Situation: We would all like to know what Warren Buffet is up to, and why (see Week 331). This week we’ll look at the 4 members of “The 2 and 8 Club” that are in the Berkshire Hathaway stock portfolio (see Table). Two of those, Coca-Cola (KO) and Wells Fargo (WFC) have long been among the top 5 holdings but the IBM holding is being reduced. The 4th company, United Parcel Service (UPS), is among several air transportation stocks recently purchased.
Mission: Provide analytics on those 4 stocks, and appropriate benchmarks, by using our Standard Spreadsheet.
Execution: see Table.
Bottom Line: Companies that pay a strong and growing dividend have always been among Warren Buffett’s favorites. The problem is that such robust returns to the shareowner are rarely sustainable. Two of these companies (KO and WFC) have had a large role in the Berkshire Hathaway portfolio for some time, all the while maintaining a high dividend yield and high dividend growth rate.
Risk Rating: 6 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-cost average into KO and IBM.
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Sunday, March 18
Week 350 - Non “S&P 100 Index” Companies in the Extended Version of “The 2 and 8 Club”
Situation: “The 2 and 8 Club” has 23 members that we have selected from the S&P 100 Index because those have a dividend yield greater than ~2%/yr, and have had a dividend growth rate of at least ~8%/yr over the past 5 years (see Week 344). By using a larger starting list than the S&P 100 Index, i.e., the Barron’s 500 List, we can add 11 companies to create the Extended Version of “The 2 and 8 Club.”
Mission: Apply our Standard Spreadsheet to those additional 11 companies.
Execution: see Table.
Administration: All 11 companies meet requirements for membership in “The 2 and 8 Club”: 1) an S&P bond rating of BBB+ or better; 2) an S&P stock rating of B+/M or better, 3) are listed in the Vanguard High Dividend Yield Index and 4) have the 16+ years of trading records that are needed for quantitative metrics using the BMW Method.
Bottom Line: These additional 11 companies help us meet a requirement that academic studies have imposed on stock-pickers who seek to avoid Selection Bias. That requirement is to be actively trading ~40 stocks to have a good chance of beating risk-adjusted returns for “the population intended to be analyzed”, which in this case is the S&P 500 Index.
Risk Rating for the cohort of 34 companies in the Extended Version: 6 (where 1 = 10-Yr US Treasury Notes, 5 = S&P 500 Index, and 10 = gold bullion).
Caveat Emptor: The risk of loss in a Bear Market (from investing equal amounts in all 34 stocks) is ~12% greater vs. investing in SPY, per Column M of this Week’s Blog and the Week 348 Blog. But price performance over the past 16 years is ~75% better, per Column K of those Blogs. Total Returns since the highest S&P 500 Index peak just prior to the Great Recession have been ~35% greater, per Column C in both Blogs.
Full Disclosure: I own shares of TRV, WEC and CMI.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
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Mission: Apply our Standard Spreadsheet to those additional 11 companies.
Execution: see Table.
Administration: All 11 companies meet requirements for membership in “The 2 and 8 Club”: 1) an S&P bond rating of BBB+ or better; 2) an S&P stock rating of B+/M or better, 3) are listed in the Vanguard High Dividend Yield Index and 4) have the 16+ years of trading records that are needed for quantitative metrics using the BMW Method.
Bottom Line: These additional 11 companies help us meet a requirement that academic studies have imposed on stock-pickers who seek to avoid Selection Bias. That requirement is to be actively trading ~40 stocks to have a good chance of beating risk-adjusted returns for “the population intended to be analyzed”, which in this case is the S&P 500 Index.
Risk Rating for the cohort of 34 companies in the Extended Version: 6 (where 1 = 10-Yr US Treasury Notes, 5 = S&P 500 Index, and 10 = gold bullion).
Caveat Emptor: The risk of loss in a Bear Market (from investing equal amounts in all 34 stocks) is ~12% greater vs. investing in SPY, per Column M of this Week’s Blog and the Week 348 Blog. But price performance over the past 16 years is ~75% better, per Column K of those Blogs. Total Returns since the highest S&P 500 Index peak just prior to the Great Recession have been ~35% greater, per Column C in both Blogs.
