Month 150 - 18 Dow Jones Composite Average Companies That Issue A-rated Bonds - January 2024

Situation: Median home prices are 7.4 times median income, which is higher than the 6.8 times median income reading at the peak of the 2008 housing crisis, and well above the long-term average of 3-4 times income . This is a bubble, and when it pops there will be a recession (if history is any guide). At such junctures, I hope for the best and plan for the worst. I focus on the professionally-curated 65-stock Dow Jones Composite Average (DJCA). Why? Because a third of those companies have strong Balance Sheets and reliably cover their costs of capital with earnings. 

Mission: Use our standard spreadsheet to analyze DJCA companies that 1) issue bonds rated A- or better by S&P, 2) have a 10-yr Actual Rate of Return that is higher than their 10-yr Required Rate of Return (calculated by the Capital Asset Pricing Model), and 3) sustained less capital loss than the S&P 500 (SPY) during 2022.  

Execution: see Table of 18 companies.

Analysis:  Warren Buffett’s favorite metric is Return on Tangible Capital Employed (Column T in the Table). He thinks a 20% return for the last fiscal year is a good number. Eight companies qualify: MRK, UNH, V, JNJ, PG, MSFT, AAPL, HD. His second point (that the company be “run by able and honest managers”) is addressed in Morningstar Reports (Column AT) and is negatively impacted by the degree to which the company is capitalized by issuing long-term bonds (Column AC). Four companies have a BUY rating from Morningstar (AEP, JNJ, NEE, AWK), and 8 have a Debt to Equity ratio lower than 1.0 (MRK, UNH, ATO, V, JNJ, WMT, PG, MSFT). Mr. Buffett also likes Free Cash Flow Yield (Column K) to be higher than Dividend Yield (Column J) because Retained Earnings allow the company to expand operations (or pay down debt) at zero cost; 13 companies qualify (MRK, CAT, UNH, ATO, V, JNJ, WMT, PG, MSFT, AAPL, JPM, UNP, HD). His third point (that the stock be available “at a sensible price”) is addressed by 1-yr and 5-year Forward PEG ratios (Columns O and P); 7 companies have PEGs under 2.5 at both time intervals (MRK, UNH, AEP, V, JNJ, NEE, MSFT). Eight companies are A-rated (Column AU): MRK, ATO, XCEL, JNJ, WMT, NEE, PG, UNP. Seven companies are cited 4 or more times (MRK, UNH, V, JNJ, WMT, PG, MSFT).

Bottom Line: Companies that issue A-rated bonds rarely suffer as much capital loss in a market crash as SPY. Companies that consistently cover their cost of capital (meet or beat their Required Rate of Return calculated by the Capital Asset Pricing Model) are even better insulated from capital loss. 

Risk Rating: 6 (where 10-yr US Treasury Note = 1, S&P 500 Index = 5, gold = 10)

Full Disclosure: I dollar-average into MRK, CAT, AEP, JNJ, WMT, NEE, PG, MSFT, JPM, UNP, HD, and also own shares of UNH, ED, ATO, XE, V.

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Month 149 - 16 Risk-averse Stocks in the Dow Jones Composite Average - December 2023

Situation: Because of increased macroeconomic uncertainty, most investors, banks, and stock brokerages have adopted a “risk-off” posture. At such times, I look at the professionally curated list of stocks in the Dow Jones Composite Average (DJCA). Why? Because a quarter of those are risk-averse and reliably cover their cost of capital with earnings. 

Mission: Use our standard spreadsheet to analyze DJCA companies that issue bonds rated A- or better by S&P, but exclude those that have a lower Finance Value (see Column G in the Table) than the S&P 500 Index ETF (SPY): UPS, CSCO, NKE, CRM, DIS, INTC. Also exclude smaller companies, meaning those that are not in IWL (the iShares Russell Top 200 ETF): TRV, ED, ATO, XEL, AWK. Also exclude those that have a 10-yr Actual Rate of Return less than their 10-yr Required Rate of Return (CVX, KO, HON, IBM). However, include the two quasi-monopolies that issue bonds rated BBB+ by S&P: Southern Company (SO), which has a monopoly on the distribution of electric power in three contiguous southern states (Alabama, Georgia and Mississippi), and McDonald’s (MCD), which dominates the fast food industry. 

Execution: see Table of 16 companies.

