Month 158 - 14 Large-cap A-rated Low-volatility Stocks for Retirement Income - October 2024

Situation: In a bull market, most companies in most sectors of the economy show surprisingly strong earnings growth, with companies in the transportation sector leading the way. We know that most companies have embedded risk factors, so why are those companies able to participate in the bull market? The reason is that wobbly companies have been able to grow revenues because of having a good story. So, they’ve been able to set up a good line of credit from banks. In other words, their CEOs think the company will be able to “ride out the storm” by using borrowed money, all the while knowing that many shareholders will feel forced to sell rather than continue to watch the company’s share price collapse. As Warren Buffett says: “You don’t find out who’s been swimming naked until the tide goes out.” But risk is a numbers game (not a story game), so embedded risk factors can be identified in advance.

Mission: Screen the top 200 S&P 500 companies for embedded risk factors, leaving a select list of A-rated companies for analysis: Those are 1) listed at VYM (the Vanguard High Dividend Yield ETF composed of of companies that have a dividend yield higher than that for the S&P 500 Index); 2) have a common stock that has been traded on a U.S. Stock Exchange for 20+ years; 3) have at least an A- S&P credit rating on their corporate bond issues, 4) have at least a B/M S&P stock rating, 5) having a positive earnings per share (TTM), 6) having a positive book value (mrq), 7) have long-term debts valued at no more than 2.5 times equity, and total debts valued at no more than 2.5 times EBITDA (unless covered by collateral of positive Tangible Book Value), 8) have a 10-year actual rate of return that is greater than their 10-year required rate of return (RRR), 9) have a 5-year Beta that is lower than 1.00, 10) is listed in Vanguard’s Dividend Appreciation ETF (VIG) of stocks with 10+ years of annual dividend growth, which eliminates the top 25% of dividend yielders (i.e., those with yields that are perhaps unsustainable).

Analysis: Warren Buffett’s favorite metric is found in Column T of the Table: Return on Tangible Capital Employed. He thinks a 20% return (TTM) is a good number, and 4 stocks qualify: MRK, PEP, JNJ and PG. His second point (that the company is being “run by able and honest managers”) is addressed in Morningstar reports (Column AL) and negatively impacted by the extent to which managers capitalize the company by issuing long-term bonds (Column X). No stocks have a BUY rating from Morningstar but 10 companies have a Long-Term Debt to Equity ratio lower than 1.0 (MRK, TRV, GD, CB, ADP, WMT, JNJ, PG, ABT, CME). Mr. Buffett also thinks a high Free Cash Flow Yield (Column K) reflects good management because Retained Earnings allow the company to expand operations (or pay down debt) at zero cost; 13 companies meet that standard (MRK, CAT, TRV, GD, CB, ADP, WMT, JNJ, NEE, PG, ABT, CME, TGT). His third point (that the stock be available at a sensible price) is addressed by 1-yr and 5-yr Forward PEG ratios (Columns O and P). Five companies have a PEG lower than 2.5 at both time intervals (MRK, TRV, GD, JNJ, TGT). Three companies are cited 3 times (MRK, JNJ, PG).

Bottom Line: When buying stocks, look for embedded risks. Then decide whether returns will likely pay you enough for taking those risks.

Risk Rating: 5 (where 10-yr US Treasury Notes = 1, S&P 500 Index = 5, and go

Full Disclosure: I dollar-average into MRK, CAT, PEP, WMT, JNJ, NEE, PG, CME, and also own shares of GD and ABT.

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Month 157 - 11 Large-cap Dividend-appreciating Members of “The 2 and 8 Club” that issue A-rated bonds - September 2024

Situation: We face a volatile market landscape, with bulls and bears vying for control. By owning stock in companies that pay a good and growing dividend, you can hedge that market risk. To quantify those terms: “Good” means an above-market dividend yield (~2%), as captured by VYM (Vanguard High Dividend Yield Index ETF). “Growing” means a compound annual growth rate (CAGR) for the dividend payout over the past 5 years has been at least 8.0%, and that the dividend payout has increased annually for 10+ years without producing an unsustainably high dividend yield, as captured by VIG (Vanguard Dividend Appreciation Index ETF). When a qualifying company issues bonds that carry an S&P credit rating of A- or better and has a 20+ year trading history, we say its stock is a member of the “2 and 8 Club”.    

Mission: Analyze all the companies in the iShares Russell Top 200 ETF that meet the above requirements. 

Execution: see Table of 11 companies.

Analysis: Warren Buffett’s favorite metric is found in Column T of the Table: Return on Tangible Capital Employed. He thinks a 20% return for the Trailing Twelve Months (TTM) is a good number, and 5 stocks qualify: TXN, ADI, HD, CME, CMCSA. His second point (that the company be “run by able and honest managers”) is addressed in Morningstar reports (Column AN) and negatively impacted by the extent to which managers capitalize the company by issuing long-term bonds (Column Z). Two stocks (CME and CMCSA) have a BUY rating from Morningstar, and 6 companies have a Long-Term Debt to Equity ratio lower than 1.0 (TXN, ADP, ADI, BLK, ABT, CME). Mr. Buffett also thinks a high Free Cash Flow Yield (Column K) reflects good management because Retained Earnings allow the company to expand operations (or pay down debt) at zero cost; 9 companies meet that standard (ADI, NEE, HD, BLK, ABT, CME, TGT, CMCSA). His third point (that the stock be available at a sensible price) is addressed by 1-yr and 5-yr Forward PEG ratios (Columns O and P). Four companies have a PEG lower than 2.5 at both intervals (ADI, BLK, TGT, CMCSA). There are 2 A-rated companies in Column AO (NEE and TGT). Eight companies have a 10-yr total return greater than its Required Rate of Return (capitalization cost), per Columns D & E: TXN, ADP, ADI, NEE, HD, ABT, CME, TGT. ADI, CME are cited 5 times.

