Having built these portfolios around November last year, I’m getting to that point where it’s time to dig deeper into my holdings and review possible candidates. My rules stipulate that I track holdings for sudden changes, but yearly reviews include candidate comparisons and dividend distributions.
Before I get to the reviews including a a look at performance, I have to share this gem from Motley Fools –
Imagine you pick 1 million random people from around the world every day,” said Toby McDade, chief investment officer of Momentum Fee Capital Management. “Some days, 51% would be in a good mood, 49% in a bad mood. The next day maybe it’s the opposite. Other days, random chance could mean 8% of people are really pissed off for no real reason. This is basically what the market is on a day-to-day basis,” he said.
Asked what his clients thought of this view, Mr. McDade laughed. “Oh my God, you think I could tell my clients that? How could I justify my salary?” Clients were told Monday’s gain was caused by a mix of reversing geopolitical instability, shifting uncertainty patterns, a risk-on atmosphere, and a perfect storm of beta meeting sigma. Noone knew what those words meant.
Performance to date
Chevron Corp – CVX – +6.97%
Any day of the week, any number of pundits, commentators and bloggers will weigh in on Chevron, comparing production and management with Exxon and others, but all agree that future prospects are sound. Chevron’s place in this portfolio was secured by the fact this it is a Dividend Aristocrat having increased dividends consecutively over the last 27 years with the most recent 7% increase meeting my minimum requirement. While free cash flow continues to be negative, with the consensus of improving prospects based on Chevron’s project pipeline, I’m prepared to watch and wait. Chevron’s 5-yr total return came in at an impressive 18%. 5-yr dividend growth was 9%.
HCP Inc – HCP – +8.44%
HCP is the only REIT to qualify for the Dividend Aristocrat index, having increased dividends for 29 years without interruption. I admit I bent some rules to include this issue, but it is a solid demographic play with a great deal of growth potential. The downside, which I can fix simply when the time is right, is that dividend growth has been anaemic. The upside: they’ve been hitting their numbers and 5-yr total return is solid at near 20% thanks to a 5.2% dividend.
Coca-Cola Co. – KO – +5.56%
Coca-Cola is once again in the crosshairs; activists objecting to compensation plans, Buffett’s response to the noise, that same activist making a case for Buffett’s privatisation of Coke and of course the healthy-eating crowd targeting Coke’s flagship sugary drinks. What is not in dispute is that industry-wide, anything with “Diet” in the name is taking a beating. Hopefully I’m not just simply blindly naive in my thinking that Coke, like so many venerable US corporations will figure this out and “get it done”. Of course, I am mindful of companies like Xerox, Kodak and Sears…
That said, Q2 earnings were weak on a TTM basis, but free cash flow grew 10% over the same time frame; dividend payout was safely under my 65% limit and total return for the 5 year period came at my 12% limit.
McDonald’s Corp – MCD – +0.14%
McDonald’s is another company that his been in the crosshairs lately. Putin’s inspectors have been shutting down individual restaurants, likely in retaliation to sanctions.
Russian officials said there had been complaints about food quality and did not provide more details, according to the Wall Street Journal. The timing of the inspection, however, overlaps with Russia’s ban of food imports from Europe, Australia and the U.S., which includes meat and dairy products.
Meanwhile, comparisons are being drawn to Chipotles, citing food quality and menu complexity. My take: this is not McDonalds first rodeo and they will sort this out. McDonald’s earned it’s spot in this portfolio by way of the Dividend Aristocrats – 38 years of uninterrupted dividend growth – and a 5 year growth record of 14%. Q2 earnings were lower than expected with a barely perceptible increase for the TTM, but FCFPS edged up by a respectable 14%. McDonald’s 5-yr total return comes in at 15%.
Walgreen Co. – WAG – +7.59%
Crosshairs seems to be the theme of the post and Walgreen was certainly no slouch this year by raising the ire of the US president, congress and their home state when their plans to change tax domicile to Switzerland through tax inversion became public. My perspective, in case Obama reads this: the idea of “economic patriotism” is a load of shit. If you choose to tax your corporations into the stone age, why are you surprised if they use your loopholes to leave your jurisdiction? But back to the case at hand, after shaming Walgreen to “stay at home”, the stock got kicked back some 15% for the day. Q2 TTM earnings of $2.84 represent an increase of 27%, year over year, and a trailing PE of 23x. Dividend payout as a function of free cash flow remained stable at 34% – well below my 65% barrier – and 44% for the year. Total return for the 5 year period came in at 26%.
I have to say that managing this portfolio has offered up a few surprises that I simply had not anticipated. Each one of these stocks has had “issues” this past year that have hampered performance, but they have stood up, respected the shareholder by paying out dividends, even during trying circumstances. Each one of these stocks requires some level of maintenance: HCP is rate sensitive, any change in Fed direction will affect the stock in ways I can’t foresee; MCD, like KO and Philip Morris may be at a crossroads where the consumer may finally understand the error of their unhealthy ways; CVX, like all of the oil companies may be the victim of some catastrophe of their making. That said, vigilance is key, the ability to filter noise from signal is important.
The coming three months will give me an opportunity to review other candidates, like GE, Johnson & Johnson, Hormel, Wal-Mart, Target.
Good times, eh?