Week 262 - The Master List for 2016

Situation: You’d like not to outlive your retirement savings. And you probably want to find a path toward that goal that doesn’t involve gambling. For that reason, non-gamblers who work on Wall Street have traditionally invested in bonds because bond pricing is stable unless the borrower faces bankruptcy. Even then, the creditor gets back most of the money owed, after the court liquidates and distributes the borrower’s assets. High quality bonds also come with fairy dust. They go up in price during recessions. Stock pricing depends on the perceived value of future cash flows discounted to the present. High quality stocks mostly go down in price during recessions because cash flows depend on demand for the company’s goods and services. 

Bonds now pay only enough interest to cover inflation. You have little choice but to invest in “bond-like” stocks that don’t fall much in value during recessions, and maybe even go up. Examples include Wal-Mart and McDonald’s, both of which went up during the Lehman Panic. We’ve constructed the 2016 Master List around that idea. It starts of course with companies that pay a good and growing dividend, the ones S&P calls Dividend Achievers because they’ve raised their dividend annually for at least the past 10 yrs. Those companies have a captive audience of some sort, people who will keep shelling out cash for a product or service, even during recessions.

Mission: Identify Dividend Achievers likely to hold their value during recessions.

Execution: You’ll know them by how little their total return to investors fell during the most recent “bear market” in an important asset class. That would be the middle two quarters of 2011, when the S&P 400 MidCap Index ETF (MDY) fell 21%. We exclude any Dividend Achiever from consideration if one or more of the following conditions apply:

1. Revenues are insufficient to warrant inclusion in the 2016 Barron’s 500 List;
2. S&P bond rating is less than BBB+ or (in the absence of a rating) debt/equity is less than or equal to one;
3. S&P stock rating is less than B+/M (or S&P assigns a denominator of “H” to the rating, denoting high risk of loss to the investor);
4. WACC exceeds ROIC;
5. Finance Value (Column E in our Tables) falls more than for the Vanguard 500 Index Fund (VFINX);
6. Dividend yield is less than for VFINX;
7. 16-yr CAGR is less than for the S&P 500 Index (^GSPC);
8. Dividend yield + 16-yr CAGR is less than 11.4%. NOTE: this metric has predictive value for Net Present Value (NPV) and is highlighted in yellow at Column Q in the Table;
9. Predicted loss to the investor at 2 standard deviations below 16-yr price CAGR is more than 36% (see Column P in the Table).

Bottom Line: We’ve found 24 Dividend Achievers in the 2016 Barron’s 500 List that defy gravity. All 24 have outgrown the Vanguard S&P 500 Index Fund (VFINX) over the past 16 yrs AND dropped no more in Finance Value during the 2011 bear market than did MDY, the S&P 400 MidCap Index ETF (see Column E in the Table). More importantly, the first 10 companies in the Table beat out 10-Yr Treasury Notes in Finance Value. Thirteen of the 24 improved their cash flow and sales numbers in 2015 compared to 2014 (highlighted in green in Columns R & S of the Table). All 24 continue to more than repay their cost of capital (see Columns AB and AC in the Table). The discounted cash flow (NPV) over the next 10 yrs, projected from 16-yr dividend and price appreciation rates by using a 9%/yr discount rate, shows that all 24 are likely to beat out Berkshire Hathaway (BRK-A), MDY, Microsoft (MSFT), and VFINX (see Columns W-AA in the Table). 

Risk Rating: 4 (where 1 = Treasury Notes and 10 = gold).

Full Disclosure: I dollar-average into JNJ and NEE, and own shares of GIS, KO and MCD.

Note: Metrics are current for the Sunday of publication. Metrics highlighted in red denote underperformance relative to our key benchmark (VBINX at Line 37 in the Table). NPV inputs are listed and justified in the Appendix for Week 256.

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