Sunday, November 26

Week 334 - Barron’s 500 Commodity Producers That Pay Good And Growing Dividends

Situation: In recent weeks, we’ve seen how difficult it is for a stockpicker to beat the S&P 500 Index. But by selecting a number of stocks from a high quality list of 30 stocks with good and growing dividends, i.e., “The 2 and 8 Club” (see Week 329), you might meet that goal. 

The downside is that you have to worry about risk-adjusted returns. After all, a low-cost S&P 500 Index fund has transaction costs of less than 0.2%/yr, and doesn’t confront you with capital gains taxes until you after you retire (when you’ll be in a lower tax bracket). As a stockpicker, your transaction costs will be at least 1% of Net Asset Value (NAV) each year. And, if you’re diligent about selling stocks whenever their 5-Yr dividend growth rate drops below 8%/yr, you’ll face a capital gains tax of ~1% of NAV because you’ll have real gains after almost every sale. That means you have to pick a discount rate (to project likely returns) that is 2%/yr higher than the discount rate for the S&P 500 Index, which is 7.0%/yr, since the 20-Yr total return for SPY (the SPDR S&P 500 Index ETF) is 7.0%/yr. That’s why we use a 9% Discount Rate when calculating Net Present Value (NPV) for columns V through Y in our Tables.

You’re chances of beating the S&P 500 Index in a risk-adjusted manner come down to two options: 1) pick only those stocks that have less volatility than the S&P 500 Index (see companies without red highlights in Column M in any of our Tables); 2) pick stocks issued by companies that have the most volatile earnings because those will outperform the S&P 500 Index by the widest margin when their industry is in a Bull Market. This week we’ll look at Commodity Producers, since that’s the highest risk industry outside real estate. Note: Real Estate stocks are excluded from our baseline index for “The 2 and 8 Club”, which is the FTSE High Dividend Yield Index.

Mission: Set up a spreadsheet limited to Commodity Producers in “The 2 and 8 Club”, because almost all of those have shown higher price volatility over the past 16 years than the S&P 500 Index per the BMW Method.  

Execution: see the 12 companies in this week’s Table.

Administration: Starting with Commodity Producers in the FTSE High Dividend Yield Index that are also in the 2017 Barron’s 500 List, we exclude any that do not have an S&P credit rating of BBB (or better) and an S&P stock rating of B/M (or better). We also exclude any that do not have the 16 years of price data required for statistical analysis by the BMW Method

Bottom Line: Commodity Producers have one thing in common. They’re inefficient deployers of capital (see Columns Z and AA in the Table). In other words, these companies fail to meet the standard metric for efficiency, which is that Return on Invested Capital (ROIC) is more than twice the Weighted Average Cost of Capital (WACC). Pulling stuff out of the ground almost always wastes capital at some point, unless there is an opportunity for combining a) Economies of Scale with b) oversight of each worksite by a Funds Administrator.

Note that 3 companies (ADM, APD, PX) in the 30-stock Extended Version of “The 2 and 8 Club” (see Week 329) are among the 12 companies that pass this week’s screen of Commodity Producers (see Table). Those 3 are the best place to start your research.

Risk Rating = 9, where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10.

Full Disclosure: I dollar-cost average into XOM and also own shares of CAT.

"The 2 and 8 Club" (CR) 2017 Invest Tune

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