Bottom Line: If you want to buy stocks likely to achieve 10+% rates of return long-term, The 2 and 8 Club is a good place to shop. That’s because the accumulation of compound interest  through a DRIP is a better way to achieve that goal than trying to estimate future capital gains.

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

Full Disclosure: I dollar-average into TXN, NEE, HD and CME.

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Month 156 - 19 Large-cap "Dow Jones Composite Average" Dividend Appreciation Companies That Issue A-rated Bonds - August 2024

Situation: Investors who want to pick individual stocks need a  “training wheels” approach. Start with a list of 65 companies that have already been vetted by Wall Street professionals: the Dow Jones Composite Average (DJCA). Then limit your attention to large-capitalization companies. Why? Because those are likely to have a) more than one product line, and b) access to a line of credit large enough and cheap enough to allow the company to “ride-out” a market crash. Finally, it is important to pick companies that have raised their dividend annually for 10+ years (but don’t have an unsustainably high dividend yield), then exclude companies that issue bonds rated lower than A- by Standard & Poor’s. 

Mission: Select from stocks found in a) the 65-stock Dow Jones Composite Average, b) the iShares Russell Top 200 ETF (IWL), and c) the Vanguard Dividend Appreciation ETF (VIG). 

Execution: see Table of 19 companies.

Analysis: Warren Buffett’s favorite metric is found in Column T of the Table: Return on Tangible Capital Employed. He thinks a 20% return for the Trailing Twelve Months (TTM) is a good number, and 9 stocks qualify: CAT, UNH, V, JNJ, PG, MSFT, AAPL, HD, CSCO. His second point (that the company be “run by able and honest managers”) is addressed in Morningstar reports (Column AN) and negatively impacted by the extent to which managers capitalize the company by issuing long-term bonds (Column Z). Two stocks (MSFT and NKE) have a BUY rating from Morningstar, and 10 companies have a Long-Term Debt to Equity ratio lower than 1.0 (MRK, TRV, UNH, V, WMT, JNJ, PG, MSFT, CSCO, NKE). Mr. Buffett also thinks a high Free Cash Flow Yield (Column K) reflects good management because Retained Earnings allow the company to expand operations (or pay down debt) at zero cost; 17 companies meet that standard (MRK, CAT, TRV, UNH, KO, HON, V, WMT, JNJ, IBM, PG, MSFT, AAPL, HD, UNP, CSCO, NKE). His third point (that the stock be available at a sensible price) is addressed by 1-yr and 5-yr Forward PEG ratios (Columns O and P). Eight companies have a PEG lower than 2.5 at both intervals (MRK, TRV, UNH, V, HON, JNJ, MSFT, NKE). There are 9 A-rated companies in Column AO (MRK, CAT, TRV, WMT, JNJ, PG, NEE, UNP, CSCO). Fourteen companies have a 10-yr total return that is greater than its 10-yr Required Rate of Return (capitalization cost), as shown in Columns D and E: MRK, CAT, TRV, UNH, KO, V, WMT, JNJ, NEE, PG, JPM, MSFT, AAPL, HD. Seven companies are cited 5 or 6 times: MRK, TRV, UNH, V, JNJ, PG, MSFT.

Bottom Line: Over the past 20 years (Column Q), these 19 stocks have appreciated 5% faster/yr (in price) than SPY (the S&P 500 Index ETF), while being exposed to no greater risk of loss (Column S).

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

Full Disclosure: I dollar-average into MRK, KO, WMT, JNJ, NEE, PG, MSFT, HD and UNP, and also own shares of CAT, UNH, V, HON, IBM, JPM, AAPL, NKE and CSCO. 

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Month 155 - 10 Large-cap industrials (with good and growing dividends) that issue A-rated bonds - July 2024

Situation: “You’ve got your show horses and your work horses.” This month’s blog highlights work horses of the industrial sector, meaning those that pay an above-market dividend yield and reliably grow that payout every year.

Mission: Take the industrial companies in Vanguard’s High Dividend Yield ETF (VYM) and eliminate any that aren’t in the iShares Top 200 ETF (IWL). Also eliminate any that aren’t in the Vanguard Dividend Appreciation ETF (VIG), which is composed of companies that increase their dividend annually but leaves out companies with a dividend yield that is thought to be unsustainable (the 25% with the highest dividend yields). Also, eliminate any that issue bonds rated lower than A- by Standard & Poor’s. 

Execution: see Table of 10 companies.

