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.
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