Situation: Food reserves are dwindling around the world. China has food shortages, and prices there are rising. Creeping desertification isn’t helping, nor is war in sub-Saharan Africa. Crop losses due to drought now occur every year somewhere in the world. The US Department of Agriculture projects that prices for food commodities will rise 1-2%/yr faster than inflation. However, for individual commodities (like corn) prices will increase one year only to fall the next year because of overplanting. Another factor is the increase in meat production, which is driven by the tens of millions of people that emerge from poverty each year. Going forward, the prices for food commodities will have to rise even more than in the past--to drive investment in technology and other types of innovation (including conservation). Otherwise, the goal of doubling food production by 2050 (to feed a world population of 9 Billion) won’t be met.
In light of these facts, investors have overbought the stocks of most companies that supply grocery stores. There are over 100 companies in the S&P Food & Beverage Index. We have winnowed the list down to those that have good recent records for growth (see Table). These 24 companies are the ones found in the 2013 Barron’s 500 list of companies with superior recent growth in sales and cash flow. Those 24 have an average price/earnings (P/E) ratio of 22 but worthwhile bargains remain (GIS, WMT, KR, PEP). If you are starting a long-term dividend reinvestment plan (DRIP), with automatic monthly additions, you need not be concerned about overvaluation because prices will revert to a mean P/E somewhere between 15 and 20 as the food business goes through its inevitable boom and bust phases. We suggest that you focus your research on the 9 companies that have both long-term Finance Value (Column E) and short-term Finance Value, i.e., an improving (or stable) rank in the Barron’s 500 Lists (Columns G and H): WMT, GIS, SJM, COST, HSY, KR, UNFI, CPB, KO.
Note: In our Table, red highlights denote inferior performance relative to our standard benchmark, which is the Vanguard Balanced Index Fund (VBINX). The numbers in the Table are brought current as of close of business (COB) the Friday before publication of the blog. Long-term total returns/yr go back to 10/9/02 (Column C) because that was the low point for our benchmark (VBINX) in the previous market cycle, i.e., the “dot.com recession.” And remember, the stocks you accumulate in your retirement portfolio over your working years will generate quarterly dividend checks after you retire. So pay attention to Columns J & K in the Table. Those tell you a) how much income your accumulated shares will generate each year, and b) how much that income will increase each year.
While it is true that the future prospects for most of these companies will change over time, that is less true for the 9 companies that are Dividend Achievers (Column N), i.e., those that have increased their dividends annually for at least the past 10 yrs. And 6 of those 9 are Dividend Aristocrats that have increased their dividends annually for at least the past 25 yrs (ADM, KO, HRL, PEP, SYY, WMT). Of those 6, Archer Daniels Midland (ADM) and Hormel Foods (HRL) are more involved in food production and therefore more influenced by fluctuations in commodity prices. Also remember that none of the companies that make farm equipment, sell fertilizer, or produce seeds are in the S&P Food and Beverage Index. The technological innovations needed for doubling food production by 2050 will mainly come from those production-enabling companies, and we’ll update you on those next week.
Bottom Line: Predictions indicate a looming food crisis that will be with us for decades. Prepare your portfolio for the rising food costs you’ll face in retirement by investing in the companies that supply your grocery store.
Risk Rating: 5
Full Disclosure: I make monthly additions to DRIPs for KO and WMT, and also have stock in HRL, GIS, and PEP.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, November 10
Sunday, November 3
Week 122 - Our Universe of 51 Companies
Situation: Stock selection comes down to assessing safety vs. efficacy. “Safety” means the company has effective defenses against having short sales consume more than 10% of its publicly-traded stock in a bear market, and effective defenses against bankruptcy. “Efficacy” means the company has a time-proven business plan that generates earnings growth over time. The problem is that many metrics are used to capture these values (safety & efficacy), and they only look backwards, amounting what the military calls “fighting the last war.” Our blog has carried on this tradition, be-laboring our readers with numbers that capture important information about safety & efficacy in the past. Simplification is needed, along with metrics that point to the future.