Analysis:  Warren Buffett’s favorite metric is Return on Tangible Capital Employed (Column T in the Table). He thinks a 20% return for the last fiscal year is a good number. Nine companies qualify: MRK, UNH, V, MCD, JNJ, PG, MSFT, AAPL, HD. His second point (that the company be “run by able and honest managers”) is addressed in Morningstar Reports (Column AR) and negatively impacted by the degree to which the company is capitalized by issuing long-term bonds (Column AA). Four companies have a BUY rating from Morningstar (AEP, MCD, JNJ, NEE), and 7 have a Debt to Equity ratio lower than 1.0 (MRK, UNH, V, JNJ, WMT, PG, MSFT). Mr. Buffett also likes Free Cash Flow Yield (Column K) to be higher than Dividend Yield (Column J) because Retained Earnings allow the company to expand operations (or pay down debt) at zero cost; 13 companies qualify (MRK, CAT, UNH, V, MCD, JNJ, WMT, PG, MSFT, AAPL, JPM, UNP, HD). His third point (that the stock be available “at a sensible price”) is addressed by 1-yr and 5-year Forward PEG ratios (Columns O and P); 6 companies have PEGs under 2.5 at both intervals (MRK, UNH, V, JNJ, NEE, MSFT). Six companies are A-rated (MRK, AEP, JNJ, WMT, NEE, PG). 6 companies are cited 4 or more times (MRK, UNH, V, JNJ, PG, MSFT).

Bottom Line: Changes in macroeconomic factors eventually impact asset values. When uncertainty increases (with respect to interest rates, national productivity, or geopolitical turmoil) in any of the 10 advanced economies, investors need to adopt a more “risk-off” posture. Companies in the Dow Jones Industrial Average get almost 50% of their sales from markets outside the United States. Investors in such companies are well-positioned to anticipate the impact of macroeconomic factors. 

Risk Rating: 6 (where 10-yr US Treasury Note = 1, S&P 500 Index = 5, gold = 10)

Full Disclosure: I dollar-average into MRK, CAT, AEP, SO, JNJ, NEE, WMT, PG, MSFT, JPM, UNP, HD, and also own shares of UNH, MCD, AAPL, V.

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Month 148 - 12 Healthcare companies that issue A-rated bonds - November 2023

Situation: Healthcare stocks have fallen almost 10% since July, mainly because of two events: 1) the adoption of appetite-suppressants to treat obesity, 2) the adoption of price controls for Medicare drugs. Obesity is a risk factor in a dozen important illnesses, and a widespread reduction in obesity would impact cash flows of the healthcare industry. The good news is that healthcare costs for the average citizen would fall, closing the gap between supply and demand.

Mission: Analyze healthcare companies that have no material risk of bankruptcy (issue bonds rated A- or better by S&P).

Execution: See Table of 12 companies.

Analysis: Warren Buffett’s favorite metric is Return on Tangible Capital Employed (Column T in the Table). He thinks a 20% return for the last fiscal year (lfy) is a good number. 10 companies qualify: LLY, CI, MRK, UNH, BMY, JNJ, TMO, DHR, PFE, ABT. His second point (that the company be “run by able and honest managers”) is addressed in Morningstar Reports (Column AR) and negatively impacted by the degree to which the company is capitalized by issuing long-term bonds (Column AA). 5 companies have a BUY rating from Morningstar (CI, ELV, BMY, PFE, MDT), and 10 have a Debt to Equity ratio lower than 1.0 (CI, MRK, ELV, UNH, JNJ, TMO, DHR, PFE, ABT, MDT). Mr. Buffett also likes Free Cash Flow Yield (Column K) to be higher than Dividend Yield (Column J) because Retained Earnings allow the company to expand operations (or pay down debt) at zero cost; 11 companies qualify (CI, MRK, ELV, UNH, BMY, JNJ, TMO, DHR, PFE, ABT, MDT). His third point (that the stock be available “at a sensible price”) is addressed by 1-yr and 3-year Forward PEG ratios (Columns O and P); 8 companies have PEGs under 2.5 at both intervals (LLY, CI, MRK, ELV, UNH, BMY, TMO, MDT). One company (JNJ) is A-rated. 6 companies (see Appendix) are Hardy Perennials: LLY, ELV, UNH, JNJ, TMO, DHR; 4 companies are cited 5 times (ELV, UNH, JNJ, TMO).

Bottom Line: Big Pharma is on sale.

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

Full Disclosure: I dollar-average into LLY, MRK, JNJ, DHR and PFE, and also own shares of UNH and TM

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Appendix: We call a company that is sustainably able to make money a Hardy Perennial. There are 5 requirements:

–it has a better Finance Value (Column G) than the S&P 500;

–it issues bonds rated A- or higher by S&P;

–it has an ROIC that exceeds its WACC (Columns W&X);

–10-yr total return/yr exceeds 10-yr Required Rate of Return (Columns D&E);

–5-yr Beta (Column C) is less than the S&P 500’s 5-yr Beta (fixed at 1.00).

Month 147 - 16 A-rated Companies in the Vanguard High Dividend Yield ETF - October 2023

Situation: Recession is no longer on the horizon, even though the FOMC will likely keep interest rates “higher for longer.” Investors may even be happy with that, since federal budget deficits are expected to stabilize around 5%/yr . A stockpicker’s job is not to match or exceed the historical returns of the S&P 500. It is to invest in companies with metrics that predict they’ll be safe in a crisis–so that you won’t be tempted to sell shares and sustain a capital loss.

