Week 84 - Dividend Achievers that focus on International Sales

Situation: Last week we started a conversation about growth that is anchored around the concept of Opportunity Risk (see Week 83). The idea is that no one saving for retirement, no family saving for college, no company saving to build a broader competitive advantage, or government saving to build a broader comparative advantage can avoid RISK, since stagnation is the only alternative. They all have to consider Opportunity Risk, i.e., the risk that an expenditure will unnecessarily go toward supporting stagnation rather than growth. 

Last week we talked about investing in the smaller (i.e., faster growing) companies that aren't in the S&P 500 Index. This week we’ll turn our attention to companies that capture most of their revenues from faster growing countries. Same as last week, we’ll confine our attention to Dividend Achievers--companies that have increased their dividend annually for at least 10 yrs. We’ve come up with 27 companies, all having an S&P “A” rating of both their stock and bond issues (see Table). The 17 companies in the upper part of the Table lost less than 65% as much as the S&P 500 Index during the Lehman Panic; companies that lost more are red-flagged with respect to Risk (Column D) and take their place in the lower part of the Table. Why less than 65%? Because a group of above-average hedge funds lost slightly less than 65% as much as the S&P 500 Index during the Lehman Panic (see Week 46).

Of those 17 companies in the upper part of the Table, 9 are “hedge" companies (see Week 82). In other words, they have a 5-yr Beta of less than 0.65 (indicating that even today they’d likely lose less than 65% as much as the S&P 500 Index in a bear market) AND beat the S&P 500 Index over the past 15 yrs: 

        McDonald’s (MCD)
        Hormel Foods (HRL)
        Abbott Laboratories (ABT)
        International Business Machines (IBM)
        Colgate-Palmolive (CL)
        Johnson & Johnson (JNJ)
        Kimberly-Clark (KMB)
        PepsiCo (PEP)
        Procter & Gamble (PG)

Investment in any of these 9 stocks doesn’t need to be backed 1:1 by a high-grade bond like an inflation-protected US Savings Bond. Do be careful to pick several rather than rely on just one because even the best stocks eventually become overpriced and have to "correct" (witness Apple’s fall from grace).        

In the benchmarks at the bottom section of the Table we’ve included one of the best mutual funds focusing on international stocks (ARTIX). This table is a handy illustration of how stock selection can be used to beat mutual funds. Mutual fund managers drum up business by taking outsize risks. This results in good performance over the long haul but comes at the expense of terrible losses during bear markets. You don’t want that (or you wouldn’t be reading this blog).

Bottom Line: Companies that focus on sales from international markets are smart: they’ll grow earnings faster than the average S&P 500 company (which gets only 40% of its sales from outside the US). But it’s a hard row to hoe, so you will have to be very selective.

Risk Rating: 6.

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