Week 145 - Commodity Plays for Long-term Investment

Situation: You know that demographers expect the world’s population to reach 9 billion within 40 yrs. This will require a build-out of infrastructure that will severely tax commodity production in order to provide needed transportation fuels, electrical power, building materials, food, and water. Conservation of resources has to be a central theme, and will be achieved by taxation, cap & trade schemes, and oppressive regulations. Nonetheless, commodity producers will enjoy pricing power for their goods. As a savvy investor, you probably would like your investments to benefit in some small way from that bounty. But you also know better than to speculate in “futures” for raw commodities. The next best choice is to own stock in companies that produce and fabricate commodities for sale, or package such goods into products that are useful to consumers. Transportation companies sit right in the middle of all that, with railroads being the most consistently profitable.

Those of us who are “buy-and-hold investors” are hoping to ease retirement with quarterly dividend checks that grow faster than inflation. Here at ITR, our mission this week is to guide you into commodity-related stocks that have less volatility than commodity futures, AND are issued by investor-friendly companies. Such companies have a dividend history that combines a reasonable payout with annual increases. 

In developing this week’s Table, we’ve only considered companies that are in both the S&P 500 Index and the 2013 Barron’s 500 list. You’ll recall that the Barron’s 500 list rank orders companies by a) recent sales growth, and b) 3-yr growth in cash-flow based return on invested capital. We’ve excluded companies with a dividend yield of less than 1.5%.

There are 20 commodity-related companies for you to consider (Table). Twelve are food-related, which should tell you something. Thirteen are Dividend Achievers (Column N); those have 10 or more consecutive years of dividend increases. We excluded any companies that have a Finance Value (Column E) less than our benchmark, which is a hedged S&P 500 Index fund: Vanguard Balanced Index Fund (VBINX). But some other company metrics also perform less well than VBINX; those metrics are highlighted in red.  

Bottom Line: Raw commodities fluctuate widely in price, given the large investment and long lead times that companies face to supply the market during “good” years. Those companies will only invest in expansion if commodity reserves have fallen for years and demand is growing. That market signal prompts investment by a number of producers who are in close competition. So, pent-up demand followed by growing production eventually results in a “supply glut.” The fortunes of every company along the supply chain will rise and fall accordingly, with the exception of food companies. Why are food companies the exception? Because food is a necessity. Such companies are classified by S&P in the least-volatile industry (Consumer Staples), whereas, mining and drilling companies are in the most volatile industries (Energy; Materials).

Risk Rating: 5.

Full Disclosure of current investment activity relative to the Table: I dollar-average into XOM.

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