Mission: Analyze our A-rating system for picking stocks (see Appendix). It has 12 red lines you might not want to cross at this uncertain time.

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 a 20% return for the last fiscal year (lfy) is a good number. Seven companies do so: LMT, HSY, SNA, PEP, JNJ, PG, CSCO. 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 capitalize the company by issuing long-term bonds (see Column Z). Three companies have a BUY rating from Morningstar (LMT, WEC, NEE), and 10 companies have a Long-term Debt to Equity ratio lower than 1.0 (ADM, GD, ATO, SNA, APD, JNJ, WMT, PG, HRL, CSCO). Mr. Buffett also states that a high Free Cash Flow Yield (Column K) reflects good management because Retained Earnings allow the company to expand operations (or pay down debt) at zero cost; 11 companies meet that standard (LMT, ADM, GD, HSY, ATO, SNA, JNJ, WMT, PG, HRL, CSCO). 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); 4 companies (GD, APD, NEE) have PEGs under 2.5 at both intervals. Five companies carry our “Value Stock” rating (Column AN): ADM, SNA, XEL, WEC, HRL. No companies are cited 4 times.

Bottom Line: There is no system for picking stocks that won’t leave you feeling frustrated during some future Bear Market. At that moment, you’ll either wish you’d bought more shares of investment-grade bond funds or you’ll be confident that your portfolio can ride out the storm.

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

Full Disclosure: I dollar-average into LMT, SNA, PEP, JNJ, WMT, NEE, PG, and also own shares of ADM, HSY, ATO, APD, CSCO, HRL.

Appendix: Twelve criteria required for stocks to receive an A-rating: 1) being listed at VYM (the Vanguard High Dividend Yield ETF); 2) being listed on a public U.S. Stock Exchange for 20+ years; 3) having at least an A- S&P rating on it’s corporate bond, 4) having at least a B+/M S&P rating on it’s common stock, 5) growth in earnings per share (EPS) for the trailing twelve month period (TTM), 6) having a positive book value, 7) having long-term debt no greater than 2.5 times equity, 8) having a 10-year actual rate of return that is greater than the 10-year required rate of return (RRR), 9) having had no dividend cuts in the past two years, 10) having a 5-year Beta lower than 1.00, 11) having a ratio of total debt to EBITDA (mrq) that is no greater than 2.5 (unless debt is covered by collateral in the form of tangible book value), 12) being listed in Vanguard’s Dividend Appreciation ETF (VIG), which eliminates the 25% of dividend-paying stocks that have the highest dividend yields (since such high yields are likely unsustainable). Rating: 5 (where 10-yr Treasury Notes = 1, S&P 500 = 5, gold = 10).

Full Disclosure: I dollar-average into LMT, SNA, PEP, JNJ, WMT, NEE, PG, and also own shares of ADM, HSY, ATO, APD, CSCO, HRL.

Appendix: Twelve criteria required for stocks to receive an A-rating: 1) being listed at VYM (the Vanguard High Dividend Yield ETF); 2) being listed on a public U.S. Stock Exchange for 20+ years; 3) having at least an A- S&P rating on it’s corporate bond, 4) having at least a B+/M S&P rating on it’s common stock, 5) growth in earnings per share (EPS) for the trailing twelve month period (TTM), 6) having a positive book value, 7) having long-term debt no greater than 2.5 times equity, 8) having a 10-year actual rate of return that is greater than the 10-year required rate of return (RRR), 9) having had no dividend cuts in the past two years, 10) having a 5-year Beta lower than 1.00, 11) having a ratio of total debt to EBITDA (mrq) that is no greater than 2.5 (unless debt is covered by collateral in the form of tangible book value), 12) being listed in Vanguard’s Dividend Appreciation ETF (VIG), which eliminates the 25% of dividend-paying stocks that have the highest dividend yields (since such high yields are likely unsustainable).

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Month 146 - 10 Food & Agriculture Companies Issuing A-rated Bonds - September 2023

Situation: “...your objective is to minimize your chances of dying poor” (William Bernstein). One way to do that is to invest in companies which meet an essential need, food being the most important. But which companies? First assess risk. We use 4 safety criteria: The company must 1) issue bonds rated A- or better by S&P (Column AC in the Table); 2) issue a stock that has a better performance record than SPY (the S&P 500 ETF) during the one year in the past ten that SPY had its worst returns–a metric we call Finance Value (Column G); 3) have a Return On Invested Capital (ROIC) over the Trailing Twelve Months (TTM) that exceeds the Weighted Average Cost of Capital (WACC) – see Columns V and W; 4) have a 10-yr Actual Rate of Return (Column E) that exceeds the 10-yr Required Rate of Return (Column D) calculated by the Capital Asset Pricing Model.

