Thursday, September 27, 2012

Decision to Sell Staples

I put a limit order in today for my entire SPLS position.  If it triggers, I exit the position with a loss of just under 4%.  While this is painful, I think the story of the company is just too uncertain to hang on.

Here are my thoughts:

  • My original decision was based on significant undervaluation and nice dividend yield, which the company has been consistently increasing.
  • Shortly after I started the position, they had a disappointing earnings announcement, and lowered guidance for the full year.
  • Tuesday, they announced they would be reducing brick and mortar square footage in the USA by 15%.  They have a small international presence in Europe and Australia, and both regions are unprofitable.
  • Charges for the restructing over the next several years are expected to to exceed $150 million this year, and are not defined in future years.  I assume restructuring charges will continue until they hit their goal of 15% reduction in 2015.
  • Earnings will be negatively impacted this year, 2013, and 2014.  Plus, the U.S. economy is struggling this year, so I expect earnings to be adjusted downwards significantly.

  • The Fast Graph above shows the original premise - analysts projecting growth in eps of at least 6.8%.  Do you believe they will achieve earnings growth in 2012 and 2013?  I don't, so I expect the price and fair value to converge (lower price, lower expectations).  

  • May be making a mistake here, but I'd like to have more cash in the portfolio to deploy on existing stocks at good valuations, or on new positions.

Saturday, September 22, 2012

Portfolio Update Through Friday 9-21-2012

Here is a summary of holdings through Friday, and performance metrics follow:

No new positions were added this week.  Shares were added to a few names on dips this week where valuations were attractive including WAG, DOV, TEVA, CSX, INTC and CSCO.  Cash is low, now only 3% of the portfolio, but TIPs are another 10.23%, which could be used for additional purchases.

COP is on my s**t list with projected growth of 0%, and a price at fair value.  If the price appreciates further this week, I'll likely put in a stop loss with the intent of selling the position for a stock with better growth potential.

Here are the stats for the portfolio:

Trailing the S&P YTD by 4.05%, however, this is not a good comparison.  I started building this portfolio in July and August, and really had it mostly built by mid-August.  Next week, I'll start tracking monthly performance vs. the S&P, and start the comparison from September 1, 2012.

From September 1 to today, the fund has returned 3.34%, but trails the S&P which is up 3.81%.  It will be interesting to see how the performance compares longer term.

Here is a snapshot of the portfolio screened through FAST Graphs, highlighting a few important metrics (Click to enlarge):

Thursday, September 20, 2012

DGI vs. No DGI Scenarios

Okay SA "cool kids,"  here is my dilemma:  My premise is that it's better to focus on total portfolio return while accumulating for retirement, then trade the big nest egg I've amassed at retirement for a high yielding, dividend growing portfolio once I need the income to live on.  Several articles I've been reading seem to suggest that maximizing yield in your portfolio now vs. at retirement is the best way to maximize retirement income.  I don't think so, but maybe I'm missing something, so let's go to the spreadsheets (yee-ha!).

1st, I built my assumptions (inputs) that can and will be varied in the analysis:

I'm analyzing two stocks, XXX, a "growth" stock with no dividends vs. YYY, a dividend champion.  Here is an example of the inputs for these two companies, from which I'll generate a spreadsheet:


In this scenario, XXX share price (=EPS Growth) will grow at a CAGR of 13% and pay no dividends, while YYY share price will grow at a CAGR of 8%, pay a starting yield of 3%, and grow the dividend at a CAGR of 5%.  I'm hoping to retire 15 years from now, so I'll run the analysis for that time duration.  Below is the spreadsheet I've built showing the two stocks and the final outcome in year "16," the start of my retirement (click to enlarge).

In this first scenario, the 13% appreciation trumps the the 8% appreciation + 3% initial yield + 5% annual dividend growth.  At retirement (year 15) stock XXX is worth $645k vs. YYY worth $437k.  If I sell all my XXX and buy as much YYY as I can, I'll have 19,716 shares paying the same dividend as the 13,800 shares in the DG scenario.  More shares = more income, $11.7k vs. $8.2k.  I know, I know, I can hear several respected commentators from SA saying "but your assumptions are wrong!"  I agree the inputs have a huge effect, so here are six different scenarios varying the inputs.  I think looking at these results, I can draw a few conclusions.


