Month 137 - S&P 100 Watch List - December 2022

 Situation: We like to compare our portfolio’s performance to the market’s performance (SPY). If we come up short, we’re “leaving money on the table”  that might better have been spent on SPY or a night at the opera.

Mission: Devise a numbers-based approach for getting 10-year total returns from our stocks that match SPY’s on a risk-adjusted basis. For example, Johnson & Johnson (JNJ) with its 5-yr Beta of 0.56 has a 10-yr Required Rate of Return (7.6%/yr) vs. SPY with its 5-yr Beta of 1.00 having a 10-yr Required Rate of Return that is 71% higher (13.1%).

Execution: see 15 S&P 100 companies in this month’s Table.

Administration: Watch Lists screen out stocks with red flag issues or concerns. We’ll start by eliminating companies that issue bonds rated lower than A- by S&P, as well as companies that don’t have a 16 year trading record in their present configuration. Then we’ll eliminate companies with one and 10 year returns that are less than their Weighted Average Cost of Capital (WACC). For the 10-year period, WACC calculations are unavailable, so a close approximation is used: Required Rate of Return (RRR). We screen out Possibly Overpriced companies by using a substitute for P/E: Enterprise Value divided by Earnings Before Interest Taxes Depreciation and Amortization (EV/EBITDA). Companies with an EV/EBITDA higher than 16, which is the upper limit of the S&P 500’s historic range (11-16), are reported separately at the bottom of this month’s spreadsheet. There are 19 Possibly Overpriced companies. 

Analysis: Warren Buffett’s favorite metric is found in Column S of the Table (Return on Tangible Capital Employed). He thinks anything higher than a 20% return for the last fiscal year (lfy) is a good number. Nine companies meet that standard (MRK, ABT, TXN, GOOGL, HD, JNJ, LMT, UPS, BMY). His second point (that the company be “run by able and honest managers”) is addressed in Morningstar reports (see Column AQ), and is negatively impacted by the degree to which managers capitalized the company by issuing long-term bonds (see Column Z). Three companies have a BUY rating from Morningstar (GOOGL, TGT, JPM). Eight companies have a Debt to Equity ratio lower than 1.0 (MRK, ABT, PFE, TXN, GOOGL, JNJ, LMT, GD). Mr. Buffett also states that a high Free Cash Flow Yield (Column J) reflects good management because Retained Earnings allow the company to expand operations (or pay down debt) at zero cost. Fourteen companies meet this standard (MRK, UNP, ABT, PFE, TXN, GOOGL, HD, JNJ, JPM, LMT, CAT, UPS, GD, BMY). His third point (that the stock be available “at a sensible price”) is addressed by the 1 year and 3-5 year Forward PEG ratios (see Columns N and O): Two companies have a Forward PEG that is a lower than 2.0 at both time points (GOOGL and GD). Nine companies are A-rated (MRK, PFE, TXN, TGT, JNJ, JPM, LMT, UPS, GD). Five companies are cited 4 times (MRK, TXN, GOOGL, JNJ, LMT). 

Bottom Line: In business school, you’d learn that there are only two ways to beat the market: Do insider trading (which is illegal) or take on more risk, which means to overweight stocks that have a 5-yr Beta higher than 1.00. Investors often overweight such stocks through a Fear Of Missing Out (FOMO). Warren Buffett is of the opposite mind. He encourages investors to run portfolios with an average 5-yr Beta of 0.7, which means overweight stocks that have a 5-year beta of ~0.7 or lower. Those are called Sleep Well At Night stocks (SWANs). This month’s Table has 5 FOMOs (TXN, GOOGL, HD, JPM, CAT) and 5 SWANs (MRK, PFE, JNJ, LMT, BMY). 

Risk Rating: 5

Full Disclosure: I dollar-average into MRK, UNP, PFE, TXN, HD, JNJ, JPM, LMT, CAT and UPS, and also own shares of GOOGL and TGT.

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Month 136 - Dow Jones Utility Average - November 2022

Situation: Electric utilities are currently upgrading their transmission and generation systems to accommodate wind and solar–power sources that have inconvenient locations and fluctuate with the weather. Surplus power at a regulated utility has to be sold to a private power grid or stored at a battery “farm.” When more power is needed than wind and solar can provide, an “on-demand” source is required because wind and solar sources “peak out.” Most public power stations have access to a natural gas pipeline and will tap into that to provide “peaking power.” Other sources can also be used, like coal, oil, nuclear, hydroelectric, geothermal, biomass, and the above-noted battery “farms” that are being built next to power plants that receive abundant supplies from wind and solar. Hydrogen fuel cells are a new development to provide peaking power, and will increasingly become the preferred option. Why? Because hydrogen can be made from the electrohydrolysis of water using clean sources like wind or solar, and its combustion emits no carbon dioxide. A hydrogen plant built next to a traditional power plant has a much smaller footprint than a battery farm (which covers 2-3 acres) and doesn’t degrade over time (which all batteries will do). Hydrogen can be transported by tanker trucks in cryogenic liquid form but hydrogen pipelines will eventually be built (to totally eliminate the need for natural gas). Air Products and Chemicals (APD) is the world’s largest producer of hydrogen  and is one of our A-rated companies (see the Benchmarks section in this week’s spreadsheet).

It is important to remember that electric utilities produce an essential good, and that the demand for electrical power grows faster than the population grows. Prices that consumers pay for electricity are regulated at the State level by public utility commissions (PUCs), which grant monopoly power to power companies in exchange for requiring them to maintain and upgrade their power grids. Stocks issued by regulated utilities have below-market price volatility because of those contracts (which ensure a profit margin of 9-11%). Regulated utilities typically pay above-market dividends and thereby attract savers looking to own a bond substitute.