Analysis: Warren Buffett’s favorite metric is found in Column T of the Table: Return on Tangible Capital Employed. He thinks a 20% return for the Trailing Twelve Months (TTM) is a good number, and 4 companies qualify: LMT, CAT, ETN, ITW. His second point (that the company be “run by able and honest managers”) is addressed in Morningstar reports (Column AL) and is negatively impacted by the extent to which managers have capitalized the company by issuing long-term bonds (Column X). One company (HON) has a BUY rating from Morningstar, and 4 have a Long-Term Debt to Equity ratio lower than 1.0 (GD, ADP, EMR, ETN). Mr. Buffett also thinks a high Free Cash Flow Yield (Column K) reflects good management because Retained Earnings allow the company to expand operations (or pay down debt) at zero cost; 9 companies qualify (LMT, CAT, GD, ADP, HON, WM, ETN, ITW, UNP). 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); 3 companies have PEGs lower than 2.5 at both intervals (GD, HON, UNP). There are 3 A-rated companies (see Month 153): CAT, GD, UNP. Seven companies have 10-yr total returns that exceed their 10-yr Required Rates of Return (capitalization cost), as shown in Columns D and E: LMT, CAT, GD, ADP, WM, ETN , ITW. The most highly cited company is GD (5 times).

Bottom Line: Fewer than 10% of the largest 200 companies in the S&P 500 Index meet these criteria for safety. Pricing for shares in the industrial sector is cyclical, but these 10 companies have 10% lower volatility than the S&P 500 Index (see Column C). This makes them less likely to fall steeply in price during a bear market (as shown in Column F) and therefore outperform the S&P 500 ETF (SPY) after 10 years (see Column E).

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

Full Disclosure: I dollar-average monthly into LMT, CAT, UNP, and also own shares of GD and HON.

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Month 154 - 26 Large-cap Risk-averse “Dow Jones Composite Average” Dividend Achievers - June 2024

Situation: Retirement savers need a “touchstone of reality” to guide their investment decisions. I offer these focus lists: 1) the 65-stock Dow Jones Composite Average; 2) the iShares Russell Top 200 ETF (IWL), and 3) the Invesco Dividend Achievers ETF (PFM). That means you’d be researching companies that are vetted by Wall Street professionals, are among the largest 40% in the S&P 500 Index, and are committed to raising their dividend annually.

Mission: Use our Standard Spreadsheet to analyze companies that issue bonds rated BBB+ (or better) by Standard & Poor’s and meet the above criteria. Exclude stocks that lost more (relative to their 10-yr total returns/yr) than the S&P 500 ETF (SPY) during the worst year for SPY in the past 10 (see Column G in the Table).

Execution: see Table of 26 stocks.

Analysis: Warren Buffett’s favorite metric is found in Column T of the Table: Return on Tangible Capital Employed. He thinks a 20% return for the Trailing Twelve Months (TTM) is a good number, and 8 stocks qualify: 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 AN) and is negatively impacted by the extent to which managers have capitalized the company by issuing long-term bonds (Column X). Four companies have a BUY rating from Morningstar (AEP, MCD, DUK, NEE), and 9 have a Long-Term Debt to Equity ratio lower than 1.0 (CVX, MRK, TRV, UNH, V, JNJ, WMT, PG, MSFT). Mr. Buffett also thinks a high Free Cash Flow Yield (Column K) reflects good management because Retained Earnings allow the company to expand operations (or pay down debt) at zero cost; 20 companies meet that standard (CVX, MRK, CAT, TRV, AMGN, UNH, KO, V, HON, MCD, JNJ, WMT, IBM, PG, MSFT, JPM, AAPL, CSX, HD, UNP). 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); 11 companies have PEGs lower than 2.5 at both intervals (MRK, TRV, UNH, AEP, V, HON, MCD, WMT, DUK, MSFT, CSX). There are 8 A-rated companies (Column AO): MRK, CAT, TRV, JNJ, WMT, PG, NEE, UNP. Nineteen companies have 10-yr total returns that equal or exceed their 10-yr Required Rates of Return, i.e., their capitalization cost, as shown in Columns D and E: MRK, CAT, TRV, AMGN, UNH, AEP, V, SO, MCD, JNJ, WMT, PG, NEE, JPM, MSFT, AAPL, CSX, HD, UNP. The 9 most highly cited stocks are MRK, TRV, UNH, V, MCD, JNJ, WMT, PG, MSFT (5 times each).

Bottom Line: Warren Buffett’s “#1 rule is never lose money.” That means build positions in buy-and-hold stocks. We find 9 (MRK, TRV, UNH, V, MCD, JNJ, WMT, PG, MSFT).

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

Full Disclosure: I dollar-average into CVX, MRK, CAT, AEP, SO, MCD, JNJ, WMT, IBM, PG, NEE, MSFT, JPM, HD, UNP; own shares of TRV, AMGN, UNH, KO, V, HON, DUK and CSX.

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Month 153 - 14 A-rated High-yield Stocks for Retirement - April 2024

Situation: Retirement savers increasingly depend on income from bond-like stocks, either through workplace retirement plans and IRAs or cashing quarterly dividend checks. The trick is to find a company that has a clean Balance Sheet and pays a good and growing dividend.

Mission: Use our Standard Spreadsheet to analyze companies that meet our “A-rating” requirements, as detailed in the Appendix.

Execution: see Table of 14 companies.