Safety is about having a stable return that grows over time with few hiccups. The main "hiccup" we want to avert is a serious drop in stock price because management then has to take measures (such as selling assets) to avert bankruptcy. To alleviate concerns like that, we won't consider any companies in this blog that have an S&P bond rating less than -A (Column N in the Table). When we invest for retirement we’re ultimately looking for retirement income that grows enough to beat inflation handily, i.e., dividend checks that arrive each quarter and get bigger each year. Remember: annuities and pensions don’t grow. Social Security is the only cost-effective exception to that rule. (At present, it more than keeps up with inflation but there is talk of having it merely keep up with inflation.) Going forward, stock ownership is likely to be the only way for investors to have a steady stream of income that more than keeps up with inflation. So what is the best way to find such stocks? You need start with the list of 200+ Dividend Achievers. Why? Because those are the only companies that will keep paying you more, year after year, and have done so for at least the past 10 yrs. Companies with a long record of increasing dividends irrespective of recessions are safe for retirement investment. You’re only looking at two metrics after you retire: a) dividend yield of the stocks you own (Column G in the Table), and b) dividend growth of the stocks you own (Column H in the Table). Adding those together approximates your future total return. What’s the catch? You need to be a little choosy in picking from the Dividend Achiever list because 1-2% of the names on that list will disappear each year. In other words, the company has discontinued annual dividend increases. This happened to Pfizer, General Electric, and Home Depot during the Lehman Panic. So you’ll need to pay particular attention to the next paragraph.
Efficacy means growth, and growth ultimately comes down to increasing sales and cash flow over time. The editors of Barron’s provide an important service to investors by publishing a 500-stock list each May that ranks companies by performance in those two key areas during the most recent 3 yrs, along with noting the previous year’s rank. Any company listed there has superior growth prospects, given that it has been chosen from the more than 6500 that are listed on US exchanges, plus those listed on the Toronto Stock Exchange.
Now we can define a “universe” of worthwhile companies for our blog to follow, by listing all of the Dividend Achievers that appear in the 2013 Barron’s 500 list. It turns out that there are 51 (see Table). At the top, you’ll see 12 Lifeboat Stocks (Week 106). Those are the companies from defensive industries (utilities, consumer staples, healthcare, and communication services) that have a Finance Value (Reward minus Risk; see Column E of the Table) superior to that of our benchmark--the Vanguard Balanced Index Fund (VBINX, which is 60% stock index and 40% bond index). Next are 7 additional defensive companies that have a Finance Value less than VBINX. The third group is most important: those are companies in non-defensive industries (energy, materials, industrials, financials, consumer discretionary, and information technology) that have a superior Finance Value compared to VBINX (see Column E in the Table). Companies in those industries do particularly well in a growing economy so you can think of them as “growth” companies. That’s where 2/3rds of your stock assets need to be. We call the best such companies Core Holdings (Week 102). The fourth group is for growth companies that didn’t have a Finance Value superior to VBINX. Benchmarks are at the bottom. Metrics are current as of close of business on October 30, 2013.
Bottom Line: Stock-picking is cumbersome but for future retirees it has a uniquely worthwhile feature. You’ll get substantial annual pay raises during your retirement (Column H of the Table). Over the past 20 yrs, dividend growth rates have far exceeded inflation for companies that have committed to annual dividend increases. All 51 of the companies in the Table have been growing dividends annually for over 10 yrs; S&P calls such companies “Dividend Achievers.” Those 51 include 34 companies that have been growing dividends annually for over 25 yrs; S&P calls such companies “Dividend Aristocrats” and there are only 54 names in that group. The Barron’s 500 List has given us a way to winnow down that list of safe companies for retirement investment (Dividend Achievers), so as to include only those that have demonstrated increasing sales and cash flow growth in recent years.
