Sunday, June 18, 2017

DivGro Pulse: June 2017

Welcome to another Pulse article! The goal of my monthly Pulse articles is to monitor the health of DivGro, my portfolio of dividend growth stocks. These articles are strategy focused and help me to identify undervalued stocks suitable for further investment. I also want to identify underperforming stocks, which should be monitored carefully. If a stock underperforms for a prolonged period of time, it should be removed from my portfolio.

Because of how I schedule my other monthly articles, I like to publish my pulse articles mid-month. Updating the fair values of every stock in DivGro takes several hours to complete, as I perform a multi-stage Dividend Discount Model analysis, a Gordon Growth Model analysis, and an analysis of dividend safety. I also consider fair value estimates and price targets available elsewhere, such as those from Morningstarfinbox.io, and S&P Capital IQ.

I hope you find my pulse articles worth the read!

In my previous pulse article, I wrote that we would be taking a vacation break in mid-May. We had a wonderful one-week vacation in Kauai, the oldest and northernmost island in Hawaii. Highlights included a catamaran tour of the Napali Coast, a visit to the "Grand Canyon of the Pacific", Waimea Canyon, and seeing the Moreton Bay fig trees featured in Jurassic Park at the National Tropical Botanical Allerton Gardens.



This was our first visit to Hawaii and I certainly hope it wouldn't be our last!

Now, onto this month's Pulse analysis!

Position Sizes

I like to monitor the size of my DivGro positions. It is unrealistic to maintain equal weights, but seeing the distribution of weights allows me to identify candidates for further investment:

 
The red dashed line represents my average position size (1.81%). Stocks with weights under 1% are underweight and suitable for further investment. 

Qualcomm (QCOM), Ford (F), and Disney (DIS) remain my largest positions. In May, I added shares to Intel (INTC) and Target (TGT) due to the assignment of put options. Including Main Street Capital (MAIN), these stocks are somewhat overweight at 4% or above. 

I have open call options on all my shares of QCOM and DIS, while the call options on my F shares just expired. Soon I'll sell more call options on F and also on INTC and TGT. While these positions are overweight, I'm happy to collect options premiums and so boost my dividend income.

MAIN pays monthly dividends yielding 5.69% at about $39 per share, so I'm happy to hang on to my shares. The stock continues to perform well, returning about 29% in total returns on an annualized basis. MAIN's yield on cost (YoC) is 7.55% and the stock has paid back 20.11% of my original investment in dividends.

Discounted Stocks

I prefer to buy stocks at discounts of at least 10%. To determine if stocks are available at a discount, I estimate fair values for every stock in my portfolio. The following chart shows the percentage discount to fair value of all the stocks in my portfolio. Green bars represent discounts, while red bars represent premiums (or negative discounts):

 

Nineteen of my stocks are trading at a discount to fair value, but only six are trading 10% below fair value. This makes it challenging to deploy available cash right now. CVS Health (CVS) is the only underweight stock also trading at a discount of more than 10% to fair value.

As part of the analysis, I also rank my stocks and assign a 7-star rating to each stock. In general, stocks rated 5-stars or better are worthy of further consideration. Here are the ten DivGro stocks with the largest discounts to fair value, as of 16 June 2017. In addition to the stock's discount and its 7-star rating, I include the stock's rank out of 48 stocks:

CVS Health Corporation (CVS)• discount  22%• rank #  2 • ★★★★
Gilead Sciences, Inc (GILD)• discount  19%• rank #27 • ★★★★★
Valero Energy Corporation (VLO)• discount  14%• rank #  4 • ★★★★★
Ford Motor Company (F)• discount  12%• rank #33 • ★★★★
Qualcomm Inc (QCOM)• discount  12%• rank #  7 • ★★★★★
Pfizer Inc (PFE)• discount  11%• rank #41 • ★★★
Intel Corporation (INTC)• discount    9%• rank #20 • ★★★★★
AbbVie Inc (ABBV)• discount    9%• rank #31 • ★★★
Target Corporation (TGT)• discount    7%• rank #12 • ★★★★★
Nike Inc (NKE)• discount    5%• rank #  3 • ★★★★★★

I won't add to positions of stocks rated less than 5-stars, so I'm not interested in adding to F, PFE, or ABBV at this time.

Quality Stocks

Every month, I rank a selection of David Fish's CCC stocks and publish an article of the top ten ranked stocks on Seeking Alpha. The top ten for June contained five of my DivGro stocks:


For pulse articles, I repeat the ranking process for my DivGro stocks. Ranks are out of 48 because there are 48 stocks in my portfolio at present. (I ignore the three funds I own).

Hormel Foods Corporation (HRL)
• premium   7%
• rank   #1 •  ★★★★★
CVS Health Corporation (CVS)
• discount  22%
• rank   #2 •  ★★★★★★
Nike Inc (NKE)
• discount    5%
• rank   #3 •  ★★★★★★
Valero Energy Corporation (VLO)
• discount  14%
• rank   #4 •  ★★★★★★
T. Rowe Price Group, Inc (TROW)
• discount    2%
• rank   #5 •  ★★★★★★
General Dynamics Corporation (GD)
• premium   9%
• rank   #6 •  ★★★★★★
Qualcomm Inc (QCOM)
• discount  12%
• rank   #7 •  ★★★★★★
Altria Group, Inc (MO)
• premium 18%
• rank   #8 •  ★★★★★★
Cummins Inc (CMI)
• premium   3%
• rank   #9 •  ★★★★★
Cisco Systems, Inc (CSCO)
• discount    4%
• rank #10 •  ★★★★★

None of the top ten ranked stocks earned a 7-star rating this month. HRL, GD, MO, and CMI are trading at premium prices, so I'm not interested in adding to those positions at this time. Any of the other stocks are candidates for further investment, though I would prefer to buy at a discount of at least 10%.

