Month 119 - 16 High Quality S&P 100 Value Stocks - May 2021

Situation: You need an easy way to pick value stocks for your retirement portfolio. Start with 4 websites:

1) S&P 100 Index;

2) Vanguard High Dividend Yield ETF;

3) Vanguard Dividend Appreciation ETF;

4) Yahoo Finance. 

Mission: Show how to use these websites to build a working list of value stocks.

Execution: see Table.

Administration: Confine your attention to large companies, meaning those in the S&P 100 Index. Put any S&P 100 company that is named under Portfolio Holdings at the bottom of either Vanguard fund webpage. Go to the Yahoo Finance web page for each such company and click on Statistics. Under “Valuation Measures” find Price/Book (mrq). Remove companies on your working list that have a Price/Book higher than 6.0. 

All that remains is a safety check on each company. Make sure that 

a) the S&P Bond Rating is A- or better; 

b) the S&P Stock Rating is B+/M or better; 

c) the stock has been traded on a public exchange for 20+ years; 

d) Earnings Per Share (EPS) for the Trailing Twelve Months (TTM) is positive.

Bottom Line: What you get from investing equal dollar amounts in each of these 16 companies is a 50% higher dividend yield than you would get from investing in the iShares Russell Top 200 Value ETF, as well as quarterly dividends that have grown 4 times faster over the trailing 5-year period. Price volatility (5-Yr Beta) is also lower; perceived value (P/E) is higher because P/E is lower. Using Warren Buffett’s favorite metrics (net return on tangible capital employed, free cash flow yield, and Long-term debt to equity), 9 of these companies look good (UNH, PFE, CSCO, MDT, INTC, BLK, MET, GD). Seven companies have forward PEG ratios under 2 (UNH, PFE, CMCSA, BK, USB, RTX, IBM). None have a BUY rating from Morningstar, and only INTC is considered to be undervalued.

Risk Rating: 7

Full Disclosure: I dollar-average into NEE, PFE, CSCO, INTC, JPM, RTX, and also own shares of UNH, BLK, USB, GD, IBM.

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

Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com

Month 118 - 10 Bedrock DRIPs - April 2021.

Situation: You want to be sure that at least 25% of the companies in your stock portfolio are well-immunized against the risk of losing their “investment grade” credit rating. Start by shopping for shares of companies in the most “defensive” industries (pharmaceuticals and consumer staples). Select 10 companies in the S&P 100 Index that issue bonds with an S&P rating of A- or better. Invest by dollar-averaging the same fixed monthly payment into each company’s stock through an online Dividend ReInvestment Plan (DRIP). 

I’ve chosen 3 companies in the Food and Beverage industry: Costco Wholesale (COST), Walmart (WMT), Coca-Cola (KO), plus one in the Pharmaceutical industry:  Merck (MRK). Move on to choosing one company from each of the 4 industries that are largely protected against bankruptcy because of government regulation that sets prices and limits competition: Systemically Important Financial Institutions, Defense Contractors, Electric Utilities, and Railroads. I’ve chosen JPMorgan Chase (JPM), Raytheon Technologies (RTX), NextEra Energy (NEE), and Union Pacific (UNP). Complete your “Bedrock DRIP” by adding the two companies that carry a AAA rating on their bonds from Standard and Poor’s: Microsoft (MSFT) and Johnson & Johnson (JNJ). 

Mission: Analyze those 10 companies using our Standard Spreadsheet.

Execution: see Table.

Analysis: Warren Buffett’s favorite metric is addressed in Column R of the Table: Return on Tangible Capital Employed. He thinks anything over 20% is a good number. Three companies (MRK, MSFT, JNJ) passed that test. His second point (that the company is being “run by able and honest managers) is addressed in Morningstar reports (see Column AM in the Table) and by the way operations are funded. The degree to which managers capitalize their company by issuing long-term bonds, as opposed to issuing common stock, is obvious from the ratio of Long-Term Debt to Equity (see Column V in the Table). The degree to which Retained Earnings can be used for expansion is determined by Free Cash Flow Yield (see Column I in the Table). Only one company (MRK) has a BUY rating from Morningstar. Five companies have a ratio of Long-Term Debt to Equity) that is less than 1.0 (MSFT, COST, WMT, JNJ, RTX). Five companies have a Free Cash Flow Yield (in Column I) that exceeds their Dividend Yield (in Column H), i.e., Retained Earnings (MSFT, COST, UNP, JPM, WMT). Warren’s third point (that the stock be available “at a sensible price”) is addressed by the 3-5 year estimated PEG Ratio (see Column N in the Table): Three companies have a PEG ratio of 2.0 or less (MRK, JNJ, RTX). NOTE: JNJ, MSFT and MRK are each mentioned 3 times out of a possible 5.

Bottom Line: Safe and effective investing isn’t hard. Just add a little each month to carefully selected “buy and forget” companies. 

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

Full Disclosure: I dollar-average into all 10.

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

Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com