Monday, March 31, 2014

Kohl's (KSS)

Remember my post from November 4, 2013 about a Kohl's upgrade?  Of course you don't ;-).  Anyway, I stated then that analysts had upgraded Kohl's from neutral to buy, and an historic peak in the stock price.  Luckily, I added KSS to the Chump IRA almost a full year earlier when analysts were panning the stock.  I then enjoyed a gain of over 34% to the analyst upgrades in November of last year.

So, how is Kohl's doing since the big upgrade?  Here is a price chart:

The stock dropped after the upgrade in November, and has fought back to similar levels recently.  With recent upticks, a few more analysts have upgraded the stock, of course, after the upticks.  

I think its time to sell.  KSS has had two consecutive years of declining earnings, despite aggressive stock buy backs.  There margins are declining, they just fired their head of merchandising, and stores are in need of renovation.  KSS was a simple value play for me, and the value is gone with the declining eps.  I've been patient, but I don't trust their forecast of a big increase in eps next year.  I'm going to sell the position over the next several weeks.



Wednesday, March 26, 2014

Wells Fargo & JP Morgan Dividends

Good news today for my WFC and JPM holdings as a result of successful stress test results:

JPM is also authorizing a massive share repurchase of $6.5 is the article on SA:


Thursday, March 13, 2014

Starting a Position in Toyota (TM)

I placed a limit order for a 1/3 position in TM today....$110.55.  More to come.


Toyota caught my eye last week for a few reasons.  1)  The stock is beaten up pretty good price-wise:

2)  It looks nicely undervalued per FASTGraphs:

Earnings are healthy and rising for the worlds #1 automaker (sorry friends & family at Ford).  And they pay a dividend, though the 4.9% shown here is an error.  They pay semi-annually, so it's actually 1/2 the yield listed, or around 2.4%.

3)  Sticking with the undervalue theme, the PE is at historic lows:

In summary, great company, undervalued, pays a growing dividend, #1 in it's industry.  Good entry point.


Wednesday, March 12, 2014

It's Not Just the Dividend, It's the Dividend GROWTH (Part 2)

I've been thinking about the dividend growth rate, and have some more data to consider.  First, I broke the Chump portfolio into two groups, sorted by dividend yield.  Everything over and under 3% (Chowder rule) are separated.

As a refresher, the Chowder Rule from a frequent contributor on Seeking Alpha, Chowder, states that you strive to find a balance between yield and dividend growth, a sweet spot, that can be monitored by adding yield + dividend growth.  Yield should always be above 3%, and dividend growth should always be above 8%.  The sum of these should always be above 12%.  This is a decent rule of thumb to find balanced stocks that can continue to grow dividends.  This also assumes that higher yield stocks tend to increase their dividends at a reduced rate versus lower yielding stocks.

Looking at my portfolio, the weighted average (based on size of holding) increase for my higher yielders was 21.56%, and 37.75% for my lower yielders.  Technically, all of my holdings below 3% violate the Chowder rule, but if you look at five year averages....most are okay.  Nevertheless, it's good to note which holdings might be slowing down their dividend increases.  

I've also plotted a 5 year forecast for earnings growth next to each holding (courtesy of FAST Graphs).  Holdings with a small dividend, small growth, and low growth in earnings forecast should be highlighted as worrisome:

- Medtronic

Both have enjoyed good price appreciation over the past year, so show low current yields.  But slowing growth coupled with a very modest dividend increase is cause for concern.

I'll keep a close eye on these two names - especially on valuation.  Below is a FASTGraph for each:

Regarding Medtronic, the yellow line above shows my average purchase cost.  I'm up 52% since purchase, and stock is still not overvalued, so I plan to hold a while longer.  I trimmed the position a bit last year, so it's still "right sized" in the portfolio.

Regarding AFLAC, I'm up 48% since purchase, and stock is still well below fair value.  I plan to hold my AFL position until the stock moves closer to fair value based on earnings.  Still a ways to go.  

This is the nice thing about have a few years left before retirement;  since I'm not living on the income, I can hold a stock for capital appreciation even if it pays a subpar dividend - at least for awhile.  But after another year, if the dividend isn't increased more meaningfully, I'll likely sell the position if I can trade up for better looking opportunity.

Thinking a bit more about AFLAC, I noticed their dividend increase was about equal to their projected growth in earnings, 6% to 7%.  Are they matching the dividend raise with eps growth? This would make some sense to me, so I checked for a correlation in my portfolio.  Here are the results:

This power curve was the best fit to the data, but still has an R squared value of only 0.154, which is pretty crappy.  Really can't draw a correlation between 5 year projected eps growth, and most recent dividend increase, which to me, is a bit surprising.  

This got me thinking, well what metric, if any, does correlate the dividend growth rate?  I played around a bit with this, and I found one....the 3 year and 5 year dividend growth rates!?  Here is data from David Fish' excellent CCC list - nice big population of over 500 stocks:

This is mildly interesting.  If you take last year's increase on the x-axis, then slide up to the best fit line, there is your prediction for the increase out three years.  The higher the initial value, the more the future value will decline, which implies that a lower dividend growth rate tends to stay at that level consistently vs. a higher DGR.