The results compare annual income from dividends in for the two scenarios in each case.  Case 1 shows the positive effect of dividends vs. no dividends with same price appreciation (growth).  No doubt, dividends help.  Case 2 increases the growth rate from 8% to 11% for the non-dividend stock.  The two outcomes are pretty close;  interestingly, the 11% growth of XXX = 8% growth + 3% yield of YYY.  Case 3 ups the growth of XXX to 13%, the example in the spreadsheet up above.  XXX is a clear "winner" here.  Case 4 increases the rate of annual dividend growth.  Interestingly, both income streams benefit at retirement because the YYY stock is paying a much higher dividend in year 16, but we can still buy more shares with the XXX proceeds.  

Case 5 is very interesting.  By increasing my starting yield in year 1 to 5% from 3%, then growing the dividends every year by 10% vs. a growth stock at a respectable annual 13% growth rate, the dividend grower wins!  This surprised me.  The extra income from the higher yield, then compounded at 10% every year had a bigger effect than I anticipated.  But hold on, let's look a one last case.

In case 6, I exchanged capital appreciation in YYY for yield.  The 5% starting yield with a share price growth of only 5% (think utilities, or COP).  The dividend grower got beaten pretty badly in this scenario.

Conclusions (my humble opinions) 
  • Size of the egg at retirement is the only factor of importance, not how you got there
  • You can get their either way, or a combination of both ways (Growth & DGI)
  • For the growth route, you have every 1% of total return makes a huge difference in the outcome.  
  • For the DGI route, investors need to monitor three things closely:  share price growth, total portfolio yield, and dividend growth of the portfolio.  
  • When DGI investors in the accumulation phase say they are ignoring share price fluctuations, that is fine in the short term, but over the long haul, earnings growth and subsequent (highly correlated) share price growth cannot be ignored.
  • Its really about total return on investment.  If you think dividend paying, high yielding stocks will grow and give a better total return in the long run, then they are the logical choice for the portfolio.
  • Maximizing yield as a goal prior to retirement, and forfeiting growth in favor of yield, results in reduced income when you retire.  The only way maximizing yield before retirement makes sense, is if you believe the ultimate total return will be greater as a result.
  • Michigan is going to wallop Notre Dame this weekend.  Go Blue!

Monday, September 17, 2012

Portfolio Update Through Friday 9/14/12

With the QE3 announcement on Thursday, the market rallied late Thursday, and again on Friday boosting the portfolio (and darn near everything) nicely.  The portfolio is up YTD 13.4% vs. the S&P which was up 16.7% through Friday.  As a reminder, the portfolio was assembled starting in June 2012.  Prior to this, the portfolio held various ETFs, and 40% cash.  My goal is to catch and pass the S&P by year's end!

Several actions took place in the portfolio this week including:

  • Dividend payout and buybacks on JNJ, CVX, and WAG
  • Sold Eastman Chemical (EMN, reasons given in earlier post) for a 7.2% gain
  • Cash was partially deployed to start a position in TEVA (see analysis in last post)
  • Altria (MO) overvalued - so I placed a stop loss for a portion of my position.  Stop loss was triggered on Friday, so MO % of portfolio was cut from 4.78% to 3.31%.  

Here's how the portfolio looked on Friday after market close:

(Click on the chart to see it more clearly)

Here are metrics of interest on the portfolio:

Total yield for the entire portfolio is a respectable 3.2%.  60% of my investments are targeted in the non core, slightly more risky, but also more undervalued stocks.  I sorted each group by EYE ratio, earnings yield estimate, which correlates well to the PE over/under valuation column.  Looking at the most undervalued stocks, they tend to be in the non core group.  The blue chip names in the core group are mostly at fair value, or overvalued.  KO, WMT, MCD, MO, JNJ, and  CVX - all examples of popular dividend core stocks, but all expensive.  I would not add to any of these until their valuations/prices become more attractive.  Among the core holdings, best values still appear to be AFL, WAG, MDT, and DOV.  AFL is a "full" position already, but I'll consider adding to the other three on any dips this week.

