Month 151 - Dogs of the Dow - February 2024

Situation: Dogs of the Dow date are the 10 highest yielding Dow Jones Industrial Average (DJIA) stocks on January second of each new year. Their dividend yields are high because their stock prices are low. These “blue chips” are in the bargain basement. If an equal dollar amount is invested in all 10 early in January, it is more likely than not that their average total return for the year will beat the price-weighted DJIA.

Mission: Run our standard spreadsheet on those 10.

Execution: see Table.

Analysis: Warren Buffett’s favorite metric is Return on Tangible Capital Employed (Column U in the Table). He thinks a 20% return for the last fiscal year is a good number. Four companies qualify: AMGN, KO, JN, CSCO. His second point (that the company be “run by able and honest managers”) is addressed in Morningstar Reports (Column AU) and negatively impacted by the degree to which those managers capitalize the company by issuing long-term bonds (Column AD). Three companies have a BUY rating from Morningstar (DOW, VZ, WBA), and 4 have a Debt to Equity ratio lower than 1.0 (CVX, JNJ, CSCO). Mr. Buffett also likes Free Cash Flow Yield (Column L) to be higher than Dividend Yield (Column L), since Retained Earnings allow the company to expand operations (or pay down debt) at zero cost; 9 companies qualify (CVX, AMGN, KO, JNJ, IBM, DOW, CSCO, VZ, MMM). His third point (that the stock be available “at a sensible price”) is addressed by 1-yr and 5-year Forward PEG ratios (Columns P and Q); 2 companies have PEGs under 2.5 at both intervals (AMGN, JNJ). Two companies are A-rated (Column AV): JNJ and CSCO. Two companies are cited 4 times (JNJ, CSCO).

Bottom Line: I suggest that you consider companies that issue bonds rated A- or better (Column AH) by S&P (CVX, KO, JNJ, IBM, CSCO). Then exclude the 3 (in Columns D and E) that don’t have a 10-yr Actual Rate of Return that covers their 10-yr Required Rate of Return (CVX, KO, IBM). But include KO because it has an ROIC (Return On Invested Capital) that is more than twice its WACC (Weighted Average Cost of Capital), as shown in Columns X and Y. That leaves 3 stocks (KO, JN, CSCO) that are suitable for investment.

Risk Rating: 8 (10-yr U.S. Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)

Full Disclosure: I dollar-average into KO, JNJ and CSCO, and also own shares of CVX, IBM, VZ, MMM and WBA.

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