Mission: Use our Standard Spreadsheet to analyze all 15 companies in the Dow Jones Utility Average.

Execution: see Table.

Analysis: Warren Buffett’s favorite metric is found in Column S of the Table (Return on Tangible Capital Employed). He thinks anything higher than a 20% return for the last fiscal year (lfy) is a good number. None of these companies meet that standard. His second point (that the company be “run by able and honest managers”) is addressed in Morningstar reports (see Column AP), and is negatively impacted by the degree to which managers have capitalized the company by issuing long-term bonds (see Column Y). Five companies have a BUY rating from Morningstar (EXC, FE, PEG, D, EIX). Atmos Energy (ATO) is the only company with a Debt to Equity ratio lower than 1.0. Mr. Buffett also states that a high Free Cash Flow Yield (Column J) reflects good management because Retained Earnings allow the company to expand operations (or pay down debt) at zero cost. However, electric utilities are upgrading transmission grids to accommodate wind and solar power. So, there is no Free Cash Flow available after paying dividends. His third point (that the stock be available “at a sensible price”) is addressed by the 1 year and 3-5 year Forward PEG ratios (see Columns N and O): AES is the only company that has a lower than 2.0 at both time points.

Five companies are A-rated (ATO, NEE, AEP, XEL, ED) in that they have met all 8 “value” criteria (see Appendix). 

Bottom Line: By owning stock in a regulated utility, you’d be profiting from an asset that is essentially risk-free. The Required Rate of Return (using the Capital Asset Pricing Model) for the Vanguard Utilities ETF (VPU) – with its 5-yr Beta of 0.47 – matches that of an S&P 500 Index ETF – with its 5-yr Beta of 1.00 – on a risk-adjusted basis. VPU’s RRR for the past 10 year holding period is 5.7%/yr but VPU actually returned 9.0%/yr vs. 11.5%/yr for the S&P 500 ETF (SPY). By taking 53% less risk you wouldn’t recover 53% less money than with SPY. You’d actually have recovered 22% less. Now you know why Warren Buffett encourages retail stock pickers to portfolio 5-yr Betas under 0.7.

Risk Rating: 4 (where 10-yr US Treasuries = 1, S&P 500 Index = 5, and gold bullion = 10). 

Full Disclosure: I dollar-average into NEE and AEP, and also own shares of ATO.

Appendix: To receive an A rating, we require the company to 1) be listed in the Vanguard High Dividend Yield ETF (VYM); 2) have the 16-yr trading history required for quantitative analysis by the BMW Method; 3) issue corporate bonds rated A- or better by S&P; 4) issue common stock rated B/M or better by S&P; 5) have shown earnings growth for the trailing twelve months; 6) have a positive Book Value for the most recent quarter; 7) have capitalization from issuance of corporate bonds that is no more than 2.5 times equity (capitalization from issuance of common stock), and 8) have a 10-yr Rate of Return (Column E in the Table) that exceeds the 10-yr Required Rate of Return (Column D in the Table).

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Month 135 - 23 A-rated Non-financial Companies in the iShares Top 200 ETF - October 2022

Situation: One of the most actionable newsletters we’ve published came out 6 months ago: Month 129 - 26 A-rated Non-financial companies in the iShares Top 200 Index - April 2022. It describes how we arrive at a workable Watch List of companies. As such, this newsletter relates to the most important criticism we’ve received from our readers. Namely, that information in our most actionable newsletters isn’t tracked over time. 

Mission: To update last April’s newsletter every six months, starting this month. The overall goal of our newsletter is to present companies and ETFs that beat the S&P 500 Index over the Trailing Sixteen Year (TSY) period on a risk-adjusted basis. 

Execution: see Table of 23 Companies selected from the iShares Top 200 ETF (IWL).

Administration: We’ve upgraded our requirements to designate a company “A-rated” (see Appendix). Six of last April’s companies no longer meet requirements: Cisco Systems (CSCO), Intel (INTC), 3M (MMM), United Parcel Service (UPS), Eaton plc (ENT) and Comcast (CMCSA), but we’ve found 3 IWL companies that do meet requirements: American Electric Power (AEP), Archer Daniels Midland (ADM), and Honeywell International (HON). New requirements for the A-rated designation include having a 16-yr RRR, meaning a Required Rate of Return (see Column D of the Table) that is no less than the 16-yr Actual Rate of Return (Column E). RRR is calculated by using the Capital Asset Pricing Model which has 4 moving parts (see sample in Appendix).

Analysis: Warren Buffett’s favorite metric is found in Column T of the Table: Return on Tangible Capital Employed. He thinks a 20% return for the last fiscal year (lfy) is a good number. Nine companies meet this standard: LLY, MRK, PG, TXN, JNJ, PEP, LMT, ITW, QCOM.  His second point (that the company be “run by able and honest managers”) is addressed in Morningstar reports (see Column AP) and is negatively impacted by the degree to which managers capitalize the company by issuing long-term bonds (see Column Y). Four companies have a BUY rating from Morningstar (APD, HON, PEP, QCOM), and 11 companies have a Long-term Debt to Equity ratio lower than 1.0: MRK, ADP, PFE, PG, ADM, TXN, APD, JNJ, WMT, RTX, GD. Mr. Buffett also states that a high Free Cash Flow Yield (Column L) reflects good management because Retained Earnings allow the company to expand operations (or pay down debt) at zero cost. 17 companies meet that standard: LLY, MRK, ADP, WM, PFE, PG, ADM, TXN, KO, HON, JNJ, LMT, ITW, RTX, CAT, GD, QCOM. His third point (that the stock be available “at a sensible price”) is addressed by 1-yr and 3-year Forward PEG ratios (see Columns O and P): Only 4 companies (HON, RTX, GD, CAT) have PEGs under 2.0 for both intervals. Seven companies are cited 3 times (MRK, PG, HON, TXN, JNJ, RTX, QCOM).