Looking at the non core group, there are some better values vs. the core:  CLF, HAL, AAPL, TEVA jump out.  CLF is a full position, so I'll consider HAL, AAPL, and building up TEVA.  Funny to see AAPL at nearly $700/share, and know that it appears to be well below fair value.  On the negative side, COP gives me some concern.  They've revised estimates, and are now at fair  value, and are project 0.00% growth for the next 5 years.  I'll look into this more, and decide whether it may make sense to sell COP and replace it with a better selection.  

Friday, September 14, 2012

TEVA Pharmaceuticals: Should I add it to the portfolio?

David Fish of Seeking Alpha publishes the Dividend Champions list and keeps it updated regularly.  You can download a free copy of his extensive spreadsheet here:

The spreadsheet, commonly called the CCC list, divides companies into three categories of dividend payers:  Champions: payers of increasing dividends every year for at least 25 consecutive years;  Contenders: dividend increases for 10-24 years; and Challengers: 5-9 straight years.  The CCC is an excellent source to find great companies for long term investing and building a successful dividend growth portfolio.

From the Contenders list, I found TEVA, an Israeli generic drug maker.  TEVA has been paying an increasing dividend for 13 consecutive years, and it's current yield is 2.45%.  TEVA pays a quarterly dividend;  they increased it this past quarter by 10%;  for the past 5 years, their dividend growth rate is 24.1%, and for the past 10 years, their DGR is 30%.  Current payout ratio is a safe 30%.  2012 revenue is up over 18% vs. 2011, and earnings are expected to be up around 24% vs. prior year, though through the second quarter TTM comparison shows growth in earnings of only 2.4%.

As you can see, their dividend track record is stellar.  Next, I'll look at valuation and earnings.

Above is a look at earnings and share price for the past 20 years.  The black price line follows the green EPS level very closely until about 2007.  Here, TEVA starts to fall below fair value.  The normal PE paid for TEVA the past 20 years is 23.2 (blue line), and at current prices, TEVA's PE is 8.0.  This shows a significant undervaluation.  Over this historical period, TEVA has grown earnings at a rate of 21.4%.

Per my investment guidelines, I like to look at PE for the past 6 years for a more recent snapshot of the what the market is paying for a stock, including during the "great recession."  The chart below shows a six year historical look:

While the PE that the market has given TEVA the past six years is lower, 15.1 over this period vs. 23.2 over 20 years, the current PE of 8 still looks very attractive and well below fair value.  (NOTE:  the yield today is actually 2.45%, based on the latest 2012 dividend data, the 1.9% in the FAST Graph above is based on the 2011 annual dividend, and is not up to date).

Another interesting metric for valuation is price/sales ratio.  See the chart below:

The price/sales ratio for this stock has been as high as 5.5; today it's at 1.75, an historically low level as indicated by the blue price/sales ratio line.

As mentioned at the top, the dividend performance of the firm has been great recently:

The chart above shows the recent dividend growth.  Not shown is their latest increase on July 31, 2012 from $0.89 to $0.98, an increase of about 10%.  An investment in TEVA back in 1998 would have returned an annualized 14.8% vs. an S&P annualized return of 4.1% over the same period.

Looking forward, the consensus of the 28 analysts covering the stock is a 5 year growth rate of 7.8%.

Based on estimated earnings this year of $5.36/share, and normal PE of 15.1, the price of TEVA should be around $80 (third orange triangle from the left).  Based on the above estimates for earnings growth, the stock should reach $117 over the next 5 years for an estimated return of 23.2% (last orange triangle on the right).  The black line shows that today's price is well below fair value, and due to rise more rapidly than the orange line that represents projected growth in earnings.

What are the analyst reports and others saying?
On a scale of 1-10, the average analyst ranking is a bullish 8.5/10, with some holds, some buys, but no sell recommendations.

Seeking Alpha, my favorite resource for stock information, has several relevant articles linked here:

Everything I'm reading points to continued strong performance for the long term.  The major short term concerns around this stock seem be focused on maintaining exclusivity for a drug call Copaxone until 2015.  Here is an update from TEVA's earnings call on August 2, 2012:

While a negative outcome around this exclusivity could impact financials over the coming year or two, the long term picture for the stock looks very positive, and I'm a long term value investor.

