January 2013 Update - A focus on dividends
Another 7 1/2 months have elapsed since my last posting and, unless you're name is Rip Van Winkel, you've heard that the Fiscal Cliff was averted, for now. For a good summation of those details, see http://www.theatlantic.com/business/archive/2013/01/fiscal-cliff-deal-faq-what-just-happened-and-what-it-means-for-you/266743/ The citizen in me is relieved that our own man-made economic doomsday device didn't destroy us, but I must admit that part of me was eager for the mass hysteria creating 2009-type stock bargains.
Beyond the Fiscal Cliff nonsense, the past 7 1/2 months were rather uneventful for the market. Our economy continues its slow but steady recovery and Greece is still part of the Euro. See http://www.fool.com/investing/general/2013/01/03/2012-the-year-few-got-right.aspx (poking fun at the many wrong predictions of 2012). The S&P 500 performed fairly well over this period, returning 10.6% since the last update. Since the last update, this is how our picks performed, not adjusted for dividends:
7 of our 11 picks outperformed the S&P's 10.6% return, and the mean average was 16.97%, or 6.37 points above the S&P (which, as a percentage, is roughly 60% better than our benchmark).
Here's each stock's non-dividend adjusted performance since being selected:
The mean average return is 60.25% and the mean age of each pick is 24 months.
Since I started tracking stock performance in 2007 and keeping this blog at the end of 2009, I've refrained from trying to include dividends because it takes a lot of work, or perhaps more mathematical ability than I possess. At the same time, I have frequently recognized the important of dividends, and back in April 2010 referenced Jeremy Siegle's well known analysis of original S&P corporation returns, as well as the returns of those companies added to the index over time. If you haven't read Siegle's "The Future for Investors", I highly recommend it. Those familiar with the book or research know that the top of the list of best-performers is dominated by dividend payers, with MO, ABT, and BMY taking gold, silver, and bronze and turning $1,000 from '57 to '03 into $4.625 Million, 1.281 Million, and 1.209 Million, respectively.
While our picks have beaten the S&P 500 without accounting for dividends, its important to recognize the impact that dividends have on returns over time, especially considering that reinvested dividends play a large part of my thesis for market-beating returns. Accordingly, I've sifted through the historical data and broke out my calculator for a quick demonstration of how dividends have boosted PM's performance.
Lets say a crazy Christopher Loyd took you for a ride in his DeLorean back to spring 2008, when PM was spun off from MO. Even though you knew that you were about to invest before the largest financial collapse in 80 years, you naturally had complete faith in my investment advice and, for the sake of this example, no moral qualms about investing in an evil corporation (I've covered oil, defense, gambling, tobacco, and fast food with the list, so sorry if my picks limit your participation, but I swore off bio-med stocks and their "promising" pipeline cures long ago). With $5,000 you invested in 100 shares in April 2008 as the price fluctuated between $48 and $52. Your July dividend payment of $46 bought you .852 extra shares, but as the price declined in the fall and the dividend payment increased to .54, your October dividend payment bought you 1.4 additional shares. You kept reinvesting your quarterly dividends and while PM completed its nearly $30 Billion in share repurchases, it also raised its quarterly dividend each subsequent October to .58, .64, .77, and .85.
Fast forward to present day and on January 11, your 121.79 shares will pay out a quarterly dividend of $103.52. Without dividends, your 100 shares bought at $50 for $5,000 would now be worth $8,652 - a solid 73% gain in 4 1/2 years considering that you bought pre-recession. With dividends, however, that original $46 dividend payment is worth $73.69 and increased your future dividend payments so that, along with the other 4 years of reinvested dividends, your holdings are now worth $10,537 for a 110% gain. Additionally, if you want to stop reinvesting your dividends and treat your holding as an income source, its now yielding 8.3% interest on your original $5,000 investment and will pass 9% in October 2013. By comparison, interest on a 10-yr Treasury is 1.73%
From this example I've decided to "double down" on my faith in INTC right now for any new money. Its paying close to a 4.5% dividend, which has grown 13% over the past 5 years, and the payout ratio is 37, so there's little danger of them lowering the dividend out from under their shareholders. The p/e has been dipping below 9 for the past 2 months and most of the press you read over the past year is how PCs are dead, Intel was late to the mobile phone market, and now they're going to enter the ultra-competitive TV market. I won't tempt fate by making some bold prediction, and yes, INTC has been my worst performing pick on this list in terms of price (its been taking a multi-year rest so that it can go on a tear:), but the numbers just don't add up right now. Intel is sitting on a pile of unneeded cash. As safe as this dividend is, its yield alone makes it a good pick over bonds and other fixed assets and that isn't considering that its chips run in nearly all servers. I'm also ignoring the mobile market and the new-found TV venture. At the end of the day, does it seem likely that we won't need processor chips in the future? INTC has the money to stay in the game and pay back its shareholders. Maybe this won't be my home-run stock in a decade, but I see little downside and ... maybe those TVs become a hit after all.