Not all that earth shattering, but if want a predictor of how much you expect your dividend to rise this year, look at last year's increase, and subtract a little.  This appears to be the best predictor available.

That's all for now.


Friday, March 7, 2014

It's Not the Dividend, It's the Dividend GROWTH (Stupid)

After finding Seeking Alpha a few years ago, I began reorganizing my IRA to reflect my changing investment philosophy. In 2012, I set about building a dividend growth portfolio for retirement, and have been recording the journey on a blog site here:

2013 was my first full year with an established dividend growth portfolio, and the results were good. The portfolio's total return in 2013 was 32.95%, slightly beating the S&P 500 index over the same one year period.

When I started my blog and the redesigned portfolio in 2012, my intent was a hybrid portfolio of stellar dividend payers and less stellar, but faster growing stocks that would eventually morph into an income producing juggernaut at retirement. Over time, I found it difficult, and somewhat counter productive, to try and group my holdings into two categories. Thus, I simplified my approach, and began buying good stocks at attractive valuations. My definitions for "good" have been evolving, and for valuation have been deteriorating, with fewer bargains evident versus 2012.

And while I've continued to change my investing "rules," one tenant of my investing principles that hasn't changed is dividend growth. While I've bought several companies that pay small dividends, these same companies have a dividend growth track record of raising the dividend for at least several years. I've found that a great dividend growth track record is a useful screen to identify excellent companies.

First, why do I care about the dividend before I retire? In one of my earliest articles, I explored the effect of dividend growth on total return. Article here:

As my simple analysis showed, and as my favorite author at Seeking Alpha, Chuck Carnevale has stated:

"Although the focus is often mostly on the dividend income, for many dividend paying stocks it is merely the icing on the cake. Whereas the cake is the capital appreciation component that is often overlooked in favor of yield."

Nevertheless, I have come to believe that the discipline required by a company to pay a dividend back to shareholders every single quarter, and grow that payout to shareholders every year, is a great indicator of earnings stability and future share price appreciation.

Throughout my career I've followed Peter Lynch's precept of "pay yourself first." Applied to companies in which I own stock, the dividend paid to shareholders is the perfect application of this principle. Management pays the dividend first, then decides how to reinvest what remains of retained earnings. As with individuals, this prevents management from "wasting" the money. This may come across as a bit cynical, but I firmly believe this to be true.

Taking this logic one step further, I believe that a stable, growing dividend is an indication of great corporate management, discipline, and deference to shareholders. And ascending a final mental step, I believe any enterprise that pays a consistent, growing dividend over long periods can very likely be considered a great company. Therefore, via the transitive property (the engineer within is always fighting to come out), long track record of dividend growth = great company!

So a growing dividend has become a consistent theme of my investing over the past 1.5 years, and my results have been pretty good so far. Looking at dividend growth in my IRA since 2010, you can see the effect of transitioning to dividend payers/growers:


Back in 2010, I was invested mostly in index funds and ETFs. By late 2012, I had transitioned the portfolio to approximately 32 dividend growth stocks. Dividend payments, which are reinvested, have been growing at a compound annual growth rate of over 21%. The increase in income from 2012 to 2013 was only 7.35% due to timing of increases, and some heavy positions in lower yielding stocks. Here was the Chumpmenudo portfolio at year end, sorted by position size:


Looking carefully at my dividend growth has given me a real appreciation for the "Chowder Rule" re-stated here from a recent Chowder article at Seeking Alpha.

"When you take the current yield and add it to the 5 year compounded annual growth, I want to see a number of 12% or better when the yield is 3% or higher, or a number of 15% or better when the yield is under 3% but above 2%."

While I don't stick to Chowder's rule perfectly, I do keep it in mind, and agree that its very important to consider the combination of current yield and dividend growth rate.

Looking at my holdings, I was surprised by the dividend growth rate. The weighted average (by position size) one year increase in dividends for this portfolio was a remarkable 31.32%!  Looking ahead to 2014, I've set myself up for a nice annual raise, I control the size of the raise, and irrespective of movements in share price, my yearly increase is virtually guaranteed.

I admit that an income of $12,704 is nothing to get excited about, and I certainly can't live on the income this portfolio threw off in 2013, but I still have around 15 years until retirement, and to some degree, I can control how that income grows. I'll continue to hold and select stocks that keep growing the dividend. If I assume retirement in 15 years, It's fun to project some different income scenarios, again, independent of stock price fluctuations. Here are those dividend income projections, with dividends reinvested:


In the chart above, every scenario starts with my actual $12k in dividends from 2013. But going out 15 years to retirement, you can see that the rate of dividend increases is a major factor in determining my income at retirement.

