Situation: We’ve narrowed our “universe” to large & established US companies that reliably pay a good & growing dividend, and called it The 2 and 8 Club. Why? Because “good ” means 2% or better and “growing” means 8% or better. We use a wash/rinse/repeat method to find those companies.
In the “wash” cycle, we collect companies that are listed at each of the 3 online spreadsheets we value: 1) The capitalization-weighted FTSE High Dividend Yield Index for US companies, which is simply the 400 companies in the Vanguard High Dividend Yield ETF. 2) The S&P 100 Index, which has the advantage of price discovery through the requirement that stocks in these large companies have active markets in Put and Call Options. 3) The BMW Method List of statistical data for stocks that have been traded on a public exchange for at least 16 years.
In the “rinse” cycle, we look up information online about each stock that passed through the wash: 1) We make sure bonds issued by that company have an S&P Rating of A- or better. 2) We make sure stocks issued by that company have an S&P Rating of B+/M or better (go to your broker’s website). 3) We make sure the company’s annual dividend payout has been growing 8% or faster over the past 5 years, i.e., we get a list of payouts from the relevant Yahoo Finance page then put the most recent year’s payout and the payout for 5 years ago into a Compound Annual Growth Rate calculator.
In the “repeat” cycle, we take the same steps 3 months later, then select stocks to add or delete by using a brokerage that charges you a flat fee of ~1% of Net Asset Value/yr. This allows you to trade without incurring transaction costs (including dividend reinvestment).
If you’re a glutton for punishment, you can extend your oversight beyond S&P 100 stocks to include those on the Barron’s 500 List, published each year in May, which has the advantage of ranking companies by using 3 cash flow metrics. Then you’ll be running the Extended Version of The 2 and 8 Club, which currently has 32 companies (see Table for Week 329). This week’s blog drills down on the 10 companies in the Extended Version that ultimately depend on feedstocks provided by farmers, to ultimately market foods & beverages, motor engine fuels, animal feed, cigarettes, cotton shirts, and plastics made from corn.
Mission: Set up a Standard Spreadsheet of those 10 companies.
Execution: see Table.
Administration: Farmers operate a capital-intensive business that requires large-scale production on ~1000 acres to justify the cost of chemicals and fertilizer plus the main cost, which is for the purchase and maintenance of equipment (e.g. combines, tractors, grain carts, center-pivot irrigation systems, sprayers, semi-tractors that haul 30 tons of grain, grain-drying bins, grain storage bins, and satellite navigation links needed for weather forecasting and precision agriculture). Their mobile powered equipment requires diesel fuel, and their grain-drying bins require natural gas or propane.
Archer-Daniels-Midland is the only pure Ag company on the list. ADM collects crops at railheads for further shipment and initial processing, and distributes products worldwide. Much of that distribution begins by loading grain onto barges in the Mississippi River.
Weather is the key variable. The software and hardware on weather satellites is IBM gear, and IBM owns The Weather Channel. GPS-based software is an important part of precision agriculture, and similarly depends on satellites running IBM equipment. Cummins (CMI) and Caterpillar (CAT) provide diesel engines, and ExxonMobil (XOM) is one of the largest sources of diesel fuel. CAT also makes skid-loaders and backhoe/end-loaders that some farmers use.
PepsiCo (PEP) and Coca-Cola (KO) process a variety of farm products (including milk, cheese, oranges, oats, coffee and tea) into dozens of branded foods and beverages that are found worldwide. Altria Group (MO) processes tobacco plants into cigarettes and smokeless tobacco for the US market. VF Corporation (VFC) is the largest company that fabricates clothing for a variety of markets, and depends on farmers to produce its main feedstock (cotton). Target (TGT) markets clothing, and Super Target stores offer a large variety of foods and beverages.