Mission: Screen large U.S. food & agriculture companies that meet these 4 safety criteria, using our Standard Spreadsheet.

Execution: see Table of 10 companies.

Analysis: Warren Buffett’s favorite metric is found in Column S of the Table: Return on Tangible Capital Employed. He thinks a 20% return for the last fiscal year is a good number. Three companies do so: HSY, PEP, KO. His second point (that the company be “run by able and honest managers”) is addressed in Morningstar reports (Column AQ) and is negatively impacted by the extent to which managers capitalize the company by issuing long-term bonds (Column Z). No companies have either a BUY or SELL rating from Morningstar but 4 have a Long-Term Debt to Equity ratio that is lower than 1.0 (ADM, WMT, HRL, COST). Mr. Buffett also states that a high Free Cash Flow Yield (Column K) reflects good management because Retained Earnings allow the company to expand operations (or pay down debt) at zero cost; 9 companies meet that standard (ADM, DE, CAT, HSY, KO, WMT, HRL, COST, UNP). His third point (that the stock be available at a sensible price) is addressed by 1-yr and 3-year Forward PEG ratios (Columns N and O); no company has PEGs lower than 2.5 at both intervals. There are 5 A-rated companies (Column AR): ADM, HSY, PEP, WMT, HRL. The most highly cited companies are ADM, HSY, WMT, HRL (3 times each).

Bottom Line: Investors think food-related stocks with strong fundamentals are safe bets. What is less widely known is that they’re growth stocks. Why? Because the world’s “middle class” demographic is growing faster than the world’s population, and that growth drives technological improvements in the production, processing, and distribution of foodstuffs.

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

Full Disclosure: I dollar-average into CAT, PEP, KO, WMT, COST and UNP, and also own shares of ADM, DE, HSY and HRL.

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Month 145 - 11 A-rated Dividend Achievers for Retirement Income - August 2023

Situation: Saving for retirement is aided by having a taxable account of individual stocks that pay a good and growing dividend. To pick safe stocks for that purpose, first assess risk. There are 4 requirements, i.e., that the company’s bond issue has an S&P Credit Rating of A- or better, its finance value exceeds that for the S&P 500 Index ETF SPY (see Column G in the Table), its Return On Invested Capital (ROIC) exceeds its Weighted Average Cost of Capital (WACC) as shown in Columns V and W, and that its 10-yr Actual Rate of Return (10-Yr ROIC) exceeds its 10-yr Required Rate of Return (which is a proxy for 10-yr WACC) as shown in Columns D and E. 

Mission: Find safe stocks for retirement income.

Execution: see Table of 11 companies.

Analysis: Warren Buffett’s favorite metric is found in Column S of the Table: Return on Tangible Capital Employed. He thinks a 20% return for the last fiscal year is a good number. Six companies do so: MRK, LMT, HSY, SNA, PEP, PG. His second point (that the company be “run by able and honest managers”) is addressed in Morningstar reports (Column AP) and is negatively impacted by the extent to which managers capitalize the company by issuing long-term bonds (Column Y). One company has a BUY rating from Morningstar (HON), and 6 companies have a Long-Term Debt to Equity ratio lower than 1.0 (MRK, ADM, SNA, APD, WMT, HRL). Mr. Buffett also states that a high Free Cash Flow Yield (Column K) reflects good management because Retained Earnings allow the company to expand operations (or pay down debt) at zero cost; 9 companies meet that standard (MRK, LMT, ADM, HSY, SNA, HON, WMT, PG, HRL). His third point (that the stock be available “at a sensible price”) is addressed by 1-yr and 3-year Forward PEG ratios (Columns N and O); 3 companies (MRK, HON, APD) have PEGs of 2.5 or below at both intervals. MRK is cited most (4 times).

Bottom Line: The goal is to build a large position in a few of these stocks by the time you retire. Since ~40% of daily movement in the S&P 500 Index is driven by its 20 largest companies, you’re likely to find success with the 4 stocks in the Table that are among those 20: MRK, PEP, WMT, PG. All 4 are low-volatility Sleep-Well-At-Night stocks (SWANs) that thrive on market downturns, have an average dividend yield of 2.4%/yr, and an average dividend growth rate of 6.1%/yr. Over the past 3 market cycles (20 years), those 4 have averaged a price return of 10.0%/yr vs. 8.0%/yr for SPY (Column P) while having less risk of loss (Column R).  

Risk Rating: 4 (where a 10-yr Treasury Note = 1, SPY = 5, and gold bullion = 10).

Full Disclosure: I dollar-average into MRK, LMT, SNA, PEP, WMT and PG, and also own shares of HON, AOD and HRL.