  • Great history of growth in revenue and earnings.
  • I like generics to combat rising healthcare costs, Obamacare, and aging baby boomers
  • They've been raising the dividend aggressively for 13 years
  • The stock is severely undervalued at today's price in the low $40s.
  • I'm going LONG TEVA!
9-21-12 ADDENDUM

Just a note on the dividend.  Because TEVA is an Israeli company, and 25% tax is deducted from the dividend before it's paid to share owners in the U.S.  Here is a statement from the company's most recent 20-F filed with the SEC:

Thursday, September 13, 2012

EMN Trade Today

As discussed in the previous post, I decided to put a trailing stop loss on EMN this morning;  the trade executed today at $56.74, for a gain of 7.2% after commissions.  I'll be evaluating new stocks, and looking to add to existing positions on a decline.  One of my new stocks under investigation is TEVA Pharmaceuticals... stay tuned.

Wednesday, September 12, 2012

Eastman Chemical - Sell or Hold?

As I pointed out in my last post, EMN's valuation is worth studying.  I bought EMN at an average cost of $52.93/share (four separate purchases to build the position).  Today, it's trading up slightly at $56.50.  I could sell and lock in gain of 6.74%.  But before I do, I want to revisit my analysis of the stock's valuation.

The chart below shows EMN's earnings, PE, dividends, and stock price for the past 15 years:

Based on this history, the market has priced EMN at 16.8 x earnings, a normal PE of 16.8.  At today's price and PE of 11.1, the stock appears to be nicely undervalued (the black line in the graph).  However, per my portfolio rules, I like to look nearer term at the average PE for the past six years, which I feel gives a more accurate account of the what the market is willing to pay recently, and including during and after the "great recession" years of 2008/2009.  Here is the same graph, but now shortened to a six year history:

The market has been pricing EMN at only 11.1 x earnings, a PE of 11.1 (the blue line and text).  Based on this look at the valuation, EMN is undervalued vs. earnings (the orange line), but right at fair value for the what the market has been paying for EMN earnings these past six years.

Next, I look at the dividend history of the company:

On the positive side, it's maintained a dividend for years, and has recently been increasing the dividend.    For 2012, the company has announced a dividend increase from $0.99 to $1.04, an increase of 5%.  I would have preferred to see a larger increase for 2012 given their nice EPS growth.  That said, as the chart above shows, an investment in EMN back in 1998 would have outperformed the S&P by 1.9%.

How about growth now and into the future?  The chart below shows earnings last year, expected for this year and next (based on company projections), and then a 5 year forecast based on the average of the 13 analysts covering the stock.

From this data, you see earnings growth in 2011 was 28%, 14% likely in 2012, and 19% estimated for 2013.  Beyond 2013, analysts are expecting 8% growth per year.  Based on these projections, the current price (black line) falls below the "fair value corridor" (orange lines), and looks to be undervalued.  I question why analysts are projecting only 8% growth, given the company's recent growth.  I need to look into the analyst reports, and company's latest 10Q.

From the 10Q:

n the first half of 2012 the Company progressed on both organic (internal growth) and inorganic (external growth through joint venture and acquisition) growth initiatives including:

entering into a definitive agreement to acquire Solutia, a global leader in performance materials and specialty chemicals, which acquisition was completed on July 2, 2012 and is expected to:
broaden Eastman's global presence, particularly in Asia Pacific;
establish a combined platform with extensive organic growth opportunities through complementary technologies and business capabilities and an overlap of key end-markets; and
expand Eastman's portfolio of sustainable products;
completing PCI segment capacity expansions to support its non-phthalate plasticizer business, including retrofitting the acquired Sterling Chemicals, Inc. ("Sterling") idled plasticizer manufacturing unit and increasing capacity of 2-ethyl hexanol ("2-EH") to support expected growth in the plasticizers, coatings, and fuel additive markets;
entering into an agreement with a third party to purchase propylene from a planned propane dehydrogenation plant, further improving the Company's competitive cost position over purchasing olefins in the North American market;
completing Specialty Plastics segment capacity expansions for cyclohexane dimethanol ("CHDM"), a monomer used in the manufacture of copolyesters, and cellulose triacetate;
completing the formal commercial introduction of acetylated wood, branded as Perennial WoodTM, to select markets;
commercial introduction of the new Eastman CerfisTM technology; and
in third quarter announcing a joint venture to build a 50,000 metric ton hydrogenated hydrocarbon resin plant in Nanjing, China.  The venture will be equally owned by Eastman and Sinopec Yangzi Petrochemical Company Limited and is expected to be operational by the end of 2014.