Analysis: Warren Buffett’s favorite metric is Return on Tangible Capital Employed (see Column T in the Table). He thinks a 20% return for the Trailing Twelve Months (TTM) is a good number. Three companies qualify: JNJ, CSCO, PG. His second point (that the company be “run by able and honest managers”) is addressed in Morningstar Reports (Column AN) and negatively impacted by the degree to which the company is capitalized by issuing long-term bonds (Column X). Three utility companies have a BUY rating from Morningstar (WEC, NEE, LNT), and 8 companies have a Debt to Equity ratio lower than 1.0 (MRK, TRV, GD, ATO, JNJ, WMT, PG, CSCO). Mr. Buffett also likes Free Cash Flow Yield (Column K) to be higher than Dividend Yield (Column J), since Retained Earnings allow the company to expand operations (or pay down debt) at zero cost; 11 companies qualify (MRK, CAT, GD, ATO, JNJ, WMT, PG, LNT, UNP, CSCO, TGT). 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); 7 companies have PEGs under 2.5 at both intervals (MRK, TRV, GD, WMT, WEC, NEE, TGT). Five companies are cited 3 times (MRK, GD, JNJ, WMT, PG, CSCO).

Bottom Line: We’ve set high standards, which tend to favor companies in the 3 defensive industries: Utilities (4), Consumer Staples (2), and HealthCare (2).

Risk Rating: 6 (where 10-yr Treasuries = 1, S&P 500 Index = 5, and gold bullion =10)

Full Disclosure: I dollar-average into MRK, CAT, JNJ, WMT, PG, NEE, UNP and CSCO, and also own shares of TRV, GD, ATO, WEC, LNT and TGT.

Appendix: Criteria for stocks to receive an A-rating: 1) being listed at VYM (the Vanguard High Dividend Yield ETF); 2) being listed on a U.S. Stock Exchange for 20+ years; 3) having at least an A- S&P rating on the corporate bond it issues, 4) having at least a B/M S&P rating on it’s common stock, 5) having a positive earnings per share (TTM), 6) having a positive book value (mrq), 7) having long-term debts no greater than 2.5 times equity, and total debts no greater than 2.5 times EBITDA (unless covered by a positive Tangible Book Value), 8) having a 10-year actual rate of return that is greater than the 10-year required rate of return (RRR), 9) having a 5-year Beta that is lower than 1.00, 10) being listed in Vanguard’s Dividend Appreciation ETF (VIG), which eliminates the 25% of dividend-paying stocks that have the highest dividend yields. (Such high yields are likely to be unsustainable).

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Month 152 - 20 Profitable Large-cap Dividend Achievers in the Dow Jones Composite Average - March 2024

Situation: The U.S. stock market lacks clear direction going forward. Investors will need to eschew risk and take a balanced position between growth stocks, bond-like stocks, and investment-grade bonds. That means giving increased attention to the Dow Jones Composite Average–where many companies issue stocks with good and growing dividends.

Mission: Use our standard spreadsheet to analyze companies in the 65-stock Dow Jones Composite Average, selecting those that 1) are included in the Russell Top 200 Index 2) are listed in the Vanguard Dividend Appreciation ETF, 3) have a 10-yr Actual Rate of Return that exceeds their 10-yr Required Rate of Return (Columns D&E) or a Return on Tangible Capital Employed (Column T) of at least 20%, 4) issue bonds rated BBB+ or better by S&P, and 5) have an S&P stock rating of B/H or higher.

Execution: see Table of 20 stocks.

Analysis: Warren Buffett’s favorite metric is Return on Tangible Capital Employed (see Column T in the Table). He thinks a 20% return for the last fiscal year is a good number. Eleven companies qualify: MRK, UNH, KO, V, HON, JNJ, PG, MSFT, AAPL, HD, UPS. His second point (that the company be “run by able and honest managers”) is addressed in Morningstar Reports (Column AP) and negatively impacted by the degree to which those managers capitalize the company by issuing long-term bonds (Column Z). Three companies have a BUY rating from Morningstar (HON, MCD, NEE), and 9 have a Debt to Equity ratio lower than 1.0 (MRK, TRV, UNH, V, JNJ, WMT, PG, MSFT, CSCO). Mr. Buffett also likes Free Cash Flow Yield (Column K) to be higher than the Dividend Yield (Column J), since Retained Earnings allow the company to expand operations (or pay down debt) at zero cost; 18 companies qualify (MRK, CAT, TRV, UNH, KO, V, HON, MCD, JNJ, WMT, PG, MSFT, AAPL, JPM, CSX, UNP, HD, CSCO). 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); 8 companies have PEGs under 2.5 at both intervals (MRK, TRV, UNH, V, HON, MCD, NEE, MSFT). Eight companies are A-rated (Column AQ): MRK, CAT, TRV, JNJ, WMT, NEE, PG, UNP, CSCO. Nine companies are cited 4 times (MRK, TRV, V, HON, MCD, JNJ, PG, MSFT, CSCO)

Bottom Line: DJCA companies are selected by a committee of Wall Street professionals to represent profitable leaders in 10 of the 11 S&P industries (Real Estate being excluded, but McDonald’s profits come mainly from rental income). 