Bottom Line: Stock-pickers need to track “fundamental” metrics over time for companies on their Watch Lists. 

Risk Rating: 7 (where 10-yr US Treasuries = 1, S&P 500 Index = 5, and gold bullion = 10). 

Full Disclosure: I dollar-average into MRK, NEE, AEP, PFE, PG, TXN, JNJ, PEP, LMT, WMT, RTX, CAT, and also own shares of APD, TGT, KO, HON, GD. 

Appendix: Requirements for A-rated designation are to 1) be listed in the Vanguard High Dividend Yield ETF (VYM); 2) have the 16-yr trading history required for quantitative analysis by the BMW Method; 3) issue corporate bonds rated A- or better by S&P; 4) issue common stock rated B/M or better by S&P; 5) have shown positive earnings growth for the trailing 12 months; 6) have shown positive Book Value for the most recent quarter; 7) have capitalization from issuance of corporate bonds that is no more than 2.5 times capitalization from issuance of common stock (equity), 8) have a 16-yr Rate of Return in Column E in the Table that is no less than the 16-yr Required Rate of Return or RRR in Column D in the Table, and 9) be domiciled in the United States.

Appendix: Calculation of RRR by using: a) Market Return (S&P 500 Index); b) Risk-free Return (10-yr US Treasury Note); c) Risk (5-yr Beta); d) Holding Period (we use 16 years so as to include a major recession). Procedure: subtract the 16-yr Risk-free Return (Vanguard Intermediate Term Treasury Fund with ticker VFITX) from the Market Return (16-yr SPDR S&P 500 ETF with ticker SPY) to get the market effect on pricing. Multiply the market effect on pricing by the 5-yr Beta to get the risk attached to that effect. Then add back the Risk-free Rate to get RRR. For example, the Vanguard Utilities ETF (VPU) has an RRR of 5.8%/yr because SPY minus VFITX for the 16-yr holding period is 6.0%/yr, and 6.0% times VPU’s 5-yr Beta of 0.47 is 2.8%. Adding back the 16-yr VFITX total return of 3.0%/yr gives VPU’s 16-yr RRR of 5.8%/yr. The actual 16-yr total return for VPU of 8.9%/yr is less than the actual 16-yr total return for SPY 9.0%/yr. But SPY has a 16-yr RRR of 9.0%/yr because the 5-yr Beta for the S&P 500 Index is fixed at 1.00 by convention. Stock traders think of RRR as the hurdle rate that must be achieved to equal the market’s return on a risk-adjusted basis.

"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.

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Month 134 - 16 Food & Agriculture Companies in Vanguard’s Dividend Appreciation ETF - September 2022

Situation: Successful investing is largely about minimizing uncertainty. It should be advantageous to invest in companies that provide essential goods and services (food, transportation fuels, natural gas, electricity). There are two problems with that: 1) pricing power is lost, since demand is inelastic to price; 2) earnings growth is slow, since it’s largely a function of population growth.

To invest in food & agriculture companies, the safe & efficient approach is to look for shareholder-friendly companies–namely those with a commitment to increasing their dividend annually. They’re called dividend achievers if they’ve been doing that for ten or more years. However, a problem arises when a company’s stock price crashes: high dividends payouts often become unsustainable, since recovery of the former price happens slowly and often requires some assets be sold. Vanguard’s Dividend Appreciation ETF avoids that problem by excluding the 25% of Dividend Achievers with the highest dividend yields.

Mission: Use our spreadsheet to analyze all the Vanguard Dividend Appreciators that issue bonds rated BBB- or higher by S&P, have a complete S&P Report rating the stock B/M or higher, and have a 16+ year trading history. Exclude any companies with negative year-over-year earnings or negative Book Values.

Execution: see Table of 16 companies.

Analysis: Warren Buffett’s favorite metric is found in Column T of the Table: Return on Tangible Capital Employed. He thinks anything higher than 20% return is a good number. Six companies meet this standard: MKC, HSY, TTC, PEP, TSN, SJM. His second point (that the company be “run by able and honest managers”) is addressed in Morningstar reports (see Column AO) and is negatively impacted by the degree to which managers have capitalized the company by issuing long-term bonds (see Column X). Three companies have a BUY rating from Morningstar: TSN, SJM, INGR. Eight companies have a Long-term Debt to Equity ratio lower than 1.0: HRL, COST, ADM, TTC, TSN, WMT, SJM, INGR. Mr. Buffett also states that a high Free Cash Flow Yield (Column L) reflects good management because Retained Earnings allow the company to expand its operations (or pay down debt) at zero cost. Twelve companies have Retained Earnings: HRL, COST, MKC, ADM, SYY, KR, HSY, KO, TTC, TSN, CAT, SJM.  His third point (that the stock be available “at a sensible price”) is addressed by the 1 year and 3-5 year Forward PEG ratios (see Columns O and P): Three companies have PEGs lower than 2.0 at both time points: SYY, CAT, INGR. Two companies are cited 4 times: TSN and SJM.

Eight companies are A-rated (see Column AR): HRL, ADM, HSY, KO, TGT, PEP, WMT, CAT. Four of those are in The 2 & 8 Club (see bolded numbers in Column M): HRL, HSY, TGT, CAT. Stocks issued by 5 companies meet our “Value Stock” requirements (see Appendix): ADM, KR, TSN, SJM, INGR.  