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Month 144 - 17 Low-volatility Stocks in the Dow Jones Composite Average - July 2023

Situation: We’ve just been through a market crash, and many of us trimmed our bets as the market imploded. Finance professionals avoid doing that, since they live by a single Commandment: Thou shalt not recognize (in Financial Statements) a loss (of Capital). Warren Buffett translates that for us retail investors: “Rule #1: Never lose money; Rule #2: Never forget Rule #1.”

Mission: Develop a system that largely removes the temptation to sell into a market crash. Start with Warren Buffett’s basic advice to retail investors, which is to keep the 5-yr Beta of their stock portfolio at approximately 0.70. That means half its value has to be in SWANs (Sleep Well At Night stocks). The remaining half carry no more than a market risk (5-yr Beta = 1.00). To model a system, prioritize liquidity and restrict sample size by looking at only the 35 stocks in the 65-stock Dow Jones Composite Average (DJCA) having a 5-yr Beta under 1.00. Exclude any stocks with a 10-yr Required Rate of Return (RRR) that exceeds the 10-yr Actual Rate of Return. For stocks with a 5-yr Beta between 0.70 and 1.00, include only ALPHAs (stocks that beat the S&P 500 Index over trailing 5 and 10 year periods.

Execution: see Table of 17 stocks.

Analysis: Warren Buffett’s favorite metric is found in Column S of the Table: Return on Tangible Capital Employed. He thinks a 20% return for the last fiscal year is a good number. Seven companies do so: MRK, UNH, AMGN, JNJ, MCD, LSTR, PG. 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 (see Column Y). Three companies have a BUY rating from Morningstar (AMGN, AEP, PEG), and 7 companies have a Long-term Debt to Equity ratio lower than 1.0 (MRK, UNH, ATO, JNJ, WMT, LSTR, PG). Mr. Buffett also states that a high Free Cash Flow Yield (see Column K) reflects good management because Retained Earnings allow the company to expand operations (or pay down debt) at zero cost; 9 companies meet that standard (MRK, CAT, UNH, AMGN, ATO, JNJ, MCD, WMT, LSTR, PG). His third point (that the stock be available “at a sensible price”) is addressed by one and 3-5 year Forward PEG ratios (see Columns N and O). Three companies (MRK, UNH, AMGN) have PEGs under 2.0 at both intervals. Nine companies are A-rated (see Column AQ): MRK, ATO, ED, AEP, XEL, JNJ, WMT, NEE, PG. Five companies are cited 4 or more times (MRK, UNH, AMGN, JNJ, PG).

Bottom Line: Taken together, the 17 low-volatility stocks beat the S&P 500 Index ETF (SPY) after 5-yr and 10-yr holding periods (see Columns E and H in the Table).  

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

Full Disclosure: I dollar-average into MRK, CAT, AEP, SO, JNJ, MCD, WMT, NEE, LSTR and PG, and also own shares of UNH, AMGN and ATO.

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Month 143 - 18 Large-cap Retirement Income Stocks - June 2023

Situation: Owning individual stocks in a taxable account is an important way to supplement retirement income. But first you have to decide which stocks have dividend payouts that are both sustainable and substantial. The trick lies in knowing how much and how consistently those companies will grow their earnings. So, it’s useful to keep an eye on the Compound Annual Growth Rate (CAGR) of the dividend over the past 5 years (Column L in the Table) and the estimated earnings growth over the next 3-5 years (Column N in the Table).

Mission: Start with two indexes: the Vanguard High Dividend Yield ETF (VYM) and the iShares Russell Top 200 ETF (IWL). List all stocks found in both. Narrow that list by excluding any with a) a 5-year Beta higher than 1.00, and/or b) a 10-year RRR (Required Rate of Return) higher than the 10-year Actual Rate of Return. Remove stocks with a lower Finance Value (Column G in the Table) than the S&P 500 Index, and stocks with a 5-yr Beta over 0.7 that have a lower 10-yr Actual Rate of Return/yr than the S&P 500 Index ETF SPY (see Column E in the Table). Exclude companies with an S&P stock rating lower than B and/or an S&P bond rating lower than BBB+; also those with less than a 20 year trading history.

Execution: see Table of 18 companies.

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 is a good number. Eight companies do so: MRK, LMT, AMGN, PEP, JNJ, MCD, PG, PFE. 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 the company by issuing long-term bonds (see Column Z). Six companies have a BUY rating from Morningstar (GD, AMGN, AEP, APD, HON, PFE), and 7 companies have a Long-term Debt to Equity ratio lower than 1.0 (MRK, GD, AEP, JNJ, WMT, PG, PFE). Mr. Buffett also states that a high Free Cash Flow Yield (Column K) reflects good management because Retained Earnings allow the company to expand operations (or pay down debt) at zero cost; 13 companies meet that standard (MRK, LMT, GD, CAT, AMGN, HON, JNJ, MCD, WM, WMT, PG, PFE, UNP). His third point (that the stock be available “at a sensible price”) is addressed by one and 3 year Forward PEG ratios (see Columns O and P); two companies (GD and AMGN) have PEGs under 2.0 at both intervals. Eleven companies are A-rated (MRK, LMT, GD, AEP, APD, HON, JNJ, WMT, NEE, PG, PFE). Six companies are cited at least 4 times (MRK, GD, AMGN, JNJ, PG, PFE).