Risk Rating: 6 (where 10-yr U.S. Treasury Notes = 1, S&P 500 = 5, and gold bullion = 10)

Full Disclosure: I dollar-average into 14 stocks (MRK, CAT, KO, MCD, JNJ, WMT, PG, NEE, MSFT, JPM, UNP, HD, UPS and CSCO), and also own shares of UNH, HON, V and CSX.

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Month 151 - Dogs of the Dow - February 2024

Situation: Dogs of the Dow date are the 10 highest yielding Dow Jones Industrial Average (DJIA) stocks on January second of each new year. Their dividend yields are high because their stock prices are low. These “blue chips” are in the bargain basement. If an equal dollar amount is invested in all 10 early in January, it is more likely than not that their average total return for the year will beat the price-weighted DJIA.

Mission: Run our standard spreadsheet on those 10.

Execution: see Table.

Analysis: Warren Buffett’s favorite metric is Return on Tangible Capital Employed (Column U in the Table). He thinks a 20% return for the last fiscal year is a good number. Four companies qualify: AMGN, KO, JN, CSCO. His second point (that the company be “run by able and honest managers”) is addressed in Morningstar Reports (Column AU) and negatively impacted by the degree to which those managers capitalize the company by issuing long-term bonds (Column AD). Three companies have a BUY rating from Morningstar (DOW, VZ, WBA), and 4 have a Debt to Equity ratio lower than 1.0 (CVX, JNJ, CSCO). Mr. Buffett also likes Free Cash Flow Yield (Column L) to be higher than Dividend Yield (Column L), since Retained Earnings allow the company to expand operations (or pay down debt) at zero cost; 9 companies qualify (CVX, AMGN, KO, JNJ, IBM, DOW, CSCO, VZ, MMM). His third point (that the stock be available “at a sensible price”) is addressed by 1-yr and 5-year Forward PEG ratios (Columns P and Q); 2 companies have PEGs under 2.5 at both intervals (AMGN, JNJ). Two companies are A-rated (Column AV): JNJ and CSCO. Two companies are cited 4 times (JNJ, CSCO).

Bottom Line: I suggest that you consider companies that issue bonds rated A- or better (Column AH) by S&P (CVX, KO, JNJ, IBM, CSCO). Then exclude the 3 (in Columns D and E) that don’t have a 10-yr Actual Rate of Return that covers their 10-yr Required Rate of Return (CVX, KO, IBM). But include KO because it has an ROIC (Return On Invested Capital) that is more than twice its WACC (Weighted Average Cost of Capital), as shown in Columns X and Y. That leaves 3 stocks (KO, JN, CSCO) that are suitable for investment.

Risk Rating: 8 (10-yr U.S. Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)

Full Disclosure: I dollar-average into KO, JNJ and CSCO, and also own shares of CVX, IBM, VZ, MMM and WBA.

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Month 150 - 18 Dow Jones Composite Average Companies That Issue A-rated Bonds - January 2024

Situation: Median home prices are 7.4 times median income, which is higher than the 6.8 times median income reading at the peak of the 2008 housing crisis, and well above the long-term average of 3-4 times income . This is a bubble, and when it pops there will be a recession (if history is any guide). At such junctures, I hope for the best and plan for the worst. I focus on the professionally-curated 65-stock Dow Jones Composite Average (DJCA). Why? Because a third of those companies have strong Balance Sheets and reliably cover their costs of capital with earnings. 

Mission: Use our standard spreadsheet to analyze DJCA companies that 1) issue bonds rated A- or better by S&P, 2) have a 10-yr Actual Rate of Return that is higher than their 10-yr Required Rate of Return (calculated by the Capital Asset Pricing Model), and 3) sustained less capital loss than the S&P 500 (SPY) during 2022.  

Execution: see Table of 18 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. Eight companies qualify: MRK, UNH, V, JNJ, PG, MSFT, AAPL, HD. His second point (that the company be “run by able and honest managers”) is addressed in Morningstar Reports (Column AT) and is negatively impacted by the degree to which the company is capitalized by issuing long-term bonds (Column AC). Four companies have a BUY rating from Morningstar (AEP, JNJ, NEE, AWK), and 8 have a Debt to Equity ratio lower than 1.0 (MRK, UNH, ATO, 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, ATO, V, 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); 7 companies have PEGs under 2.5 at both time intervals (MRK, UNH, AEP, V, JNJ, NEE, MSFT). Eight companies are A-rated (Column AU): MRK, ATO, XCEL, JNJ, WMT, NEE, PG, UNP. Seven companies are cited 4 or more times (MRK, UNH, V, JNJ, WMT, PG, MSFT).

Bottom Line: Companies that issue A-rated bonds rarely suffer as much capital loss in a market crash as SPY. Companies that consistently cover their cost of capital (meet or beat their Required Rate of Return calculated by the Capital Asset Pricing Model) are even better insulated from capital loss. 

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, JNJ, WMT, NEE, PG, MSFT, JPM, UNP, HD, and also own shares of UNH, ED, ATO, XE, V.

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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.

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Month 148 - 12 Healthcare companies that issue A-rated bonds - November 2023

Situation: Healthcare stocks have fallen almost 10% since July, mainly because of two events: 1) the adoption of appetite-suppressants to treat obesity, 2) the adoption of price controls for Medicare drugs. Obesity is a risk factor in a dozen important illnesses, and a widespread reduction in obesity would impact cash flows of the healthcare industry. The good news is that healthcare costs for the average citizen would fall, closing the gap between supply and demand.