Bottom Line: These companies tend to be overvalued because of their stable earnings (see Column N). That is largely because demand is inelastic to price. (Food inflation has little effect on the volume of food purchased.) To put a fine point on this, Warren Buffett is only on record for having recommended one stock: Coca-Cola (KO).

Risk Rating: 7 (where 1 = 10-yr US Treasury Notes, 5 = S&P 500 Index, 10 = gold bullion)

Full Disclosure: I dollar-average into COST, PEP, WMT and CAT, and also own shares of TSN, MKC, KO and TGT.

Appendix: A “Value Stock” meets 3 criteria: 1) price (50d MA) is no greater than twice the Graham Number (see Columns AG & AH); 2) 7-yr P/E is no greater than 25 (see Column AJ); 3) Price (50d MA) is no greater than 6 times Book Value (see Column AI). 

"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.

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Month 133 - Dow Jones Transportation Average - August 2022

Situation: We’re in a Bear Market. But when will the next Bull Market start? The time-tested way to answer that question is to apply Dow theory, which requires that evidence of an uptrend in the Dow Jones Industrial Average be confirmed by evidence of an uptrend in the Dow Jones Transportation Average. 

The idea behind Dow theory is simple: when economic activity starts to recover, that recovery has to be reflected by companies in the transportation sector getting more business. The trick is to define an “uptrend” in price-action for each of those market averages. Why is that a trick? Because those movements will always a) be halting, b) often backtrack, and c) rarely coincide. You (the investor) will have to plot (or download) the price-action over time for both averages, then draw two lines on each plot: one connecting the valleys that mark downward movements, the other connecting the peaks that mark upward movements. Decide if there's a beginning uptrend in the Dow Jones Industrial Average, then decide whether or not it is being confirmed by a beginning uptrend in the Dow Jones Transportation Average. The Bear Market has ended when both answers are “yes.”

Since price-action in the 20 companies in the Dow Jones Transportation Average determines when you’ll next open your wallet, a good idea would be to know those players and the positions they play. By doing that, you’ll soon notice that air transportation, ground transportation, and water transportation are separate games. The good news is that information technology has brought those together and created a fourth game, called third-party freight forwarding or 3PL (3rd-Party Logistics). Information is an end in itself.

Mission: Use our Standard Spreadsheet to analyze the Dow Jones Transportation Average.

Execution: see Table of 20 companies.

Analysis: Warren Buffett’s favorite metric is addressed in Column V of the Table: Return on Tangible Capital Employed. He thinks anything higher than a 20% return for the last fiscal year (lfy) is a good number. Six of the 20 companies meet that standard: ODFL, EXPD, MATX, LSTR, CHRW and UPS. His second point (that the company be “run by able and honest managers”) is addressed in Morningstar reports (see Column AQ) and is negatively impacted by the degree to which managers choose to capitalize their company by issuing long-term bonds instead of common stock (see Column Z). The 4 major airlines are the only companies assigned a BUY rating from Morningstar (UAL, LUV, DAL and AAA) but 6 companies have a Long-term Debt to Equity ratio that is less than 1.0 (ODFL, EXPD, MATX, LSTR, JBHT and KEX). Mr. Buffett also states that a high Free Cash Flow Yield (Column L) reflects good management because Retained Earnings allow the company to expand operations (or pay down debt) at zero cost. Nine companies (UNP, CSX, NSC, ODFL, EXPD, MATX, LSTR, UPS and FDX) have Free Cash Flow left over after paying dividends. His third point (that the stock be available “at a sensible price”) is addressed by the 1 year and 3-5 year Forward PEG ratios (see Columns Q and R): Only 2 companies have PEGs under 2.0 at both time points (LUV and FDX). Four companies (ODFL, EXPD, MATX and LSTR) are cited 3 times.

Bottom Line: These are high risk companies, with an average 5-yr Beta of 1.25. Only the freight forwarders (EXPD, LSTR and CHRW) have less price volatility than the S&P 500 Index (Column C in the Table). And only one company (UPS) is A-rated (see Appendix).

Risk Rating: 7 (where 10-yr US Treasuries = 1, S&P 500 Index = 5, and gold bullion = 10). Four of these companies have “risk-off” investment potential per quantitative analysis shown in Columns S-U: NSC, LSTR, JBHT and UPS. 

Full Disclosure: I dollar-average into UNP and UPS.

Appendix: Current requirements for a company to be A-rated are to 1) be listed in the portfolio of the Vanguard High Dividend Yield ETF (VYM); 2) have the 16-yr trading history required for quantitative analysis by the BMW Method; 3) issue corporate bonds rated A- or better by S&P; 4) issue common stock rated B/M or better by S&P; 5) have shown earnings growth for the trailing twelve months; 6) have a positive Book Value for the most recent quarter; 7) have capitalization from issuance of corporate bonds that is no more than 2.5 times equity (i.e., capitalization from issuance of common stock); 8) have a 10-yr Total Rate of Return (Column F in the Table) that exceeds the long term (16-yr) Required Rate of Return (Column D in the Table).

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Month 132 - Learn the Dow - July 2022

Situation: We’re experiencing a market crash, which means it is a bad time to be a risk-on growth investor. But it’s OK if you’re a risk-off value investor. Wall Street professionals used to be so risk-off that Henry Paulson, the Secretary of Treasury and former CEO of Goldman Sachs, had a personal investment account composed almost entirely of bonds. 