Risk Rating: 4
Full Disclosure: I make automatic monthly additions to DRIPs in ABT, JNJ, WMT, PG, KO, NEE, NKE, XOM, and IBM.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Safety is about having a stable return that grows over time with few hiccups. The main "hiccup" we want to avert is a serious drop in stock price because management then has to take measures (such as selling assets) to avert bankruptcy. To alleviate concerns like that, we won't consider any companies in this blog that have an S&P bond rating less than -A (Column N in the Table). When we invest for retirement we’re ultimately looking for retirement income that grows enough to beat inflation handily, i.e., dividend checks that arrive each quarter and get bigger each year. Remember: annuities and pensions don’t grow. Social Security is the only cost-effective exception to that rule. (At present, it more than keeps up with inflation but there is talk of having it merely keep up with inflation.) Going forward, stock ownership is likely to be the only way for investors to have a steady stream of income that more than keeps up with inflation. So what is the best way to find such stocks? You need start with the list of 200+ Dividend Achievers. Why? Because those are the only companies that will keep paying you more, year after year, and have done so for at least the past 10 yrs. Companies with a long record of increasing dividends irrespective of recessions are safe for retirement investment. You’re only looking at two metrics after you retire: a) dividend yield of the stocks you own (Column G in the Table), and b) dividend growth of the stocks you own (Column H in the Table). Adding those together approximates your future total return. What’s the catch? You need to be a little choosy in picking from the Dividend Achiever list because 1-2% of the names on that list will disappear each year. In other words, the company has discontinued annual dividend increases. This happened to Pfizer, General Electric, and Home Depot during the Lehman Panic. So you’ll need to pay particular attention to the next paragraph.
Efficacy means growth, and growth ultimately comes down to increasing sales and cash flow over time. The editors of Barron’s provide an important service to investors by publishing a 500-stock list each May that ranks companies by performance in those two key areas during the most recent 3 yrs, along with noting the previous year’s rank. Any company listed there has superior growth prospects, given that it has been chosen from the more than 6500 that are listed on US exchanges, plus those listed on the Toronto Stock Exchange.
Now we can define a “universe” of worthwhile companies for our blog to follow, by listing all of the Dividend Achievers that appear in the 2013 Barron’s 500 list. It turns out that there are 51 (see Table). At the top, you’ll see 12 Lifeboat Stocks (Week 106). Those are the companies from defensive industries (utilities, consumer staples, healthcare, and communication services) that have a Finance Value (Reward minus Risk; see Column E of the Table) superior to that of our benchmark--the Vanguard Balanced Index Fund (VBINX, which is 60% stock index and 40% bond index). Next are 7 additional defensive companies that have a Finance Value less than VBINX. The third group is most important: those are companies in non-defensive industries (energy, materials, industrials, financials, consumer discretionary, and information technology) that have a superior Finance Value compared to VBINX (see Column E in the Table). Companies in those industries do particularly well in a growing economy so you can think of them as “growth” companies. That’s where 2/3rds of your stock assets need to be. We call the best such companies Core Holdings (Week 102). The fourth group is for growth companies that didn’t have a Finance Value superior to VBINX. Benchmarks are at the bottom. Metrics are current as of close of business on October 30, 2013.
Bottom Line: Stock-picking is cumbersome but for future retirees it has a uniquely worthwhile feature. You’ll get substantial annual pay raises during your retirement (Column H of the Table). Over the past 20 yrs, dividend growth rates have far exceeded inflation for companies that have committed to annual dividend increases. All 51 of the companies in the Table have been growing dividends annually for over 10 yrs; S&P calls such companies “Dividend Achievers.” Those 51 include 34 companies that have been growing dividends annually for over 25 yrs; S&P calls such companies “Dividend Aristocrats” and there are only 54 names in that group. The Barron’s 500 List has given us a way to winnow down that list of safe companies for retirement investment (Dividend Achievers), so as to include only those that have demonstrated increasing sales and cash flow growth in recent years.
Risk Rating: 4
Full Disclosure: I make automatic monthly additions to DRIPs in ABT, JNJ, WMT, PG, KO, NEE, NKE, XOM, and IBM.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
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