Mission: Analyze healthcare companies that have no material risk of bankruptcy (issue bonds rated A- or better by S&P).

Execution: See Table of 12 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 (lfy) is a good number. 10 companies qualify: LLY, CI, MRK, UNH, BMY, JNJ, TMO, DHR, PFE, ABT. 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). 5 companies have a BUY rating from Morningstar (CI, ELV, BMY, PFE, MDT), and 10 have a Debt to Equity ratio lower than 1.0 (CI, MRK, ELV, UNH, JNJ, TMO, DHR, PFE, ABT, MDT). 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; 11 companies qualify (CI, MRK, ELV, UNH, BMY, JNJ, TMO, DHR, PFE, ABT, MDT). His third point (that the stock be available “at a sensible price”) is addressed by 1-yr and 3-year Forward PEG ratios (Columns O and P); 8 companies have PEGs under 2.5 at both intervals (LLY, CI, MRK, ELV, UNH, BMY, TMO, MDT). One company (JNJ) is A-rated. 6 companies (see Appendix) are Hardy Perennials: LLY, ELV, UNH, JNJ, TMO, DHR; 4 companies are cited 5 times (ELV, UNH, JNJ, TMO).

Bottom Line: Big Pharma is on sale.

Risk Rating: 7 (where 10-yr Treasury Notes = 1, S&P 500 = 5, gold = 10).

Full Disclosure: I dollar-average into LLY, MRK, JNJ, DHR and PFE, and also own shares of UNH and TM

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Appendix: We call a company that is sustainably able to make money a Hardy Perennial. There are 5 requirements:

–it has a better Finance Value (Column G) than the S&P 500;

–it issues bonds rated A- or higher by S&P;

–it has an ROIC that exceeds its WACC (Columns W&X);

–10-yr total return/yr exceeds 10-yr Required Rate of Return (Columns D&E);

–5-yr Beta (Column C) is less than the S&P 500’s 5-yr Beta (fixed at 1.00).

Month 147 - 16 A-rated Companies in the Vanguard High Dividend Yield ETF - October 2023

Situation: Recession is no longer on the horizon, even though the FOMC will likely keep interest rates “higher for longer.” Investors may even be happy with that, since federal budget deficits are expected to stabilize around 5%/yr . A stockpicker’s job is not to match or exceed the historical returns of the S&P 500. It is to invest in companies with metrics that predict they’ll be safe in a crisis–so that you won’t be tempted to sell shares and sustain a capital loss.

Mission: Analyze our A-rating system for picking stocks (see Appendix). It has 12 red lines you might not want to cross at this uncertain time.

Execution: see Table of 16 companies.

Analysis: Warren Buffett’s favorite metric is found in Column T of the Table: Return on Tangible Capital Employed. He thinks a 20% return for the last fiscal year (lfy) is a good number. Seven companies do so: LMT, HSY, SNA, PEP, JNJ, PG, CSCO. His second point (that the company be “run by able and honest managers”) is addressed in Morningstar reports (see Column AQ) and is negatively impacted by the degree to which managers capitalize the company by issuing long-term bonds (see Column Z). Three companies have a BUY rating from Morningstar (LMT, WEC, NEE), and 10 companies have a Long-term Debt to Equity ratio lower than 1.0 (ADM, GD, ATO, SNA, APD, JNJ, WMT, PG, HRL, CSCO). Mr. Buffett also states that a high Free Cash Flow Yield (Column K) reflects good management because Retained Earnings allow the company to expand operations (or pay down debt) at zero cost; 11 companies meet that standard (LMT, ADM, GD, HSY, ATO, SNA, JNJ, WMT, PG, HRL, CSCO). His third point (that the stock be available “at a sensible price”) is addressed by 1-yr and 3-year Forward PEG ratios (see Columns O and P); 4 companies (GD, APD, NEE) have PEGs under 2.5 at both intervals. Five companies carry our “Value Stock” rating (Column AN): ADM, SNA, XEL, WEC, HRL. No companies are cited 4 times.

Bottom Line: There is no system for picking stocks that won’t leave you feeling frustrated during some future Bear Market. At that moment, you’ll either wish you’d bought more shares of investment-grade bond funds or you’ll be confident that your portfolio can ride out the storm.

Risk Rating: 5 (where 10-yr Treasury Notes = 1, S&P 500 = 5, gold = 10).

Full Disclosure: I dollar-average into LMT, SNA, PEP, JNJ, WMT, NEE, PG, and also own shares of ADM, HSY, ATO, APD, CSCO, HRL.

Appendix: Twelve criteria required for stocks to receive an A-rating: 1) being listed at VYM (the Vanguard High Dividend Yield ETF); 2) being listed on a public U.S. Stock Exchange for 20+ years; 3) having at least an A- S&P rating on it’s corporate bond, 4) having at least a B+/M S&P rating on it’s common stock, 5) growth in earnings per share (EPS) for the trailing twelve month period (TTM), 6) having a positive book value, 7) having long-term debt no greater than 2.5 times equity, 8) having a 10-year actual rate of return that is greater than the 10-year required rate of return (RRR), 9) having had no dividend cuts in the past two years, 10) having a 5-year Beta lower than 1.00, 11) having a ratio of total debt to EBITDA (mrq) that is no greater than 2.5 (unless debt is covered by collateral in the form of tangible book value), 12) being listed in Vanguard’s Dividend Appreciation ETF (VIG), which eliminates the 25% of dividend-paying stocks that have the highest dividend yields (since such high yields are likely unsustainable). Rating: 5 (where 10-yr Treasury Notes = 1, S&P 500 = 5, gold = 10).