As a stock-picker, you need to pay attention to companies that Wall Street professionals think are representative of the US economy, such as the 30 companies in the Dow Jones Industrial Average (DJIA). Twenty-one of those are value companies, in that they reliably pay an above-market dividend yield. Value stocks are outperforming growth stocks this year by ~20%. However, growth has outperformed value in 18 of the last 28 years. 

Growth is about future production (difficult to measure), whereas, value is about current production (easy to measure). Growth stocks underperform value stocks when the path forward for growth is uncertain. If the Federal Open Market Committee (FOMC) concludes that the economy is overheated, it will raise short-term interest rates to dampen demand. That will pull investors away from growth companies. Why? Because the cash flows of growth companies are expected to accelerate in the future. Therefore, those flows are discounted at the “Risk-free Rate”, which is understood to be the rate of interest paid on a 10-yr US Treasury Note. That rate will go up whenever the FOMC starts to raise short-term interest rates. Growth stocks have more price volatility than value stocks because estimates for future earnings growth are to some extent a matter of speculation about what the FOMC is going to do about interest rates. 

The value of any stock depends on its price volatility relative to earnings growth. If the volatility statistic (5-yr Beta) is too high and earnings growth is too low, you might be better off investing in Risk-free Zero-cost 10-yr US Treasury Notes. To manage that risk, you need to know the Required Rate of Return (RRR). The RRR for a stock or business is calculated by using the Capital Asset Pricing Model or CAPM. RRR is the total return per year that must be achieved to eliminate the material risk that the Risk-free Rate (return on a 10-yr US Treasury Note) will prove a better investment. First you need to know the Market Return (MR), which is the total return over interval X of an S&P 500 Index ETF like SPY. Second, know the Risk-free Rate (RfR) for the Vanguard Intermediate-Term Treasury Fund (VFITX) over interval X. Third, know the 5-yr Beta for the stock in question. RRR = RfR + 5-yr Beta multiplied by (MR - RfR).

Mission: Use our Standard Spreadsheet to analyze DJIA companies.   

Execution: see Table.

Analysis: Warren Buffett’s favorite metric is addressed in Column V of the Table: Return on Tangible Capital Employed. He thinks anything higher than a 20% return for the last fiscal year (lfy) is a good number. Ten of the 30 companies meet that standard: MRK, MSFT, V, CSCO, PG, AAPL, AMGN, HD, JNJ and MMM. His second point (that the company be “run by able and honest managers”) is addressed in Morningstar reports (see Column AQ) and is negatively impacted by the degree to which managers choose to capitalize their company by issuing long-term bonds instead of common stock (see Column Z). Twelve companies have a BUY rating from Morningstar (CRM, NKE, MSFT, CSCO, BA, DIS, HON, VZ, JPM, INTC, GS and MMM) and 15 companies have a Long-term Debt to Equity ratio that is less than 1.0 (CRM, NKE, UNH, MRK, MSFT, V, CSCO, PG, DIS, JNJ, INTC, CVX, WMT, TRV and GS). Mr. Buffett also states that a high Free Cash Flow Yield (Column L) reflects good management because Retained Earnings allow the company to expand operations (or pay down debt) at zero cost. Twenty-six companies (CRM, NKE, UNH, MRK, MSFT, V, CSCO, PG, AAPL, MCD, AMGN, AXP, HD, DIS, HON, JNJ, KO, JPM, INTC, WBA, CVX, TRV, CAT, MMM, IBM and DOW) have Free Cash Flow left over after paying dividends. His third point (that the stock be available “at a sensible price”) is addressed by the 1 year and 3-5 year Forward PEG ratios (see Columns Q and R): Eight companies have PEGs under 2.0 at both time points (CRM, NKE, UNH, DIS, HON, CAT, MMM and IBM). In summary, 6 companies (CRM, NKE, MSFT, CSCO, DIS and MMM) are cited 4 times. 

Bottom Line: Value investing is about owning stock in companies that offer goods and services people need rather than want. Demand is inelastic to price because people keep buying in the same quantities (https://www.investopedia.com/terms/p/priceelasticity.asp). People keep buying food, toothpaste and internet service; diabetics keep buying insulin; businesses keep contracting for kilowatt-hours of electricity, and governments keep buying defense goods. 

Risk Rating: 7

Full Disclosure: I dollar-average into NKE, MRK, MSFT, PG, JNJ, VZ, INTC and WMT, and also own shares of CRM, UNH, CSCO, MCD, BA, HD, HON, KO, JPM, CAT, MMM and IBM.

Note: Eleven stocks have a 16-yr Total Return (Column E) that is less than the Required Rate of Return (Column D): CSCO, BA, AXP, DIS, JPM, WBA, CVX, CAT, GS, MMM and IBM.

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Month 131 - 13 Berkshire Hathaway S&P 500 Companies That Issue A-rated Bonds - June 2022

Situation: The basic idea behind these newsletters is to highlight economically viable companies that make suitable investments for retirement savers. ”Economically viable” means the company is in a position to survive an existential calamity by further capitalizing itself: It can readily issue long-term bonds (and get short-term bank loans) at attractive rates. The recent history of Boeing (BA) is instructive in this matter.

Berkshire Hathaway is mainly an insurance company, so Warren Buffett has to set aside income from premiums (which he calls “float”) to pay future claims. That means holding a lot of cash (US Treasury Bills), owning stock in a lot of companies (the “portfolio”), and having a lot of wholly-owned subsidiaries that reliably generate income even in an economic downturn (e.g. electric utilities and a railroad). Stocks are the tricky part, given that other “property and casualty” companies invest paid-in premiums in bonds. He had to be a genius stock-picker, and he is, so you and I want to drill down on his stock picks. 