Recent Performance

One way to assess a stock's recent performance is to plot the current price relative to the stock's 52-week trading range. Stocks trading below the 50% mark (those in orange below) potentially are undervalued:

 
Stocks that trade below the 50% mark (those in orange) are potentially undervalued.

Another way to look at recent performance is to compare a stock's recent returns to annualized returns over a longer time frame. The following chart compares 1-year returns to annualized 5-year returns for all DivGro stocks. The returns exclude dividends:

 

In the past year, GILD and CVS have performed poorly relative to their annualized 5-year returns, while Apple (AAPL) and CMI performed quite well compared with annualized 5-year returns.

Positions To Close

STAG is still the lowest ranked stock in my DivGro portfolio:

STAG Industrial, Inc (STAG)• premium   8%• rank #48 •  

Notice that the 1-star rating. I have annualized total returns of 38%, while the dividends I received represents a payback percentage of 11.37%. STAG yields 5.02% at $27.89, though my YoC is 7.60%!

So far, I've hesitated to pull the trigger on this one and my hesitation has paid off! Aside from STAG's recent performance, I like that STAG pays monthly dividends.


Source: finviz.com

However, it might be time to finally part ways with STAG. The REITs dividend growth rate is declining rapidly and I don't expect big increases in the near future:



STAG has a relatively high FFO payout ratio and has slowed down its dividend growth rate to focus on reducing the payout ratio:


Source: I Bet on STAG, It Feels Like I'm 'Always Dreaming' , by Brad Thomas

While I can't fault reducing the payout ratio, anemic dividend increases are not fun! STAG's latest dividend increase brings the dividend only 1.47% above the year-ago payment:



So, I'll be parting ways with STAG!

Positions To Boost

Of my existing positions, CVS looks the most interesting. My current position is underweight at only 0.7%, while CVS is trading at a discount of 22% to my estimated fair value and is ranked #2 of 48 stocks:

CVS Health Corporation (CVS)• discount  22%• rank #  2 • ★★★★

Another candidate is CSCO, which also is underweight at only 0.72% of portfolio value. The stock is trading at a discount of 4% to fair value and is ranked #10 of 48 stocks:

Cisco Systems, Inc (CSCO)
• discount    4%
• rank #10 •  ★★★★★

Notice that both CVS and CSCO made my top 10 list for June 2017. CVS is third and CSCO is tenth.

New Positions?

I recently published an update of the Top Holdings Of Dividend ETFsBy analyzing the top 25 holdings in 28 Dividend ETFs and assigning weights proportional to the size of each holding, I could rank the holdings and so find the top holdings of these dividend ETFs.

Looking at my own portfolio of 51 different stocks, I own nine of the top 10 stocks and eighteen of the top 25 stocks:

Rank    
    1    
    2    
    3    
    4    
    5    
    6    
    7    
    8    
    9    
    10    
Top 50 Holdings
T
In DivGro?
x

Rank    
    11    
    12    
    13    
    14    
    15    
    16    
    17    
    18    
Top 50 Holdings
In DivGro?
xxxx

Rank    
    19    
    20    
    21    
    22    
    23    
    24    
    25    
Top 50 Holdings
In DivGro?
xx

Of the stocks I don't own, Phillip Morris International (PM), Merck & Co (MRK), Boeing (BA), and Pepsico (PEP) are attractive dividend growth stocks, but I suspect they're all trading well above fair value. I'm not interested in Chevron (CVX) at this time, and following the accounts scandal at Wells Fargo (WFC), I don't care to invest in WFC again. JP Morgan Chase (JPM) might be an interesting substitute for WFC, though.

Over the next few months, I'll look into these stocks to see if any of them is worthy of my investment dollars. 

If you have any stock you think I should consider, please let me know in the comments below!

Thanks for reading and take care, everybody!

4 comments :

  1. Always love the pulse articles and your analysis. Find great names in the list and can get a second opinion on their value. Thanks for sharing.

    ReplyDelete
    Replies
    1. Cool! Thanks for your kind words, Dividend Daze -- I hope you continue to find my pulse articles worth reading. Take care and happy investing!

      Delete
  2. Hey FerdiS,

    tx for sharing your portfolio in such detail. i like how you filter your stocks for positions where you want to add. - CVS is interesting in my opinion too, think about opening a position but couldn't convince myself to pull the trigger yet. QCOM is the stock on your list that i think got punished too much by all the apple lawsuit talk. They seem fairly valued to me. Maybe i'll add on to my small position.

    Kind Regards,
    DividendSolutions

    ReplyDelete
    Replies
    1. Hi, DividendSolutions!

      Thanks for your comment. CVS is interesting, yes, with some concerns about increasing competition from Walgreens and others. 14 years of dividend growth, 5-yr DGR of 28%, yield of 2.6%... all good stats for this candidate. As for QCOM, it is already my largest position, so I don't want to add at this time. I agree with you that it is a good stock, though. All the best and happy investing!

      Delete

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