividend throughout that crisis, i.e., companies that S&P calls Dividend Achievers. 

Mission: Apply our standard spreadsheet analysis to Basic Materials and Energy companies in the 2016 Barron’s 500 List that are a) Dividend Achievers, b) have traded long enough to appear on the 16-yr BMW Method List, and c) have an investment-grade rating on their bonds from Standard & Poor’s. Only 9 companies meet those 4 requirements, if we include a Canadian energy company (Enbridge) that has grown its dividend annually for the past 10+ yrs. (Canadian companies are not surveyed by S&P for inclusion on the Dividend Achievers list.)

Execution: see Table.

Administration: During the 4.5 year Housing Crisis, all 9 companies outperformed the S&P 500 Index (see Column D in the Table). However, 5 of these companies are projected to lose more than that index in the next Bear Market (see Column M in the Table), as determined by statistical analysis conducted by the BMW Method. NOTE: stocks from this sector can’t balance out the effect of cyclical forces on your portfolio because they’re at the mercy of the multi-decade Commodities Supercycle: “A commodities supercycle is an approximately 10-35 year trend of rising commodity prices. The commodities super-cycle is based on the assumption that population growth and the expansion of infrastructure in emerging market nations drive long-term demand and higher prices for industrial and agricultural commodities.” It now appears that a new supercycle is beginning, in that the Dow Jones Commodity Index (^DJC) of 22 futures contracts in 7 sectors has “bounced off” its 1999 low and is heading upward.

Bottom Line: These companies issue stocks that represent high-risk/high-reward investments (see Columns I and M in the Table). The Net Present Value calculations are highest for ENB and SHW (see Column Y in the Table). When evaluating commodity-related companies, recall that copper prices set the trend for commodity prices. High grade copper prices fell 14%/yr from 2011 through 2015 but have risen 30% over the past year.

Risk Rating: 8 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)

Full Disclosure: I dollar-average into MON and own shares of ENB.

NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 19 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years (no dividends accrue in 10th year), Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 10-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/Yr from a stock index of similar risk to owning a small number of large-cap stocks, where risk is mainly due to “selection bias.” That stock index is the S&P MidCap 400 Index at Line 26 in the Table. The ETF for that index is MDY at Line 18.

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