Mission: From the 40+ companies in Berkshire Hathaway’s stock portfolio, select those that are suitable for retirement savers.

Execution: see Table of 13 companies.

Administration: Calamity-proof companies need to a) be in the S&P 500 Index, b) have a clean Balance Sheet, c) keep long-term debt less than 2.5 times equity, d) have a 20+ year history of trading for their common stock, and e) have at least an A- S&P rating for their bonds.

Analysis: Warren Buffett’s favorite metric is addressed in Column R of the Table: Return on Tangible Capital Employed. He thinks anything over 20% for the last fiscal year (lfy) is a good number, and 6 companies meet that standard: MMC, PG, AAPL, JNJ, UPS, ATVI. His second point (that the company is “run by able and honest managers”) is addressed in Morningstar reports (see Column AM) and is negatively impacted by the degree to which managers choose to capitalize their company by issuing long-term bonds instead of common stock (see Column V). Six companies have a BUY rating from Morningstar (AMZN, BAC, BK, USB, UPS, ATVI); 8 have a Debt:Equity ratio less than 1.0 (AMZN, PG, JNJ, GL, BK, CVX, USB, ATVI). Mr. Buffett has also stated that a high Free Cash Flow Yield (Column I) reflects good management because Retained Earnings allow the company to expand (or pay down debt) at zero cost. Ten companies (MMC, PG, AAPL, JNJ, KO, BK, CVX, USB, UPS, ATVI) have Free Cash Flow remaining after paying dividends. His third point (that the stock be available “at a sensible price”) is addressed by the 1-yr and 5-yr Forward PEG ratios (see Columns M and N): Two companies have PEGs under 2.0 at both time points (BK and UPS). BK, UPS and ATVI are each cited 4 times.

Bottom Line: In the aggregate, these 13 companies score remarkably high in our Analysis and Finance Value (Column E) sections, and are accordingly overpriced (Columns AF to AH).

Risk Rating: 7

Full Disclosure: I dollar-average into PG, JNJ, KO and UPS, and also own shares of AMZN and USB.

"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.

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Month 130 - 11 Bedrock DRIPs: Dividend Achievers in the Dow Jones Composite Average - May 2022

Situation: This is an update of last April’s blog about dollar-cost averaging (Month 118). Those 10 Dividend ReInvestment Plans were chosen on the basis of fundamental metrics. Since then, I’ve decided to place more emphasis on safety than fundamentals. (When the price of a stock collapses, you might give up on the idea of automatically buying more shares each month.) 

If safety is what’s needed to keep you from giving up on dollar-averaging, how is that achieved? Let’s confine our stock-picking inside a Venn diagram of three safe fences: 1) the 65-stock Dow Jones Composite Average, 2) Vanguard Group’s list of Dividend Achievers (VIG), and 3) companies that issue bonds rated A- or higher by S&P. 

Mission: Apply our Standard Spreadsheet to a core list of companies that warrant automatic investment by using these restrictions.

Execution: see Table of 11 DRIPs. Note that 7 of those were on last year’s list of 10 DRIPs (UNP, MSFT, NEE, JNJ, KO, JPM, WMT).

Analysis: Warren Buffett’s favorite metric is addressed in Column R of the Table: Return on Tangible Capital Employed. He thinks anything over 20% for the last fiscal year (lfy) is a good number, and 4 companies meet that standard: MSFT, PG, JNJ, UPS. His second point (that the company is “run by able and honest managers”) is addressed in Morningstar reports (see Column AM) and is negatively impacted by the degree to which managers capitalize their company by issuing long-term bonds instead of common stock (see Column W). Only one company (MSFT) has a BUY rating from Morningstar but 5 have a Debt:Equity ratio less than 1.0 (NKE, MSFT, PG, JNJ, WMT). Mr. Buffett has also stated that a high Free Cash Flow Yield (Column I) reflects good management because Retained Earnings allow the company to expand (or pay down debt) at zero cost. 10 companies (NKE, UNP, MSFT, PG, JNJ, KO, JPM, WMT, UPS, CAT) have Free Cash Flow remaining after dividends. His third point (that the stock be available “at a sensible price”) is addressed by the 1-yr and 5-yr Forward PEG ratios (see Columns M and N): Only one company has PEGs under 2.0 at both time points (CAT). MSFT is cited 4 times.

Bottom Line: Dollar-cost averaging, over time, prevents you from either overpaying or underpaying for building a position. It does this by forcing you to buy shares when to do so appears unwise. By doing so, you get a larger number of shares for your monthly investment than would otherwise be the case.

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

Full Disclosure: I dollar-average into all 11 companies.

"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.

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Month 129 - 26 A-rated Non-financial Companies in the iShares Top 200 Index - April 2022

Situation: In order to “corral” a group of companies for close attention, investors have to work from a theme or Central Thought. I did this recently (Month 126) by focusing on A-rated non-financial companies in the S&P 100 Index. Now I’ve doubled the catchment population and improved the definition of A-rated. Stocks that S&P rates B/M and B/L are now included (MRK, KO, WMT, CAT, QCOM). Companies that are capitalized by issuing long-term loans valued at more than 2.5 times equity are now excluded (HD, AMGN, CL, IBM).

Mission: analyze companies on the newly updated list.

Execution: see Table.

