Sunday, December 3

Month 149 - 16 Risk-averse Stocks in the Dow Jones Composite Average - December 2023

Situation: Because of increased macroeconomic uncertainty, most investors, banks, and stock brokerages have adopted a “risk-off” posture. At such times, I look at the professionally curated list of stocks in the Dow Jones Composite Average (DJCA). Why? Because a quarter of those are risk-averse and reliably cover their cost of capital with earnings. 

Mission: Use our standard spreadsheet to analyze DJCA companies that issue bonds rated A- or better by S&P, but exclude those that have a lower Finance Value (see Column G in the Table) than the S&P 500 Index ETF (SPY): UPS, CSCO, NKE, CRM, DIS, INTC. Also exclude smaller companies, meaning those that are not in IWL (the iShares Russell Top 200 ETF): TRV, ED, ATO, XEL, AWK. Also exclude those that have a 10-yr Actual Rate of Return less than their 10-yr Required Rate of Return (CVX, KO, HON, IBM). However, include the two quasi-monopolies that issue bonds rated BBB+ by S&P: Southern Company (SO), which has a monopoly on the distribution of electric power in three contiguous southern states (Alabama, Georgia and Mississippi), and McDonald’s (MCD), which dominates the fast food industry. 

Execution: see Table of 16 companies.

Analysis:  Warren Buffett’s favorite metric is Return on Tangible Capital Employed (Column T in the Table). He thinks a 20% return for the last fiscal year is a good number. Nine companies qualify: MRK, UNH, V, MCD, JNJ, PG, MSFT, AAPL, HD. His second point (that the company be “run by able and honest managers”) is addressed in Morningstar Reports (Column AR) and negatively impacted by the degree to which the company is capitalized by issuing long-term bonds (Column AA). Four companies have a BUY rating from Morningstar (AEP, MCD, JNJ, NEE), and 7 have a Debt to Equity ratio lower than 1.0 (MRK, UNH, V, JNJ, WMT, PG, MSFT). Mr. Buffett also likes Free Cash Flow Yield (Column K) to be higher than Dividend Yield (Column J) because Retained Earnings allow the company to expand operations (or pay down debt) at zero cost; 13 companies qualify (MRK, CAT, UNH, V, MCD, JNJ, WMT, PG, MSFT, AAPL, JPM, UNP, HD). His third point (that the stock be available “at a sensible price”) is addressed by 1-yr and 5-year Forward PEG ratios (Columns O and P); 6 companies have PEGs under 2.5 at both intervals (MRK, UNH, V, JNJ, NEE, MSFT). Six companies are A-rated (MRK, AEP, JNJ, WMT, NEE, PG). 6 companies are cited 4 or more times (MRK, UNH, V, JNJ, PG, MSFT).

Bottom Line: Changes in macroeconomic factors eventually impact asset values. When uncertainty increases (with respect to interest rates, national productivity, or geopolitical turmoil) in any of the 10 advanced economies, investors need to adopt a more “risk-off” posture. Companies in the Dow Jones Industrial Average get almost 50% of their sales from markets outside the United States. Investors in such companies are well-positioned to anticipate the impact of macroeconomic factors. 

Risk Rating: 6 (where 10-yr US Treasury Note = 1, S&P 500 Index = 5, gold = 10)

Full Disclosure: I dollar-average into MRK, CAT, AEP, SO, JNJ, NEE, WMT, PG, MSFT, JPM, UNP, HD, and also own shares of UNH, MCD, AAPL, V.

"The 2 and 8 Club" (CR) 2017 Invest Tune All rights reserved.

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