Reinvesting dividends, that are growing rapidly every year, has an amazing compounding effect; what Lowell Miller refers to as your "compounding machine." The chart below shows that effect, comparing income growth without reinvested dividends versus with reinvested dividends. Dividend growth rate coupled with reinvestment is very powerful.

Can the Chump portfolio sustain a 20% dividend growth rate? Probably not, but if I'm focused on this metric, I can sure try to keep it above 10%. Looking back up at my holdings, and the one year dividend growth column, I count 9 of my 32 holdings that raised the dividend by at least 20% last year, and another 7 of 32 that raised the dividend by more than 10%. And depending on weighting of each stock, I can tilt the scales toward the higher dividend growth stocks by rebalancing. Even if I can't maintain 20% compound annual growth rate over time, I'd be quite happy with 15%, which gets to me to an income of $126k per year at retirement, and importantly, I don't have to sell any shares to get it.

This is where I think we folks that focus on dividend growth are on to something. If I keep my portfolio focused on two highly controllable metrics, current yield and dividend growth, the so called icing on the cake of capital appreciation, I can virtually guarantee a projected income stream in retirement. Conversely, I think its much harder (and stressful) to focus on capital appreciation! Yes, capital appreciation and total return are of paramount importance to me, but the best method I've found to insure price appreciation is to buy really good companies, which I define as those with the discipline and strength to pay and grow a dividend.

In summary, I want it all! Great total return and plenty of dividend income for a great lifestyle in retirement. The strategy I've adopted thus far is to focus on keeping the dividend stream growing at a healthy clip, and using a track record of dividend growth coupled with valuation to choose which stocks belong in the portfolio.

Thursday, March 6, 2014

Valmont Industries - Acquisition

VMI announced an acquisition on March 3rd.  Here is the press release:

Valmont Announces Acquisition Of A Leading Northern European Manufacturer Of Engineered Steel Products >VMI

Valmont Announces Acquisition of a Leading Northern European Manufacturer of Engineered Steel Products
PR Newswire
OMAHA, Neb.March 3, 2014
OMAHA, Neb.March 3, 2014 /PRNewswire/ -- Valmont Industries, Inc. (VMI) , a leading global provider of engineered products and services for infrastructure and mechanized irrigation equipment for agriculture, announced today that it has acquired privately-held DS SM A/S, a market leader in Northern Europe for the manufacture of heavy complex steel structures for a diverse range of industries including wind energy, offshore oil and gas, and electricity transmission. The Company, which will be renamed Valmont SM A/S, and will be reported in Valmont's Engineered Infrastructures Products Segment, has annual sales of approximately $190 million and operates two manufacturing locations in Denmark. The enterprise was valued at DKK 800 million (approximately $148 million) and DS SM's operating characteristics are similar to Valmont's other businesses within the Engineered Infrastructure Products Segment. Valmont expects the acquisition to be accretive to 2014 earnings.
DS SM ( part of DS Gruppen operates in three primary product segments.
   -- For wind energy, the company manufactures support structures for both the
      onshore and rapidly growing offshore wind market segments, as well as
      rotor housings for direct drive turbines.

   -- For the oil and gas industry, the company manufactures specialty
      equipment for offshore drilling rig stability. For offshore production
      platforms they also manufacture lifting and handling equipment such as
      cranes and winches.

   -- For the utility industry, DS SM manufactures engineered transmission
      support structures.

"DS SM is a premier engineered structures firm focused on energy infrastructure," said Vik Bansal, Group President of Valmont's Global Engineered Infrastructure Products Segment. "Support structures for the onshore/offshore wind and utility industries fit well with Valmont's existing competencies. This acquisition enables Valmont to participate in growing markets for wind energy, oil and gas exploration, power transmission and other related infrastructure projects, while giving us an attractive platform to expand our engineered infrastructure product lines across a broader geographic footprint."
"My management team and I are very pleased to be joining Valmont. We will maintain our 10% ownership interest in DS SM and we believe that Valmont provides the best strategic fit for DS SM and enables the next growth phase for our company," added Claus Bo Jorgensen, CEO of DS SM.
Valmont is a global leader in designing and manufacturing poles, towers and structures for lighting and traffic, wireless communication and utility markets, industrial access systems, highway safety barriers and a provider of protective coating services. Valmont also leads the world in mechanized irrigation equipment for agriculture, enhancing food production while conserving and protecting natural water resources. In addition, Valmont produces a wide variety of tubing for commercial and industrial applications.
The Chump IRA has maintained a 2.2% (of portfolio) position in VMI since January 2014.  I initiated the position on October 1st, and built it up throughout October, 2013.  My average cost per share is $137.37, is up 9.66% since purchase.
I like when companies buy competitors, or companies in the same industry.  This seems like a decent fit for VMI, so I'll hold the position as long it doesn't get too over valued.  Here is a FAST Graph of VMI today:

Today's blended PE of 13.5 is still a good value, and well below historical levels.  I'll trim the position if the PE reaches 20, but until then, I'll hold barring any new information.