Full Disclosure: I dollar-average into LMT, SNA, PEP, JNJ, WMT, NEE, PG, and also own shares of ADM, HSY, ATO, APD, CSCO, HRL.

Appendix: Twelve criteria required for stocks to receive an A-rating: 1) being listed at VYM (the Vanguard High Dividend Yield ETF); 2) being listed on a public U.S. Stock Exchange for 20+ years; 3) having at least an A- S&P rating on it’s corporate bond, 4) having at least a B+/M S&P rating on it’s common stock, 5) growth in earnings per share (EPS) for the trailing twelve month period (TTM), 6) having a positive book value, 7) having long-term debt no greater than 2.5 times equity, 8) having a 10-year actual rate of return that is greater than the 10-year required rate of return (RRR), 9) having had no dividend cuts in the past two years, 10) having a 5-year Beta lower than 1.00, 11) having a ratio of total debt to EBITDA (mrq) that is no greater than 2.5 (unless debt is covered by collateral in the form of tangible book value), 12) being listed in Vanguard’s Dividend Appreciation ETF (VIG), which eliminates the 25% of dividend-paying stocks that have the highest dividend yields (since such high yields are likely unsustainable).

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Month 146 - 10 Food & Agriculture Companies Issuing A-rated Bonds - September 2023

Situation: “...your objective is to minimize your chances of dying poor” (William Bernstein). One way to do that is to invest in companies which meet an essential need, food being the most important. But which companies? First assess risk. We use 4 safety criteria: The company must 1) issue bonds rated A- or better by S&P (Column AC in the Table); 2) issue a stock that has a better performance record than SPY (the S&P 500 ETF) during the one year in the past ten that SPY had its worst returns–a metric we call Finance Value (Column G); 3) have a Return On Invested Capital (ROIC) over the Trailing Twelve Months (TTM) that exceeds the Weighted Average Cost of Capital (WACC) – see Columns V and W; 4) have a 10-yr Actual Rate of Return (Column E) that exceeds the 10-yr Required Rate of Return (Column D) calculated by the Capital Asset Pricing Model.

Mission: Screen large U.S. food & agriculture companies that meet these 4 safety criteria, using our Standard Spreadsheet.

Execution: see Table of 10 companies.

Analysis: Warren Buffett’s favorite metric is found in Column S of the Table: Return on Tangible Capital Employed. He thinks a 20% return for the last fiscal year is a good number. Three companies do so: HSY, PEP, KO. His second point (that the company be “run by able and honest managers”) is addressed in Morningstar reports (Column AQ) and is negatively impacted by the extent to which managers capitalize the company by issuing long-term bonds (Column Z). No companies have either a BUY or SELL rating from Morningstar but 4 have a Long-Term Debt to Equity ratio that is lower than 1.0 (ADM, WMT, HRL, COST). Mr. Buffett also states that a high Free Cash Flow Yield (Column K) reflects good management because Retained Earnings allow the company to expand operations (or pay down debt) at zero cost; 9 companies meet that standard (ADM, DE, CAT, HSY, KO, WMT, HRL, COST, UNP). His third point (that the stock be available at a sensible price) is addressed by 1-yr and 3-year Forward PEG ratios (Columns N and O); no company has PEGs lower than 2.5 at both intervals. There are 5 A-rated companies (Column AR): ADM, HSY, PEP, WMT, HRL. The most highly cited companies are ADM, HSY, WMT, HRL (3 times each).

Bottom Line: Investors think food-related stocks with strong fundamentals are safe bets. What is less widely known is that they’re growth stocks. Why? Because the world’s “middle class” demographic is growing faster than the world’s population, and that growth drives technological improvements in the production, processing, and distribution of foodstuffs.

Risk Rating: 5 (where 10-yr Treasuries = 1, S&P 500 = 5, and gold bullion = 10)

Full Disclosure: I dollar-average into CAT, PEP, KO, WMT, COST and UNP, and also own shares of ADM, DE, HSY and HRL.

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Month 145 - 11 A-rated Dividend Achievers for Retirement Income - August 2023

Situation: Saving for retirement is aided by having a taxable account of individual stocks that pay a good and growing dividend. To pick safe stocks for that purpose, first assess risk. There are 4 requirements, i.e., that the company’s bond issue has an S&P Credit Rating of A- or better, its finance value exceeds that for the S&P 500 Index ETF SPY (see Column G in the Table), its Return On Invested Capital (ROIC) exceeds its Weighted Average Cost of Capital (WACC) as shown in Columns V and W, and that its 10-yr Actual Rate of Return (10-Yr ROIC) exceeds its 10-yr Required Rate of Return (which is a proxy for 10-yr WACC) as shown in Columns D and E. 

Mission: Find safe stocks for retirement income.

Execution: see Table of 11 companies.