Full Disclosure: I own shares of TRV, WEC and CMI.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, March 11
Week 349 - Dividend Achievers with high Long-term Debt offset by a Strong Global Brand
Situation: Some highly indebted companies manage to pass through economic cycles with little difficulty, even though though they sometimes find it expensive to roll-over (refinance) their Long-Term Debt. This is a conundrum, given the impairment of their Balance Sheets (debt maturing in more than one year represents more than one third of their total assets). Think of having $200,000 left on your mortgage but your household assets (including equity in your home) are only worth $600,000.
I try to avoid investing in such companies. When I do, I look for an excuse to sell. But there has to be a rational explanation for why these companies prosper, given the cost of servicing long-term debt. Two explanations come to mind:
1) These companies have a lower cost of capital, since so much of their capitalization is in the form of debt, where interest payments have not been taxed until recently. (The new tax law levies a 21% tax on interest payments that consume more than 30% of earnings.)
2) These companies have a strong Global Brand, which is an Intangible Asset that increases their acquisition value. That is, a strong Global Brand would increase the purchase price at least 5% above Tangible Book Value.
3) These companies sell products that are remarkably “inelastic”, meaning that sales volumes are insensitive to price: “The price elasticity of supply measures how the amount of a good that a supplier wishes to supply changes in response to a change in price.[2] In a manner analogous to the price elasticity of demand, it captures the extent of horizontal movement along the supply curve relative to the extent of vertical movement [in price]. If the price elasticity of supply is zero the supply of a good supplied is ‘totally inelastic’ and the quantity supplied is fixed.”
Mission: Analyze high-yielding Dividend Achievers (companies that have increased their dividend annually for at least the past 10 years). Select companies that have long-term Debt amounting to more than 33% of Total Assets, as shown in Column P of the Table. Reject companies that do not have a strong Global Brand. Also reject companies that do not have A ratings from S&P for both the bonds and common stocks that they have issued (see Columns T and U in the Table). Brand rankings are shown in Columns AB-AC of the Table. Examine a comparison group of companies in the Benchmark Section of the Table.
Execution: see Table.
Bottom Line: The outperformance and low price volatility of these stocks, even during difficult market conditions (see Column D in the Table), cannot be explained by unique Tangible Assets such as strong Patent Protections or Tax Advantages. That leaves Brand Values (i.e., consumers prefer a brand they can trust) and Inelasticity (i.e., unit sales are not price sensitive) to account for the resiliency of their stock prices. That resiliency ultimately comes from pricing power.
Risk Rating: 6 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into Coca-Cola (KO), and also own shares of IBM and McDonald’s (MCD).
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
I try to avoid investing in such companies. When I do, I look for an excuse to sell. But there has to be a rational explanation for why these companies prosper, given the cost of servicing long-term debt. Two explanations come to mind:
1) These companies have a lower cost of capital, since so much of their capitalization is in the form of debt, where interest payments have not been taxed until recently. (The new tax law levies a 21% tax on interest payments that consume more than 30% of earnings.)
2) These companies have a strong Global Brand, which is an Intangible Asset that increases their acquisition value. That is, a strong Global Brand would increase the purchase price at least 5% above Tangible Book Value.
3) These companies sell products that are remarkably “inelastic”, meaning that sales volumes are insensitive to price: “The price elasticity of supply measures how the amount of a good that a supplier wishes to supply changes in response to a change in price.[2] In a manner analogous to the price elasticity of demand, it captures the extent of horizontal movement along the supply curve relative to the extent of vertical movement [in price]. If the price elasticity of supply is zero the supply of a good supplied is ‘totally inelastic’ and the quantity supplied is fixed.”
Mission: Analyze high-yielding Dividend Achievers (companies that have increased their dividend annually for at least the past 10 years). Select companies that have long-term Debt amounting to more than 33% of Total Assets, as shown in Column P of the Table. Reject companies that do not have a strong Global Brand. Also reject companies that do not have A ratings from S&P for both the bonds and common stocks that they have issued (see Columns T and U in the Table). Brand rankings are shown in Columns AB-AC of the Table. Examine a comparison group of companies in the Benchmark Section of the Table.
Execution: see Table.
Bottom Line: The outperformance and low price volatility of these stocks, even during difficult market conditions (see Column D in the Table), cannot be explained by unique Tangible Assets such as strong Patent Protections or Tax Advantages. That leaves Brand Values (i.e., consumers prefer a brand they can trust) and Inelasticity (i.e., unit sales are not price sensitive) to account for the resiliency of their stock prices. That resiliency ultimately comes from pricing power.
Risk Rating: 6 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into Coca-Cola (KO), and also own shares of IBM and McDonald’s (MCD).