Bottom Line: These stocks have an average dividend growth rate (for the past 5 years) of 7.7%/yr, and a projected average earnings growth rate (for the next 3-5 years) of 7.0%/yr. Their dividend yield is 2.8%/yr.

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

Full Disclosure: I dollar-average into MRK, LMT, CAT, AEP, PEP, SO, JNJ, MCD, WMT, NEE, PG, PFE and UNP, and also own shares of GD, AMGN, APD, HON and WM.

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Month 142 - Dow Jones Industrial Average - May 2023

Situation: We have yet to help you create a scorecard for your side business, which is saving for retirement. That means we have to address Warren Buffett’s Rule #1 (“Never lose money”) and his Rule #2 (“See Rule #1”) in a direct and straightforward manner.

Mission: Set up a thought experiment wherein your side business has invested equal amounts of money in each of the 30 stocks in the Dow Jones Industrial Average. Then assume you retire after either one or ten years (liquidate your side business). For each stock, calculate the Weighted Average Cost of Capital (WACC) and the Return on Invested Capital (ROIC) after each holding period. In the Bottom Line section, list the companies that returned the full value of your money (or more) after both holding periods.

Execution: see Columns V-W and Columns D-E in the Table. Purple highlights denote a return on capital that is less than the cost of capital.

Analysis: Warren Buffett’s favorite metric is found in Column S of the Table: Return on Tangible Capital Employed. He thinks a 20% return for the last fiscal year (lfy) is a good number. Twelve companies do so: MRK, UNH, AMGN, KO, V, JNJ, MCD, PG, MSFT, AAPL, HD, CSCO. 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). Nine companies have a BUY rating from Morningstar (HON, GS, CSCO, VZ, WBA, MMM, CRM, DIS, DOW), and 15 companies have a Long-term Debt to Equity ratio lower than 1.0 (CVX, MRK, UNH, TRV, V, JNJ, WMT, PG, MSFT, CSCO, NKE, CRM, DIS, INTC, DOW). Mr. Buffett also states that a high Free Cash Flow Yield (Column K) reflects good management because Retained Earnings allow the company to expand operations (or pay down debt) at zero cost; 26 companies meet that standard (CVX, MRK, UNH, CAT, TRV, AMGN, HON, KO, V, JNJ, MCD, WMT, BA, IBM, PG, AXP, MSFT, GS, AAPL, JPM, HD, CSCO, MMM, CRM, DIS, DOW). 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 N and O); 9 companies (UNH, CAT, TRV, AMGN, V, AXP, CRM, DIS, DOW) have PEGs under 2.0 at both intervals. Five companies are A-rated (MRK, JNJ, WMT, PG, CSCO). Eight companies are cited 4 times (MRK, UNH, V, JNJ, PG, CSCO, DIS, DOW).

Bottom Line: Your side business didn’t lose money when invested for 1-year and 10-year periods in 15 DJIA stocks: MRK, UNH, CAT, AMGN, HON, V, JNJ, MCD, WMT, PG, MSFT, AAPL, JPM, HD, NKE. Your batting average is 0.500.

Risk Rating: 7 (10-yr U.S. Treasury Note = 1; S&P 500 Index = 5; gold bullion = 10) 

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

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

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Month 141 - 24 A-rated Mid-Caps and Large-Caps - April 2023

Situation: This is our most important Watch List, so we update it every 6 months. Since the last version appeared (Month 135 - October 2022), we’ve added mid-cap companies and 3 new requirements for the A-rating (see Appendix). As a result, 10 companies have been deleted (ADP, WM, TXN, HON, KO, PEP, RTX, ITW, CAT and QCOM) and 11 added (PCAR, ED, SNA, ATO, XEL, WEC, LIN, HRL, LNT, UPS and CSCO).

Mission: Analyze all companies in the FTSE Russell 1000 Index ETF (IWB) having a reliably above-market dividend yield, low price volatility, and strong Balance Sheet. 

Execution: see Table of 24 companies.

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 do so: MRK, LMT, LLY, SNA, JNJ, PG, PFE, UPS, and CSCO. 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 capitalize the company by issuing long-term bonds (see Column Z). Six companies have a BUY rating from Morningstar (AEP, APD, NEE, LNT, PFE and CSCO), and 14 companies have a Long-term Debt to Equity ratio lower than 1.0 (MRK, ADM, GD, PCAR, ATO, SNA, APD, JNJ, WMT, LIN, PG, HRL, PFE and CSCO). Mr. Buffett also states that a high Free Cash Flow Yield (Column K) reflects good management because Retained Earnings allow the company to expand operations (or pay down debt) at zero cost; 16 companies meet that standard (MRK, LMT, LLY, ADM, GD, PCAR, SNA, JNJ, WMT, LIN, PG, HRL, LNT, PFE, UPS and CSCO). 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); 6 companies (MRK, LLY, GD, APD, UPS and CSCO) have PEGs under 2.5 at both intervals. Four companies are cited 4+ times (MRK, PFE and CSCO).