Analysis: Warren Buffett’s favorite metric is found in Column S of the Table: Return on Tangible Capital Employed. He thinks a 20% return for the last fiscal year is a good number. Six companies do so: MRK, LMT, HSY, SNA, PEP, PG. His second point (that the company be “run by able and honest managers”) is addressed in Morningstar reports (Column AP) and is negatively impacted by the extent to which managers capitalize the company by issuing long-term bonds (Column Y). One company has a BUY rating from Morningstar (HON), and 6 companies have a Long-Term Debt to Equity ratio lower than 1.0 (MRK, ADM, SNA, APD, WMT, HRL). Mr. Buffett also states that a high Free Cash Flow Yield (Column K) reflects good management because Retained Earnings allow the company to expand operations (or pay down debt) at zero cost; 9 companies meet that standard (MRK, LMT, ADM, HSY, SNA, HON, WMT, PG, HRL). His third point (that the stock be available “at a sensible price”) is addressed by 1-yr and 3-year Forward PEG ratios (Columns N and O); 3 companies (MRK, HON, APD) have PEGs of 2.5 or below at both intervals. MRK is cited most (4 times).

Bottom Line: The goal is to build a large position in a few of these stocks by the time you retire. Since ~40% of daily movement in the S&P 500 Index is driven by its 20 largest companies, you’re likely to find success with the 4 stocks in the Table that are among those 20: MRK, PEP, WMT, PG. All 4 are low-volatility Sleep-Well-At-Night stocks (SWANs) that thrive on market downturns, have an average dividend yield of 2.4%/yr, and an average dividend growth rate of 6.1%/yr. Over the past 3 market cycles (20 years), those 4 have averaged a price return of 10.0%/yr vs. 8.0%/yr for SPY (Column P) while having less risk of loss (Column R).  

Risk Rating: 4 (where a 10-yr Treasury Note = 1, SPY = 5, and gold bullion = 10).

Full Disclosure: I dollar-average into MRK, LMT, SNA, PEP, WMT and PG, and also own shares of HON, AOD and HRL.

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Month 144 - 17 Low-volatility Stocks in the Dow Jones Composite Average - July 2023

Situation: We’ve just been through a market crash, and many of us trimmed our bets as the market imploded. Finance professionals avoid doing that, since they live by a single Commandment: Thou shalt not recognize (in Financial Statements) a loss (of Capital). Warren Buffett translates that for us retail investors: “Rule #1: Never lose money; Rule #2: Never forget Rule #1.”

Mission: Develop a system that largely removes the temptation to sell into a market crash. Start with Warren Buffett’s basic advice to retail investors, which is to keep the 5-yr Beta of their stock portfolio at approximately 0.70. That means half its value has to be in SWANs (Sleep Well At Night stocks). The remaining half carry no more than a market risk (5-yr Beta = 1.00). To model a system, prioritize liquidity and restrict sample size by looking at only the 35 stocks in the 65-stock Dow Jones Composite Average (DJCA) having a 5-yr Beta under 1.00. Exclude any stocks with a 10-yr Required Rate of Return (RRR) that exceeds the 10-yr Actual Rate of Return. For stocks with a 5-yr Beta between 0.70 and 1.00, include only ALPHAs (stocks that beat the S&P 500 Index over trailing 5 and 10 year periods.

Execution: see Table of 17 stocks.

Analysis: Warren Buffett’s favorite metric is found in Column S of the Table: Return on Tangible Capital Employed. He thinks a 20% return for the last fiscal year is a good number. Seven companies do so: MRK, UNH, AMGN, JNJ, MCD, LSTR, PG. His second point (that the company be run by able and honest managers) is addressed in Morningstar reports (see Column AP) and is negatively impacted by the degree to which managers choose to capitalize the company by issuing long-term bonds (see Column Y). Three companies have a BUY rating from Morningstar (AMGN, AEP, PEG), and 7 companies have a Long-term Debt to Equity ratio lower than 1.0 (MRK, UNH, ATO, JNJ, WMT, LSTR, PG). Mr. Buffett also states that a high Free Cash Flow Yield (see Column K) reflects good management because Retained Earnings allow the company to expand operations (or pay down debt) at zero cost; 9 companies meet that standard (MRK, CAT, UNH, AMGN, ATO, JNJ, MCD, WMT, LSTR, PG). His third point (that the stock be available “at a sensible price”) is addressed by one and 3-5 year Forward PEG ratios (see Columns N and O). Three companies (MRK, UNH, AMGN) have PEGs under 2.0 at both intervals. Nine companies are A-rated (see Column AQ): MRK, ATO, ED, AEP, XEL, JNJ, WMT, NEE, PG. Five companies are cited 4 or more times (MRK, UNH, AMGN, JNJ, PG).

Bottom Line: Taken together, the 17 low-volatility stocks beat the S&P 500 Index ETF (SPY) after 5-yr and 10-yr holding periods (see Columns E and H in the Table).  

Risk Rating: 4 (where 1 = 10-yr US Treasury Note, 5 = S&P 500 Index, 10 = gold).

Full Disclosure: I dollar-average into MRK, CAT, AEP, SO, JNJ, MCD, WMT, NEE, LSTR and PG, and also own shares of UNH, AMGN and ATO.

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