Subscribe to Portfolio Insight and Save!

Use my affiliate link to sign up for a free 14-day, no-obligation trial of Portfolio Insight. No credit card required. If you decide to subscribe during the trial period, you'll receive a 20% discount on the first year's annual subscription price of $330. Please note the 20% affiliate discount does not apply to the monthly rate.

Thursday, November 24, 2016

DivGro Pulse: November 2016

This is the third edition of my new monthly article series in which I'm monitoring the health of DivGro, my portfolio of dividend growth stocks.

These pulse articles are strategy focused. I provide updated fair value estimates and compare them to current market prices. Undervalued stocks are candidates for further investment. I rate stocks on a 7-star scale and consider 6-star or 7-star stocks to be quality dividend growth stocks.

I also provide various charts to visualize recent performance. If a stock performs poorly, it could be a sign of some underlying problem. Hopefully, these charts will help identify potential problems and inform my investment decisions.

In last month's article, I identified Caterpillar Inc (CAT) as a stock I wanted to get rid of. CAT made a decent comeback but I expressed concerns about the company's near-term future. I gave the stock a 4-star rating and ranked it #36 out of 49 stocks. I closed my CAT position on 30 October for a modest gain of 11.6%, or 4.7% annualized.

Discounted Stocks

Stocks in my portfolio that trade at a discount to fair value are candidates for further investment.

Before I buy more shares, I want to analyze a stock to see if I still like the fundamentals. Conversely, if a stock is trading at a premium to fair value, I don't want to buy more shares.

The following chart shows the percentage discount to fair value of all the stocks in my portfolio. Green bars represent discounts, and red bars represent premiums (or negative discounts):
I prefer buying stocks when they're available at a discount of 10% to fair value. From the chart above, nine stocks are discounted by more than 10%. But are these stocks suitable for further investment?

As a first pass test, I rank the stocks based on fundamentals and assign a 7-star rating to each stock:

Gilead Sciences, Inc (GILD)• discount  30%• ★★★★★★
Ford Motor Company (F)• discount  30%• ★★★★★☆☆
AbbVie Inc (ABBV)• discount  25%• ★★★★★☆☆
Pfizer Inc (PFE)• discount  16%• ★★★★★☆☆
Cisco Systems, Inc (CSCO)• discount  14%• ★★★★★★
Valero Energy Corporation (VLO)• discount  13%• ★★★★★★
Omega Healthcare Investors, Inc (OHI)• discount  12%• ★★☆☆☆☆☆
PennantPark Investment (PNNT)• discount  12%• ☆☆☆☆☆☆☆
Walgreens Boots Alliance, Inc (WBA)• discount  11%• ★★★★★☆☆

GILD, CSCO, and VLO have 6-star ratings. At 2.20% of available capital, GILD is the largest investment of these stocks. I have 1.74% allocated to CSCO and 1.36% allocated to VLO. The average position size in DivGro is 1.64%.

Quality Stocks

Sometimes it is appropriate to add shares to an existing position even if the stock is trading at fair value or at a small premium to fair value. Alternatively, one could sell puts on stocks trading at a premium, and so set your preferred entry price while collecting options premiums.

Here are the top ten ranked stocks for November:

General Dynamics Corporation (GD)• premium  12%• ★★★★★★
Nike Inc (NKE)• premium    6%• ★★★★★★
Cisco Systems, Inc (CSCO)• discount   14%• ★★★★★★
3M Company (MMM)• premium  15%• ★★★★★★
T. Rowe Price Group, Inc (TROW)• discount     1%• ★★★★★★
Chubb Limited (CB)• premium  15%• ★★★★★★
International Business Machines Corporation (IBM)• premium    2%• ★★★★★★
Valero Energy Corporation (VLO)• discount   14%• ★★★★★★
Qualcomm Inc (QCOM)• discount     7%• ★★★★★★
Target Corporation (TGT)• discount     7%• ★★★★★★

All these stocks have 6-star ratings.

The premiums on GD, MMM and CB are too high for my taste. I'm unlikely to find suitable put options (at or near fair value) unless I choose expiration dates far into the future.

As for NKE and IBM, I'm more likely to find suitable put options trades. And IBM is trading at about fair value, so I could even consider doing a straight covered call trade.

Of the discounted stocks, I have less than 1% of available capital allocated to TGT, while TROW (1.41%) and VLO (1.36%) both have allocations below DivGro's average of 1.65%.

GD remains my top performing stock with an annualized total return of 45%. NKE currently yields 1.25% but its dividend growth rate is impressive.

TROW, TGT, IBM, and QCOM made my list of 10 Dividend Growth Stocks for November 2016.