Bottom Line: Farm incomes have fallen 20%/yr over the last 3 years, but appear to have stabilized with this year’s harvest. Cost-cutting and scaling-up are the main survival strategies. Farms that are large enough to sustain a family are multi-million dollar enterprises that cultivate more than a square mile of ground. When farmers are forced to cut costs, suppliers are forced into being acquired by (or merged with) other companies. To further complicate matters, efficient transportation networks now circle the planet. The supply of crop commodities outstrips demand enough that the effects of drought or war in one place are mitigated by bumper crops in another place.
Risk Rating: 8 (where 10-yr Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10).
Full Disclosure: I dollar-cost average into KO, XOM, and IBM, and also own shares of CAT and MO.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Showing posts with label tractors. Show all posts
Showing posts with label tractors. Show all posts
Sunday, December 17
Sunday, January 22
Week 290 - Farm Tractors
Situation: The “green revolution” started in the 1920s with the introduction of mechanization to agriculture. Tractors replaced mules, along with large cadres of farm workers. After 100 years of improvements, tractors have evolved into internet laboratories designed to optimize crop yields, and fitted-out like a home-office. Competition is fierce, with tricked-out models costing 10 times more than basic tractor models. Dealerships for those basic models, like the Mahindra Tractor made in India, are starting to pop up in the US. Remember that manufacturer’s name because it’s the top-selling tractor worldwide. However, there will soon be an even more stripped-down model coming to market, one built in Cuba by an American company (Cleber), named the Oggun 1.0, to be priced at $10,000.
Mission: Standard spreadsheet to lay out important metrics to consider before buying stock in one of the main tractor companies. Detail performance of commodity futures and the Dow Jones Commodity Index, and combine that with earnings projections for tractor and combine producers.
Execution: see Table.
Administration: Deere’s most recent quarterly results: year-over-year (y-o-y) declines in both profit and revenues but both beat projection and both are projected to be down less in 2017.
Caterpillar’s most recent quarterly results: y-o-y declines for both revenues and profit; missed projections for both; downgraded revenue and profit projections for FY16.
CNH Industrial’s most recent quarterly results: y-o-y decline in revenues but y-o-y increase in profit; full year guidance “reaffirmed.” Interestingly, I live near a CNH Industrial plant at Grand Island, NE, that produces New Holland combines. The plant has been idled for the past 2 yrs but recently started running one shift. New Holland combines are going onto flatbed trucks at the rate of several a day.
AGCO’s most recent quarterly results: showed slight improvement y-o-y in revenues but a 90% fall in profits: “Lower global demand for farm equipment is expected to continue to negatively impact AGCO’s sales and earnings in 2016.”
Kubota’s most recent results: revenue fell 5.9% in the first 9 months of 2016 vs. 2015.
Commodity futures (see Lines 19-22 in the Table) document a strong negative trend in pricing for corn, soybean, wheat, and beef contracts over the past 5 yrs, likely due to overproduction that has resulted from favorable weather and the buildout of “precision agriculture” technology.
Bottom Line: Incomes for both farmers and ranchers have been falling worldwide because of an increase in the efficiency of production (“precision agriculture”), and favorable weather from “El Nino." El Nino will soon be replaced by La Nina, which will likely result in drier conditions. Farmers may then have the resources to buy up-to-date machinery. Actually, they’ve already started. And, the Dow Jones Commodity Index has resumed its upward trend after recently bouncing off the low set in 1999. But you should read the fine print!
caveat emptor: Five sectors support agricultural production: a) farm machinery (e.g. tractors and combines); b) fertilizers that replenish nitrogen, phosphorus, and potash in the soil; c) chemicals that insure a good crop yield, in terms of bushels per acre (herbicides, fungicides, and insecticides); d) transportation assets (trucks, highways, and railroads); e) financial services (short-term loans, mortgages, and commodity markets based on brokerages, which are regulated in the U.S. by the Commodity Futures Trading Commission). Worldwide weather patterns introduce an element of uncertainty that affects companies in all 5 sectors. When investors buy stocks issued by those companies, they have to allow for an extra dose volatility. So, which sectors are least impacted by weather? Probably the transportation sector, railroads in particular: Those monopolies are sanctioned and regulated by the government to be certain that their profits will be large enough to ensure adequate and safe maintenance of tracks and yards. Railroads also have clients other than commodity producers, which dilutes risk of loss from weather-related events.