Bottom Line: A-rated companies are our response to the observation that “It is the destruction of capital during market declines that has the greatest impact on long-term portfolio performance.” (Gerard Minack, Morgan Stanley strategist.) Ten stocks outperformed the S&P 500 (i.e., exhibited Alpha) over the past 10 years while having a lower 5-yr Beta (MRK, LMT, LLY, GD, ATO, SNA, APD, NEE, LIN and CSCO). We call those Hardy Perennials.

Risk Rating: 6, where 10-year Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10.

Full Disclosure: I dollar-average into MRK, LMT, LLY, SNA, AEP, JNJ, WMT, NEE, PG, PFE, UPS and CSCO, and also own shares of ATO, APD, LIN and TGT. 

Appendix: Eleven criteria required for an A-rating: 1) being listed at VYM (the Vanguard High Dividend Yield ETF), 2) being listed for 16+ years at the New York Stock Exchange, 3) having at least an A- S&P rating on the company’s corporate bonds, 4) having the company’s common stock rated at least B+/M by S&P, 5) having positive earnings per share (EPS) for the trailing twelve month period (TTM), 6) having a positive book value per share for the most recent quarter (mrq), 7) having long-term debt no greater than 2.5 times equity, 8) having a 10-year actual rate of return greater than the 10-year required rate of return (RRR), 9) having no dividend cuts in the past two years, 10) having a 5-year Beta lower than 1.00, 11) having a total debt to EBITDA (mrq) ratio no higher than 2.5 unless there is collateral (tangible book value).

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

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Month 140 - 18 Large-Cap Low-Beta Dow Jones Composite Average stocks - March 2023

 Situation: When does a temporary loss of capital become permanent? Answer: When we sell. Lesson: Pay more attention to low-volatility large-capitalization blue-chip companies.

Mission: Screen the 65-stock Dow Jones Composite Average for low Beta, large-cap stocks, meaning those listed in the iShares Russell Top 200 ETF (IWL) that have a 5-year Beta of 1.00 or lower (per Barron’s). Include all companies having a 5-yr Beta lower than 0.70, which traders call Sleep-Well-At-Night stocks (SWANs). For companies with a 5-yr Beta between 0.70 and1.00, include only those with a 10-yr total return/yr that exceeds the 10-yr total return/yr for the S&P 500 Index ETF (SPY).

Execution: see Table of 18 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 a 20% return for the last fiscal year (lfy) is a good number. Seven companies meet that standard (MRK, AMGN, KO, JNJ, MCD, PG, CSCO). 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 have capitalized the company by issuing long-term bonds (see Column Z). Six companies have a BUY rating from Morningstar (AEP, HON, NEE, DUK, CSCO, VZ), and 7 companies have a Debt to Equity ratio lower than 1.0 (MRK, UNH, CAT, JNJ, WMT, PG, CSCO). Mr. Buffett also states that a high Free Cash Flow Yield (Column K) reflects good management because Retained Earnings allow a company to expand operations (or pay down debt) at zero cost. Free Cash Flow remains after paying dividends at 12 companies (MRK, UNH, AMGN, CAT, HON, KO, JNJ, MCD, WMT, PG, UNP, CSCO). 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): Six companies have a PEG lower than 2.5 for both time periods (MRK, UNH, AMGN, CAT, HON, CSCO). Nine companies are A-rated (MRK, CAT, AEP, HON, JNJ, WMT, NEE, PG, CSCO). Six companies are cited 4 or more times (MRK, CAT, HON, JNJ, PG, CSCO).

Bottom Line: We find two Pricing Anomalies that should interest investors. 1) Eight companies have 10-yr total returns that beat the S&P 500 Index (MRK, UNH, CAT, HON, MCD, NEE, UNP, CSCO). We call those License-To-Print-Money (LTPM) stocks because they are high-reward and low-risk. 2) There are 5 SWANs with a 10-yr Required Rate of Return that is higher than their 10-yr Actual Rate of Return (KO, SO, DUK, D, VZ), meaning their cost of capital exceeds their return on capital. Stocks in such straits normally do not have a low enough 5-yr Beta to be SWANs. So, difficulties being faced at those companies are likely temporary.  

Risk Rating: 6 (where 10-yr Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)

Full Disclosure: I dollar-average into MRK, CAT, AEP, JNJ, MCD, KO, SO, WMT, NEE, PG, UNP, CSCO and VZ, and also own shares of UNH, AMGN, HON, DUK and D.

