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).

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

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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.

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

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