Risk Rating: 7 (where 10-Yr Treasury Notes = 1, the S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I own shares of Caterpillar (CAT at Line 3 in the Table) and offset that risk by owning shares of Union Pacific (UNP at Line 9 in the Table).
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 13 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 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 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 26 in the Table. The ETF for that index is MDY at Line 12.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Standard spreadsheet to lay out important metrics to consider before buying stock in one of the main tractor companies. Detail performance of commodity futures and the Dow Jones Commodity Index, and combine that with earnings projections for tractor and combine producers.
Execution: see Table.
Administration: Deere’s most recent quarterly results: year-over-year (y-o-y) declines in both profit and revenues but both beat projection and both are projected to be down less in 2017.
Caterpillar’s most recent quarterly results: y-o-y declines for both revenues and profit; missed projections for both; downgraded revenue and profit projections for FY16.
CNH Industrial’s most recent quarterly results: y-o-y decline in revenues but y-o-y increase in profit; full year guidance “reaffirmed.” Interestingly, I live near a CNH Industrial plant at Grand Island, NE, that produces New Holland combines. The plant has been idled for the past 2 yrs but recently started running one shift. New Holland combines are going onto flatbed trucks at the rate of several a day.
AGCO’s most recent quarterly results: showed slight improvement y-o-y in revenues but a 90% fall in profits: “Lower global demand for farm equipment is expected to continue to negatively impact AGCO’s sales and earnings in 2016.”
Kubota’s most recent results: revenue fell 5.9% in the first 9 months of 2016 vs. 2015.
Commodity futures (see Lines 19-22 in the Table) document a strong negative trend in pricing for corn, soybean, wheat, and beef contracts over the past 5 yrs, likely due to overproduction that has resulted from favorable weather and the buildout of “precision agriculture” technology.
Bottom Line: Incomes for both farmers and ranchers have been falling worldwide because of an increase in the efficiency of production (“precision agriculture”), and favorable weather from “El Nino." El Nino will soon be replaced by La Nina, which will likely result in drier conditions. Farmers may then have the resources to buy up-to-date machinery. Actually, they’ve already started. And, the Dow Jones Commodity Index has resumed its upward trend after recently bouncing off the low set in 1999. But you should read the fine print!
caveat emptor: Five sectors support agricultural production: a) farm machinery (e.g. tractors and combines); b) fertilizers that replenish nitrogen, phosphorus, and potash in the soil; c) chemicals that insure a good crop yield, in terms of bushels per acre (herbicides, fungicides, and insecticides); d) transportation assets (trucks, highways, and railroads); e) financial services (short-term loans, mortgages, and commodity markets based on brokerages, which are regulated in the U.S. by the Commodity Futures Trading Commission). Worldwide weather patterns introduce an element of uncertainty that affects companies in all 5 sectors. When investors buy stocks issued by those companies, they have to allow for an extra dose volatility. So, which sectors are least impacted by weather? Probably the transportation sector, railroads in particular: Those monopolies are sanctioned and regulated by the government to be certain that their profits will be large enough to ensure adequate and safe maintenance of tracks and yards. Railroads also have clients other than commodity producers, which dilutes risk of loss from weather-related events.
Risk Rating: 7 (where 10-Yr Treasury Notes = 1, the S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I own shares of Caterpillar (CAT at Line 3 in the Table) and offset that risk by owning shares of Union Pacific (UNP at Line 9 in the Table).
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 13 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 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 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 26 in the Table. The ETF for that index is MDY at Line 12.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
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