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, March 4
Week 348 - Capitalization-weighted Index of “The 2 and 8 Club”
Situation: Whatever your stock-picking method, you need to decide how to manage large vs. small company stocks. If most of your stocks are issued by S&P 500 companies, your benchmark is the S&P 500 Index. It’s the greyhound you’re trying to catch. You won’t be able to keep up unless you invest more in mega-cap stocks than in the remaining companies of the S&P 500 Index. (I’ll bet you wish you’d owned Boeing stock going into 2017.)
Our stock-picking method is to invest in mega-caps, specifically the S&P 100 Index companies that represent 63% of the market capitalization of the S&P 500. Membership in that Index requires their stocks to have active “exchange-listed options” on the CBOE (Chicago Board Options Exchange). That’s important because a strong market in Put and Call Options means that there will be accurate and prompt price discovery, which is the best way to protect investors from a sudden collapse in price.
Mission: Use our Standard Spreadsheet to list the 22 S&P 100 companies that are in “The 2 and 8 Club” (see Week 327).
Execution: see Table listing those 22 stocks by market capitalization.
Administration: We confine our attention to S&P 100 companies among the ~400 companies in the Russell 1000 Index that pay a stable above-market dividend, one that is usually above 2%/yr. The Vanguard High Dividend Yield ETF (VYM) is a capitalization-weighted Index of those 400 companies, and is updated monthly. We reject companies that have not grown their dividend ~8%/yr (or faster) over the most recent 5-Yr period.
There are currently 22 members of “The 2 and 8 Club”. All 22 companies have BBB+ or better S&P Bond Ratings, and B+/M or better S&P Stock Ratings. Additionally, all 22 have at least the 16-yr trading record that is required for quantitative analysis by the BMW Method, which is based on stock prices that are updated every Sunday.
Bottom Line: These 22 stocks collectively have greater volatility (see Column M in the Table) but higher long-term total returns (see Column C in the Table), than the S&P 500 Index (see the ETF SPY at Line 32 in the Table). Only 7 of the 22 have less price volatility than the S&P 500 Index (see Column M): KO, PEP, IBM, MO, UPS, NEE, TGT. If you’re not a gambler, stick to investing in those and the benchmark ETFs (SPY and VYM).
Risk Rating: 6 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10).
Full Disclosure: I dollar-cost average into MSFT, JPM, KO and NEE, and also own shares of PFE, CSCO, PEP, IBM, MMM, MO, AMGN, TXN, CAT and TGT.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Our stock-picking method is to invest in mega-caps, specifically the S&P 100 Index companies that represent 63% of the market capitalization of the S&P 500. Membership in that Index requires their stocks to have active “exchange-listed options” on the CBOE (Chicago Board Options Exchange). That’s important because a strong market in Put and Call Options means that there will be accurate and prompt price discovery, which is the best way to protect investors from a sudden collapse in price.
Mission: Use our Standard Spreadsheet to list the 22 S&P 100 companies that are in “The 2 and 8 Club” (see Week 327).
Execution: see Table listing those 22 stocks by market capitalization.
Administration: We confine our attention to S&P 100 companies among the ~400 companies in the Russell 1000 Index that pay a stable above-market dividend, one that is usually above 2%/yr. The Vanguard High Dividend Yield ETF (VYM) is a capitalization-weighted Index of those 400 companies, and is updated monthly. We reject companies that have not grown their dividend ~8%/yr (or faster) over the most recent 5-Yr period.
There are currently 22 members of “The 2 and 8 Club”. All 22 companies have BBB+ or better S&P Bond Ratings, and B+/M or better S&P Stock Ratings. Additionally, all 22 have at least the 16-yr trading record that is required for quantitative analysis by the BMW Method, which is based on stock prices that are updated every Sunday.
Bottom Line: These 22 stocks collectively have greater volatility (see Column M in the Table) but higher long-term total returns (see Column C in the Table), than the S&P 500 Index (see the ETF SPY at Line 32 in the Table). Only 7 of the 22 have less price volatility than the S&P 500 Index (see Column M): KO, PEP, IBM, MO, UPS, NEE, TGT. If you’re not a gambler, stick to investing in those and the benchmark ETFs (SPY and VYM).
Risk Rating: 6 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10).
Full Disclosure: I dollar-cost average into MSFT, JPM, KO and NEE, and also own shares of PFE, CSCO, PEP, IBM, MMM, MO, AMGN, TXN, CAT and TGT.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
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