Because of its dividend payments, INTC's poor performance on this list is also deceiving. (Really wish I had found this Total Return Calculator prior to doing all of this math: http://www.intc.com/calculator.cfm). In our time-machine DeLorean scenario, you might have also bought 100 shares in mid-April 2008 for $2200. Reinvesting those dividends, you would currently hold 116 shares worth $2446, an 11% gain on your pre-recession investment. Thats not great, but this was also our worst-performing pick and during that time the S&P 500 only returned 7.8%.
Other holdings on our list ripe for new money include MELI, NOV, BRK.B, and MCD, as well as PM if the price is right. MELI's thesis from last update remains and I'm still confident that its growth will surprise everyone. Latin America is still developing and the next few years should see a surge of internet usage. NOV also looks like a good value at this price and MCD is nearing its 52 week low while it keeps raising its dividend. There's not much to say about BRK.B that hasn't already been said. Its a tank and its not overvalued. Its basically an index fund of strong companies diversified across many sectors. Even though BRK.B is up 7% in the last month, its still trading around 1.2 p/b, which is the price at which Buffett has stated it would buy its own shares back at.
MPEL has been on a tear lately as its City of Dreams resort saw increased revenue and December revenue all over Maccau was higher than expected. LVS still gets most of the attention in Maccau but I like MPEL's pure play in the area and 2014 will see the opening of their Studio City resort with another resort planned for 2015 in the Philippines. Without any new projects in 2013, hopefully they will focus on improving margins in 2013 while the large Chinese middle class pours into the Cotoi strip. It could take investors a year to start factoring the Studio City opening into their valuations of MPEL, so this could be a slow year for MPEL, but I'm fine waiting. RAX has been a nice addition to our list and I remain optomistic while recognizing that the move to the cloud is a disruptive technology, and trying to pick winners or losers is difficult. RAX has to fight against GOOG, AMZN and CRM for market share, which is no small task. At the same time, RAX has made its business with its fanatical focus on customer service and if that continues, it should fare well against its rivals. Unfortunately, this also makes RAX our most vulnerable pick and customers could quickly turn on them if service issues arise, so we'll keep watching for warning signs.
From our current list, the stock I'm most willing to replace is AFL, with ATW coming in a distant second, but despite their solid performances over the past 7 1/2 months, neither of them are pricey on a p/e level, nor have their fundamentals drastically changed. I will say that I'm growing more pessimistic of insurance companies in the wake of Hurricane Sandy. BRK.B obviously has insurance exposure as well and for the past several years, Buffett has commented about how one "superstorm" or another caused an avalanche of claims and hurt the business. But it seems like each year brings a bigger storm with bigger insurance losses. With a p/e below 9, perhaps I should be clinging to AFL, but something tells me AL Gore might be right and 100-year storms might occur more than every 100 years going forward. I'm not a scientist and I'm not bailing on AFL right now, but I'm hesitant to put more money in even though I recognize that I could be wrong and that reacting to a dramatic event fresh in everyone's memory is precisely what I caution against.
So sadly, I've decided not to add a new stock to the list for this update. Had the Fiscal Cliff played out differently, I anticipated having several ideas. I've flirted with everything from TSLA to WFM, and even added RGR to my watchlist and seriously considered putting it on the list in place of AFL, but at the end of the day, I'm just not completely sold. Rather than taking action for action's sake, I'm going to stick with the current list in its entirety and see how things shake out over the next 7-8 months. I heard that Warren Buffett once suggested that people could drastically increase their investment returns if they were only allowed to make 20 investments in their entire lifetimes, forcing them to be more patient and thoughtful before taking any action. Counting the 11 current selections, I think I've gone through 17 companies in this blog in 3 years, so I'd better slow down.
Next update scheduled for July '13.
* Disclaimer: I currently maintain real-life holdings in several of the companies discussed in this update, including RAX, MPEL, NOV, PM, BRK.B, INTC, NUE, and AMZN. Your interest in these companies could, on the most miniscule level, benefit me personally. [more]