Analysis: Warren Buffett’s favorite metric is addressed in Column R of the Table: Return on Net Tangible Capital Employed. He thinks anything over 20% for the last fiscal year (lfy) is a good number, and 13 companies meet that standard: LLY, MRK, CSCO, PG, TXN, JNJ, PEP, ETN, LMT, UPS, ITW, MMM, QCOM. His second point (that the company is “run by able and honest managers”) is addressed in Morningstar reports (see Column AO) and is negatively impacted by the degree to which managers capitalize their company by issuing long-term bonds rather than common stock (see Column W). Five companies (MRK, ADP, APD, INTC, CMCSA) have a BUY rating from Morningstar, and 14 companies have Debt:Equity ratios of less than 1.0 (MRK, ADP, PFE, CSCO, PG, TXN, APD, JNJ, INTC, ETN, WMT, CMCSA, RTX, GD). Mr. Buffett has also stated that a high Free Cash Flow Yield (Column I) reflects good management because Retained Earnings allow the company to expand (or pay down debt) at zero cost. 24 companies (LLY, MRK, ADP, PFE, CSCO, WM, PG, TGT, TXN, JNJ, KO, INTC, PEP, ETN, LMT, WMT, CMCSA, RTX, UPS, ITW, CAT, GD, MMM, QCOM) have Free Cash Flow remaining after dividends have been paid. His third point ( that the stock be available “at a sensible price”) is addressed by the 1-yr and 5-yr Forward PEG ratios (see Columns M and N): 10 companies have PEGs under 2.0 at both time points (MRK, PFE, TGT, APD, ETN, CMCSA, UPS, ITW, CAT, QCOM). 3 companies are cited 4 times (MRK, ETN, CMCSA).

Bottom Line: The stock market will be experiencing turbulence for some time. Merck (MRK) and Comcast (CMCSA) appear most likely to weather the storm.

Risk Rating: 7 (where 10-yr Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10).

Full Disclosure: I dollar-average into MRK, NEE, PFE, CSCO, PG, TXN, JNJ, KO, INTC, LMT, WMT, RTX, UPS, CAT, and also own shares of APD, CMCSA, GD and MMM.

"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.

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Month 128 - A-rated Non-financial Dividend Achievers in The 2 and 8 Club - March 2022

Situation: Stock-pickers know what they want, which is to own stock in a company that grows its cash flows ~10%/yr. To convert that growth into retirement income, they'll gravitate to stocks with a dividend yield of ~2%/yr plus a dividend growth rate of ~8%/yr – what I call “The 2 and 8 Club.” But there aren't many companies that will commit to such a generous policy, given that Free Cash Flow has to grow ~10% every year to sustain the policy without borrowing money. 

Mission: Find and analyze A-rated companies (with at least $10B in market capitalization) that are members of The 2 and 8 Club. Only analyze Dividend Achievers that are listed in VIG (the Vanguard ETF that excludes the 25% of Dividend Achievers that have unsustainably high dividend yields). Also exclude companies in the Financial Services industry, since those have above-market price volatility. 

Execution: see Table.

Administration: Our new requirements (changes italicized) for an A-rating are that a company 1) be listed in the US version of the FTSE All-World High Dividend Yield Index, which we know as the Vanguard High Dividend Yield ETF VYM; 2) be listed in the 20-year BMW Method Screen; 3) issue bonds rated A- or better by S&P; 4) issue stock rated B/M or better by S&P; 5) have a positive number for trailing 12-month earnings (TTM); 6) have a positive number for Book Value in the most recent quarter (mrq); 7) have long-term Debt that is no greater than 2.5 times Equity.

Analysis: Warren Buffett’s favorite metric is addressed in Column R of the Table: Return on Net Tangible Capital Employed. He thinks anything over 20% for the last fiscal year (lfy) is a good number and 6 companies meet that standard: FAST, SNA, TXN, LMT, UPS, ITW. His second point -- that the company is being “run by able and honest managers” -- is addressed in Morningstar reports (see Column AL) and is negatively impacted by the degree to which managers capitalize their company by issuing long-term bonds rather than common stock (see Column U). Two companies (APD and CMCSA) have a BUY rating from Morningstar, and 7 companies have Long-Term Debt:Equity ratios that are less than 1.0 (ADP, FAST, SNA, TXN, APD, CMCSA, GD).  Mr. Buffett has also stated that a high Free Cash Flow Yield (Column I) reflects good management because Retained Earnings allow the company to expand (or pay down debt) at zero cost. Ten companies (ADP, WM, SNA, TGT, TXN, LMT, CMCSA, UPS, ITW, GD) have Free Cash Flow remaining after dividends have been paid. His third point -- that the stock be available “at a sensible price” -- is addressed by the 1-yr and 5-yr Forward PEG ratios (see Columns M and N): 5 companies have PEGs under 2.0 at both time points (SNA, TGT, CMCSA, UPS, ITW). Two companies are cited 4 times (SNA, CMCSA).

Bottom Line: The 2 and 8 Club is a plan to invest for reliable growth. Seven of the 13 companies are in IWY (the iShares Russell Top 200 Growth ETF): ADP, WM, TGT, TXN, LMT, UPS, ITW. It is also a belt and suspenders plan, given the risk of loss that growth stocks carry. But you’re being paid up front for taking that risk by confining your attention to large companies with an above-market dividend yield. The hard part is finding reliable growth, which is why you’ll need to further confine your attention to Dividend Achievers.

Risk Rating: 7 (where 10-yr US Treasury Note = 1, S&P 500 Index = 5, and gold bullion = 10)

Full Disclosure: I dollar-average into NEE, TXN, LMT and UPS, and also own shares of APD, CMCSA and GD.

"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.

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Month 127 - Dogs of the Dow for 2022 - Februray 2022

 “In the markets you don’t take risk without being paid hard cash at the same time.”