Recent Performance

One way to assess a stock's recent performance is to plot the current price relative to the 52-week trading range:
I consider stocks trading below the 50% mark potentially to be undervalued.

Another way to look at a stock's recent performance is to plot current yield relative to the 52-week yield range. For consistent dividend payments, a stock's yield rises when the stock price drops, and vice versa. Dividend growth investors often look at current yield relative to average yield over a time frame. A higher current yield suggests that a stock may be undervalued.
Because of the inverse price-yield relationship, the chart essentially reverses the order of the stocks. It is not an exact reversal, though. The reason is many stocks have experienced dividend increases over the past year.

Finally, I compare recent returns to annualized returns over a longer time frame. Doing so allows me to get a sense of each stock's recent performance. The following chart compares 1-year returns to annualized 5-year returns for all DivGro stocks. Note that dividends are not accounted for in this chart:
GILD is the worst performer of all the stocks in my DivGro portfolio. In contrast, BHP Billiton (BBL), QCOM, and Cummins Inc (CMI) have performed quite well over the last year.

Positions To Close

My plans to sell the following stocks have not changed. I'm including 8-year F.A.S.T. Graphs showing the stock price correlated with each stock's Adjusted (Operating) Earnings Growth Rate. In each case, the projected growth rates are negative.

• BHP Billiton (BBL)
Since my last pulse article, BBL has improved from an annualized loss of 11% to an annualized loss of 8%. BBL is rated 2-stars and ranked #47 out of 48 stocks. The company has cut the dividend twice in the past year, so BBL now yields only 1.75%. I'm planning to sell BBL by year's end and to offset some 2016 capital gains.

• Helmerich & Payne Inc (HP)
HP is ranked #39 out of 48 stocks and has a 4-star rating. HP's performance over the past month has been great, so my decision to hang on a little longer is paying off. The stocks' yield has contracted to 3.99% from the 4.21% reported last time. I should be able to sell my shares for a small profit before year's end.

• PennantPark Investment (PNNT)
Unfortunately, PNNT announced a cut in the distribution starting with the March 2017 payment. The stock reacted violently, dropping nearly 10% on the day after the press release. I'm not surprised that the cut finally came, as PNNT's yield was unsustainable at nearly 16%. I'll collect the final 28¢ dividend in December and then sell my shares. At the current price, I'll get out with a slight profit with one more round of distributions.

Positions To Boost

Based on the information presented here, I'll be looking for opportunities to add shares to a few of my DivGro positions or to look for suitable put options trades. By selling a put, I can set my entry price and collect an options premium while waiting for the stock to drop to my preferred price.

Please note that I'm not recommending these stocks. Readers should do their due diligence!

In the following descriptions, the yield is calculated on closing prices on 23 November 2016, payout is the EPS (earnings per share) payout ratio, and debt is the stock's debt to equity ratio. I also include Morningstar's moat rating and Standard and Poor's credit ratingValue Line's safety and financial strength ratings round things out.

• T. Rowe Price Group, Inc (TROW)
streak 30 years 5-year growth rate 14% yield 2.91% @ $74.28 payout 52% debt 0% moat wide credit rating N/A safety 2 financial strength A+

Dividend Champion TROW is trading at about fair value. I like the stock's yield, dividend growth rate, and the fact that it has zero debt. S&P Capital IQ gives TROW a Quality Ranking of A-.

• Qualcomm Inc (QCOM)
streak 14 years 5-year growth rate 20% yield 3.11% @ $68.13 payout 62% debt 38% moat narrow credit rating A+ safety financial strength A++

QCOM is trading at a discount of 8% to my fair value estimate. I own 100 shares, but those shares are in one of my FolioInvesting accounts and not eligible for options trading. I'm thinking about executing a covered call trade.

• Cisco Systems, Inc (CSCO)
streak 6 years 3-year growth rate 32% yield 3.50% @ $29.69 payout 49% debt 45% moat narrow credit rating AA- safety financial strength A++
CSCO is trading at a 13% discount to fair value. I own 200 shares of CSCO. I'm considering doubling my position and writing calls against my position.

Thanks for reading and take care, everybody!


  1. Very impressive study! Thanks!

  2. Excellent analysis! Despite the markets at all time highs, there is still some value out there. One of the stocks you looked at in particular, GILD, is one that I have been selling a lot of put options on. Hoping to pick that up at a discount.


    1. Thanks, Scott -- this rally since the election is pretty amazing. Especially because lots of pundits thought a Trump victory would cause a 1,000 point drop in the markets.

      All the best with GILD. I don't have option puts on GILD myself -- at this time, I need to wait for some other open puts to expire first. I don't want to overextend myself with put trading.


Please don't include links in comments. I will mark such comments as spam and the comment won't be published. To make me aware of your blog or website, comment on my Blogrole page instead.