Week 306 - A-rated Dividend Achievers That Have Outperformed The S&P 500 For 25 Years At Lower Risk

Situation: Some companies have served investors well over the past 25 yrs, compared to an investment in the Vanguard 500 Index Fund (VFINX). If we define “gambling in the stock market” as a statistical probability of losing more than you would from VFINX in any given market calamity, we find that 10 of those outperforming companies aren’t gambles. As long as those companies retain their management culture, as well as their competitive advantages, they’ll continue to outperform at less risk vs. the S&P 500 Index. 

Mission: Subject those 10 companies to our standard spreadsheet analysis, except that in calculating Net Present Value we’ll use the rate of price appreciation over the past 25 yrs instead of 16 yrs, i.e., the BMW Method.

Execution: see Table.

Administration: Our conditions for inclusion are that companies must meet a high standard of quality. S&P ratings for both their stock and bond issues cannot be lower than A-. Balance Sheets must be clean, meaning that Long-Term Debt cannot constitute more than a 1/3rd of total assets, Tangible Book Value cannot be negative (we grant a little leeway in the event of a recent acquisition), and dividends have to be paid from Free Cash Flow (FCF). Companies must have annual revenues that are high enough to warrant inclusion in the Barron’s 500 List of large US and Canadian companies. 

Bottom Line: These 10 companies represent 6 of the 10 S&P Industries (see Column Z in the Table). Each stock’s predicted risk of loss (at 2 Standard Deviations below trendline price appreciation per the BMW Method) is less than the S&P 500 Index’s projected loss (see Column M in the Table). All 10 have positive NPVs at a 9% Discount Rate, suggesting that you’re likely to realize at least a 9%/yr total return over a 10 year Holding Period, whereas VFINX has a negative NPV (see Column Y in the Table). Hormel Foods (HRL) and NextEra Energy (NEE) have the highest NPVs.

Risk Rating: 5 (10-yr Treasury Notes = 1, S&P 500 Index = 5, gold = 10)

Full Disclosure: I dollar-average into NEE, and own shares of TRV, ABT, MMM, and HRL.

NOTE: Metrics are current for the Sunday of publication. Red highlights denote under-performance vs. VBINX at Line 18 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 3-Yr CAGR found at Column H. Price Growth Rate is the 25-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/yr from a stock index of similar risk to owning shares in a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index at Line 23 in the Table. The ETF for that index is MDY at Line 17. For bonds, Discount Rate = Interest Rate.


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