                                                                                            -- Michael Lewis

Situation: The 10 “Dogs of the Dow” have the highest dividend yields in the 30 Dow Jones Industrial Average (DJIA) companies. Yields are high because the companies face challenges that have driven their share prices down. But high-quality companies tend to overcome challenges so you have an opportunity to profit.

Mission: Use our Standard Spreadsheet to analyze all 10 companies.

Execution: see Table.

Analysis: Warren Buffett’s favorite metric is addressed in Column R of the Table: Return on Tangible Capital Employed. He thinks anything over 20% is good. Three companies meet that standard (MRK, AMGN, MMM). His second point -- that the company be “run by able and honest managers” -- is addressed in Morningstar Reports (see Column AP) and is negatively impacted by the degree to which managers choose to capitalize the company by issuing long-term bonds rather than common stock (see Column X). Five companies (MRK, AMGN, VZ, INTC, MMM) have BUY ratings from Morningstar; 4 companies have Long-Term Debt to Equity ratios lower than 1.0 (MRK, INTC, CVX, DOW).  Mr. Buffett has also stated that high Free Cash Flow Yield (Column I) reflects good management because Retained Earnings allow the company to expand (or pay down debt) at zero cost. Nine companies (MRK, AMGN, KO, INTC, WBA, CVX, MMM, IBM, DOW) have Retained Earnings after dividend payouts. His third point -- that the stock be available “at a sensible price” -- is addressed by the 1-yr and 5-yr Forward PEG ratios (see Columns M and N): Only one company has a PEG ratio under 2.0 at both time points (MRK). MRK and AMGN are also members of The 2 and 8 Club (Column J). There are 3 Value Stocks (VZ, INTC, WBA) per Columns AH to AM. That is, Price (50-day moving average) is no more than twice the Graham Number (Price normalized to 1.5 times Book Value and 15 times Earnings), 7-yr P/E is no more than 25, and Price is no more than 6 times Book Value. Two companies have 4 citations: MRK and INTC. 

Bottom Line: These Dogs are the same as last year’s except that Intel (INTC) replaces Cisco Systems (CSCO). You would need to have invested equal amounts in all 10 of these Dogs at the first of the year to have a statistical likelihood of achieving Total Returns for 2022 that approximate those for the DJIA.

Risk Rating: 7 (where 10-yr Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)

Full Disclosure: I dollar-average into MRK, KO and INTC, and also own shares of VZ, MMM, IBM. KO and MMM are my largest holdings because those are the only Dividend Achievers (Column AT) on the list.

"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.

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Month 126 - 22 A-rated Non-Financial Companies in the S&P 100 Index - January 2021

Situation: Stock-picking is essentially about forming three habits: 1) Corral a workable group of companies that have something of fundamental value in common, then study (and learn from) those. 2) Keep an eye on their debts (and yours). 3) Follow their Morningstar Reports. Your goal is to overweight the underpriced stocks in your corral and underweight the overpriced stocks. 

Mission: This month’s newsletter is about my corral. I’m looking for companies that are potentially underpriced, starting with those that have a dividend yield above ~2.5%: PFE, AMGN, JNJ, INTC, PEP, LMT, MMM, IBM. 

Execution: I decide which of those 8 companies have debt problems and an unflattering Morningstar Report, then cross those off my Watch List. AMGN, PEP, IBM have debt problems and are “overvalued” according to Morningstar. Five companies remain on the "Watch List": PFE, JNJ, INTC, LMT, MMM. Now let’s analyze all 22 companies in the corral, because some of those will face challenges in the future and become underpriced.

Analysis: Warren Buffett’s favorite metric is addressed in Column R of the Table: Return on Tangible Capital Employed. He thinks anything over 20% for the last fiscal year (lfy) is a good profit margin. 12 companies meet that standard (CSCO, PG, HD, AMGN, TXN, JNJ, INTC,  PEP, LMT, EMR, CL, MMM). His second point -- that the company is “run by able and honest managers” -- is addressed in Morningstar Reports (see Column AL) and also is negatively impacted by the degree to which managers choose to capitalize the company with long-term bonds rather than common stock (see Column V). 4 companies (INTC, CMCSA, LMT, EMR) have a BUY rating from Morningstar; 11 companies have Long-Term Debt to Equity ratios lower than 1.0 (CSCO, PFE, PG, TGT, TXN, LIN, JNJ, INTC, EMR, RTX, GD).  Mr. Buffett has also stated that high Free Cash Flow Yield (Column I) reflects good management because Retained Earnings allow the company to expand (or pay down debt) at zero cost. 13 companies (LLY, CSCO, HD, AMGN, TGT, LIN, INTC, CMCSA, LMT, EMR, CL, GD, IBM) have Retained Earnings after dividend payouts. His third point -- that the stock be available “at a sensible price” -- is addressed by the 1-yr and 5-yr Forward PEG ratios (see Columns M and N): 4 companies have PEG ratios under 2.0 at both time points (PFE, AMGN, CMCSA, RTX). 9 companies are members of The 2 and 8 Club (Column J): LLY, NEE, CSCO, HD, AMGN, TXN, CMCSA, LMT, GD. 

Bottom Line: Cisco Systems (CSCO) is cited 4 times; Intel (INTC) and Lockheed Martin (LMT) are each cited 3 times. Since INTC and LMT are on my Watch List, those become BUYs.

Risk Rating: 7 (where 10-yr Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)

Full Disclosure: I dollar-average into NEE, CSCO, PFE, PG, INTC, JNJ and RTX, and also own shares of HD, TXN, LIN, CMCSA, LMT, GD, IBM and MMM. 

"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.

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