Situation: Business people seeking to predict outcomes often quote Wayne Gretzky quote: “I skate to where the puck is going to be, not where it has been.” This highlights a problem: All of the metrics and technical charts that we use are retrospective. We’re driving forward by looking in the rear view mirror! Warren Buffett has tried to estimate outcomes by making calculations of the growth in “core earnings’ in companies that have a “Durable Competitive Advantage”. DCA companies have had a growth rate for Tangible Book Value over the most recent 10 years that exceeds 7%/yr, with no more than three down years. (c.f. The Warren Buffett Stock Portfolio, Scribner, NY, 2011 by Mary Buffett and David Clark) You can read more about such estimates of “true” Shareholder Equity by Googling Net Tangible Asset Investing.
We agree with Mr. Buffett, and have learned to envision the future prospects of a company by first assessing its ability to grow Tangible Book Value. But since the Great Recession, few S&P 500 companies have even a dollar of Net Tangible Assets. Why? Because the Federal Reserve’s policy (to accelerate recovery from the Great Recession) has been to make money more freely available than ever before. Accordingly, companies favor debt financing over equity financing. Debt becomes a larger dollar amount on the Balance Sheet than equity. (Equity for most companies represents the initial cost of property, plant and equipment, which equals Tangible Book Value.)
Mission: Use our Standard Spreadsheet to arrive at an estimate of a company’s position in its sector of the economy 10 years from now. Start by analyzing S&P 500 companies in the Food, Beverage and Restaurant sector that are Dividend Achievers, i.e., have increased their dividend annually for at least the past 10 years.
Execution: see Table.
Administration: For almost any business, the name of the game for making money is not losing money. If a stock falls 50% in price, that price must rise 200% just to get back to where it started. So, let’s start our analysis by excluding Dividend Achievers that have a 16 year record of price appreciation showing volatility which exceeds that for the S&P 500 Index (see Column M in the Table). Then, we’ll look for companies having a clean Balance Sheet (Columns P-S in the Table) and a strong Global Brand (Columns AC-AD in the Table). None of the 11 companies have a clean Balance Sheet, but Coca-Cola (KO), Costco Wholesale (COST), Target (TGT), and Walmart (WMT) come close. Those four are also the only companies that have any Tangible Book Value (see Column R in the Table) but none have grown TBV fast enough to meet Warren Buffett’s requirements for DCA (see Column AF in the Table), although Walmart (WMT) comes close. Those 4 companies are also among the 7 that have a strong Global Brand.
Bottom Line: Walmart (WMT) is the winner of this contest.
Risk Rating: 5 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10). As a group, these 11 companies had remarkably buoyant total returns during the recent commodity recession (see Column D in the Table), which saw a 24.2%/yr drop in commodity prices (see Line 21 in the Table). Of course, raw food commodities were less expensive during that period but the outperformance of the food sector is strong enough to suggest that investors tend to move money there in deflationary times.
Full Disclosure: I dollar-cost average into Coca-Cola (KO), and also own shares of Costco Wholesale (COST), Target (TGT), Walmart (WMT), McCormick (MKC) and McDonald’s (MCD).
"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
Sunday, February 25
Sunday, February 18
Week 346 - Dogs of the Dow
Situation: It’s that time of year again. You need to think about placing a bet or two on the Dogs of the Dow at the start of each new year. Why? Because that group contains the 10 highest-yielding stocks in the 30-stock Dow Jones Industrial Average (DJIA) and is likely to outperform the DJIA over the next year. The Dogs of the Dow have had a total return of 8.6%/yr since 2000 vs. 6.9% for the DJIA.
SPOILER ALERT: The 10 highest-yielding DJIA stocks at the end of 2017 includes General Electric (GE), which is likely to be removed from the DJIA before the end of 2018. So, I’ve substituted the next highest-yielding stock, which is Intel (INTC).
Mission: Run our Standard Spreadsheet for the 10 highest-yielding DJIA stocks. Highlight the two members of “The 2 and 8 Club” (CSCO, IBM), as well as the two that would be members if their dividend growth rates were slightly higher, to meet the dividend growth requirement of 8.0%/yr over the past 5 years: Coca-Cola(KO) and Pfizer (PFE).
Execution: see Table.
Administration: Four of the 10 are gambles (see Column M), likely to lose more than the S&P 500 Index in a future Bear Market: CSCO, INTC, PFE, MRK. Four are worth your attention because of being in (or nearly in) “The 2 and 8 Club”: CSCO, KO, IBM, PFE. It is also important to consider the two integrated oil companies (CVX, XOM) because their stocks are the most rational way for you to gain exposure to the Energy Industry.
Bottom Line: The Dogs of the Dow strategy calls for buying equal dollar amounts of stock in all 10 companies on the first trading day of the new year. I’m not of that mind, but do know that these 10 companies are “blue chips.” Their valuations haven’t been impressive lately, which accounts for their high dividend yields. DJIA companies are called Blue Chips because they’re thought to be large enough and diversified enough to weather any downturn. Some of the Dogs will outperform the 30-stock DJIA in any given year, but not all of them. My plan is to bet on any Dog in “The 2 and 8 Club” that meets my criteria for brand value and balance sheet stability, which would be Cisco Systems (CSCO).
GOOD NEWS: All 10 of these companies are projected to beat the DJIA ETF (DIA) over the next decade (see Column Y in the Table), assuming that growth rates for dividends and stock prices hold steady.
Risk Rating: 6 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-cost average into PG, XOM and KO, and also own shares of CSCO, INTC, IBM and PFE.
"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
SPOILER ALERT: The 10 highest-yielding DJIA stocks at the end of 2017 includes General Electric (GE), which is likely to be removed from the DJIA before the end of 2018. So, I’ve substituted the next highest-yielding stock, which is Intel (INTC).
Mission: Run our Standard Spreadsheet for the 10 highest-yielding DJIA stocks. Highlight the two members of “The 2 and 8 Club” (CSCO, IBM), as well as the two that would be members if their dividend growth rates were slightly higher, to meet the dividend growth requirement of 8.0%/yr over the past 5 years: Coca-Cola(KO) and Pfizer (PFE).
Execution: see Table.
Administration: Four of the 10 are gambles (see Column M), likely to lose more than the S&P 500 Index in a future Bear Market: CSCO, INTC, PFE, MRK. Four are worth your attention because of being in (or nearly in) “The 2 and 8 Club”: CSCO, KO, IBM, PFE. It is also important to consider the two integrated oil companies (CVX, XOM) because their stocks are the most rational way for you to gain exposure to the Energy Industry.
Bottom Line: The Dogs of the Dow strategy calls for buying equal dollar amounts of stock in all 10 companies on the first trading day of the new year. I’m not of that mind, but do know that these 10 companies are “blue chips.” Their valuations haven’t been impressive lately, which accounts for their high dividend yields. DJIA companies are called Blue Chips because they’re thought to be large enough and diversified enough to weather any downturn. Some of the Dogs will outperform the 30-stock DJIA in any given year, but not all of them. My plan is to bet on any Dog in “The 2 and 8 Club” that meets my criteria for brand value and balance sheet stability, which would be Cisco Systems (CSCO).
GOOD NEWS: All 10 of these companies are projected to beat the DJIA ETF (DIA) over the next decade (see Column Y in the Table), assuming that growth rates for dividends and stock prices hold steady.
Risk Rating: 6 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-cost average into PG, XOM and KO, and also own shares of CSCO, INTC, IBM and PFE.
"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
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