EMN purchased Solutia for $4.8 Billion on July 2, 2012.  That explains the spike in earnings this year and next, but not the relatively modest 8% growth going forward.  Looking at revenue and earnings for EMN absent the Solutia acquisition, we see basically a flat revenue from 2011, and a slight decrease in earnings.  It will be interesting to see how they grow 2, 3, 4 years out, and how the acquisition pans out.

Based on my rules, the valuation is close to fair value.  The undervaluation is at least partially a result of the recent acquisition.  This integration will take time, and the future growth prospects of the company need to play out over the next two years more fully.  I don't like the recent small increase in the dividend, it's history of no increases in the dividend, nor do I like the current yield of only 1.8%.  I'm not comfortable holding this stock for the long term until I see a better track record for management post acquisition.

I'll be placing a trailing stop loss on the stock today, with the intent to sell the entire position when a dip triggers the stop.  I'll put the proceeds from the sale to work in existing undervalued holdings, or a new holding to be identified.

Tuesday, September 11, 2012

All Holdings

Here is the entire group, both the core, and non-core holdings.  From here, I will blog any activity in the portfolio, and recap performance every Friday/weekend.

Current Chumpmenudo portfolio:

Worth noting the following vs. my rules:

  • Core group needs two additional stocks
  • Allocations in core are a bit scattered, though I don't want to reduce a position if its still undervalued, nor will I add to a position that is presently overvalued
  • Non core group has 14 positions, but after I sell EMN, this will be corrected.  TIPs are really not a position, more like cash.

Now my Non Core holdings

Shown below are my "non core" holdings, a bit more value oriented and speculative.  Most of these I will sell when they reach fair value in favor of better, more undervalued selections.  Here is the list as of  9-7-12:

In addition to the conventional stocks listed, I also own an mREIT, NLY, and an ETF, TIP.  NLY is a way to juice my yields in the current low interest economic environment, and TIP is a place a park my cash, and acts as a hedge against the a market decline or rising interest rates, while still paying a 2.2% yield.

The pinkish-red section shows a stock that has reached fair value, and is not worth hanging on to.  I plan to put in some stops, let it run, and sell when there is a slight pull back.  I'll put the proceeds to cash, and look to add a replacement stock.  Since I have 14 stocks in this group, I'll look to add a stock the core group.  My next post will show the total group of stocks held together.

Sunday, September 9, 2012

Core Holdings

I plan to have two groups of stocks in the portfolio; core holdings from the CCC David Fish list, emphasis on Champions, and a slightly more speculative group of holdings comprised of value stocks that pay dividends, with an occasional growth stock, but always at a favorable valuation.  I agree strongly with Chuck Carnevale and many others on SA that stock price ALWAYS follows earnings in the long term.  Thus, I don't ever want to buy shares that are over valued, whether I'm starting a new position, or adding shares via dividends.

I've been building both groups over the past few months.  As of September 7, 2012, here is my group of core holdings.  My positions in many of these is lower than I'd like, but several are over-valued in my opinion, so I'm waiting for a more favorable price to add to these positions.

My "Core" holdings are listed here (for 9-7-12):

I'll add a few more names to this list in the coming weeks, perhaps with a "0%" position, just to show that I intend to add these.  My next post will show the second group of stocks - non core, added based on favorable valuation, but still with an eye toward yield and the rules stated in the first post.  However, the non-core group will have some higher betas, possible lower yields, but will all be very undervalued at time of purchase.

Saturday, September 8, 2012

1st, Rules for the Portfolio

After reading Seeking Alpha for over a year, I've decided to re-vamp my IRA into a value based DGI portfolio.  I'm 48 (2012), and would like to retire at 60, though may have to work to 65.   1st,  I put together my rules.  Here they are: