Sunday, April 23

Week 303 - A-rated Barron’s 500 Industrial Companies That Are Dividend Achievers

Situation: There are a number of large and well-established industrial companies. By taking a “buy and hold” approach to owning stock in a few of those, you’ll likely realize your best results as a stock-picker. Yes, they’re cyclical. But the level of reward found in purchasing these stocks is generally higher than their level of risk.

Mission: Focus on companies that 1) pay a good and growing dividend, 2) are big enough to be included in the Barron’s 500 List of US and Canadian companies with the highest revenues, 3) have been analyzed statistically over the past 20 yrs by the BMW Method, as shown in Columns K-M in the Table, 4) issue bonds and stocks that S&P rates as A- or better, and 5) have a clean Balance Sheet (see Columns P-R in the Table), which means that  a) long-term debt constitutes no more than 1/3rd of total assets, b) Tangible Book Value is not a negative number, and c) dividends are consistently paid out of Free Cash Flow (FCF). 

Execution: see Table.

Administration: We have applied our standard spreadsheet with one change. The compound annual growth rate (CAGR) of weekly prices is 20 yrs, instead of the customary 16 yrs (see Column K).

Bottom Line: To help you narrow your choices, we have focused on A-rated Dividend Achievers that have clean balance sheets. We have also calculated the Net Present Value (NPV) of owning a stock for the next 10 yrs then selling it (see Column Y in the Table). That statistic assembles income streams from the current dividend (Column G), maintenance of the dividend growth rate that has been established over the past 3 yrs (Column H), and maintenance of the price growth rate that has been established over the past 20 yrs (Column K). A positive number suggests a total return of 9%/yr or more, whereas a negative number projects a lower rate. Per NPV, the leading choice is Canadian National Railway (CNI). 

Risk Rating: 6 (where 10-Yr Treasury Notes = 1, the S&P 500 Index = 5, and gold bullion = 10)

Full Disclosure: I dollar-average into UNP, and also own shares of CNI, CAT, MMM, and GD.

NOTE: Metrics are current for the Sunday of publication. Red highlights denote under-performance vs. VBINX at Line 16 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, 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 3-Yr CAGR found at Column H. Price Growth Rate is the 20-Yr CAGR found at Column K ( 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 shares in a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index at Line 22 in the Table. The ETF for that index is MDY at Line 15. For bonds, Discount Rate = Interest Rate.

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