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

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Month 139 - Dogs of the Dow - February 2023

Situation: We’re always on the lookout for value stocks issued by Blue Chip companies, which makes January the most important month in the calendar. That’s when we know the Dogs of the Dow for the upcoming year, meaning the 10 highest-yielding stocks in the Dow Jones Industrial Average. That’s like finding Brooks Brothers shirts at T.J.Maxx. All we have to do is figure out why they’re on sale. Remember, the Efficient Market Hypothesis tells us that today’s stock price reflects all available information on the company, the market, the Federal Reserve, the economy, and the geopolitical situation. 

Mission: Use our Standard Spreadsheet to analyze this year’s Dogs of the Dow.

Execution: see Table of 10 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 a 20% return for the last fiscal year (lfy) is a good number. Three companies meet that standard (CSCO, AMGN, 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 have capitalized the company by issuing long-term bonds (see Column Z). Five companies (CSCO, VZ, INTC, WBA, DOW) have a BUY rating from Morningstar, and 4 companies have a Debt to Equity ratio that is lower than 1.0 (CSCO, INTC, CVX, DOW). Mr. Buffett also states that a high Free Cash Flow Yield (Column K) reflects good management because Retained Earnings allow a company to expand operations (or pay down debt) at zero cost. Eight companies have Free Cash Flow remaining after they pay dividends (CSCO, AMGN, JPM, CVX, WBA, MMM, IBM, DOW). 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): But none of these struggling companies have a PEG lower than 2.0 for both time periods. One company is A-rated (JPM).

Bottom Line: Only two companies (AMGN and JPM) have an Actual Rate of Return after 10 years that exceeds their Required Rate of Return (RRR). But, we’re in a good position (being near the bottom of a Bear Market). Why? Because that reduces the risk of buying a stock on sale. Benjamin Graham's advice for finding value in down markets is to look for stocks priced lower than their Graham Number (Column AJ) that also have a 7-yr P/E (Column AL) lower than 26. In that light, JPM, VZ, INTC and WBA are BUYs (in agreement with Morningstar).  

Risk Rating: 8 (where 10-yr US Treasury Note = 1, S&P 500 Index = 5, and gold bullion = 10)

Full Disclosure: I dollar-average into INTC, VZ, WBA, JPM, and also own shares of CSCO, AMGN, MMM and IBM.

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

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Month 138 - 18 A-Rated Low-Beta Defensive Stocks - January 2023

Situation: Investors currently face a period of uncertainty due to macroeconomic and geopolitical events. Opportunities abound but safety is the byword. That means you’ll be taking greater interest in SWANs (Sleep Well At Night stocks), which offer an above-market dividend yield combined with low price volatility. 

Mission: Use our Standard Spreadsheet to analyze stocks in the Vanguard High Dividend Yield ETF (VYM) that have a 5-yr Beta lower than 0.7. Omit VYM stocks that don’t have all the safety factors we require for our A-rated designation: 1) at least a 16-yr trading history on public US stock exchanges; 2) issued corporate bonds rated A- or better by S&P; 3) an S&P Stock Rating of B/M or better; 4) positive earnings for the Trailing Twelve Month (TTM) period; 5) a positive Book Value for the most recent quarter (mrq); 6) capitalization from issuing corporate bonds that doesn’t exceed 2.5 times Equity; 7) a 10-yr Actual Rate of Return that exceeds the 10-yr Required Rate of Return calculated by using the Capital Asset Pricing Model. 

Execution: see Table of 18 stocks.

Analysis: Warren Buffett’s favorite metric is found in Column T 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. Eight companies meet that standard (LLY, MRK, WEC, PG, HSY, JNJ, PEP, LMT). 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 have capitalized the company by issuing long-term bonds (see Column Z). One company (LNT) has a BUY rating from Morningstar. Eight companies have a Debt to Equity ratio lower than 1.0 (MRK, HRL, ATO, PFE, PG, JNJ, LMT, WMT). Mr. Buffett also states that a high Free Cash Flow Yield (Column K) reflects good management because Retained Earnings allow a company to expand operations (or pay down debt) at zero cost. Twelve companies have Free Cash Flow remaining after they pay dividends (LLY, MRK, HRL, PFE, LNT, PG, ES, KO, HSY, JNJ, LMT, WMT). 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): No companies have a PEG lower than 2.0 for both time periods. Four companies are cited 3 times (MRK, PG, JNJ, LMT). 

Bottom Line: SWANs have low price volatility, under-participating in both Bear and Bull Markets. As a group, however, these 17 SWANs have outperformed the S&P 500 ETF (SPY) after both 5-yr and 10-yr holding periods (see Columns E and H).

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

Full Disclosure: I dollar-average into LLY, MRK, AEP, PFE, PG, KO, JNJ, PEP, LMT, WMT.

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

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