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Saturday, November 18, 2017

DivGro Pulse: November 2017

Welcome to another edition of my monthly pulse article series.

In these articles, I focus on strategy and monitor the health of DivGro, my portfolio of dividend growth stocks. I update the fair value estimates for every stock in DivGro and use the information to identify undervalued stocks suitable for further investment.

To estimate fair value, I perform a multi-stage Dividend Discount Model analysis, a Gordon Growth Model analysis, and an analysis of dividend safety. My final fair value estimates also consider fair value estimates and price targets available elsewhere, such as those from Morningstarfinbox.io, and S&P Capital IQ.

Since I didn't have any cash available for purchases in October, I don't have much to report by way of a recap of last month's pulse article. Instead, let me review the recent performance of DivGro's holdings to see if any of them are performing poorly.

Recent Performance

One way to assess a stock's recent performance is to plot the current price relative to its 52-week trading range:
Stocks trading below the 50% mark are colored orange. These are stocks with poor recent performance. Of course, it is a judgment call whether these stocks are undervalued or not. One should consider the fundamentals of each stock to assess the situation.

Another way to look at recent performance is to compare recent returns to annualized returns over a longer time frame. The following chart compares 1-year returns to annualized 5-year returns. The returns exclude dividends:
In the past year, General Electric (GE) has performed particularly poorly compared with its annualized 5-year return. In contrast, NVIDIA (NVDA), Apple (AAPL), Wal-Mart Stores (WMT), and T Rowe Price Group (TROW) have performed quite well!

After a disastrous decline of the once iconic company, GE cut its dividend by 50 percent on Monday, 13 November, and announced that it will aggressively dial back operations. Following the announcement, GE's stock price dropped by more than 10%!

I hate dividend cuts!

Not only do I give up some of my projected annual dividend income, I'm also forced to decide what to do with my shares. Do I sell immediately and realize the loss, or do I wait things out to see if the stock recovers a bit after the shock of the announcement wears off a little?

Below, I'll attempt to answer this question.

Quality Stocks

To determine if stocks I own are trading at a discount, I estimate the fair value of stocks in my portfolio. A byproduct of the evaluation process is a 7-star rating for each stock and a score that I use to rank all the stocks in my portfolio.

Here are the top ten ranked stocks in DivGro for November 2017:

CVS Health (CVS) • discount  20.6% • rank   #1 •  ★★★★★
Hormel Foods (HRL) • premium 12.9% • rank   #2 •  ★★★★★
Walgreens Boots Alliance (WBA)
 • discount  10.7%
• rank   #3 •  ★★★★★
Texas Instruments (TXN)
 • premium 15.2%
• rank   #4 •  ★★★★★
Cummins (CMI)
 • premium   2.0%
• rank   #5 •  ★★★★★
T. Rowe Price (TROW) • premium   9.6% • rank   #6 •  ★★★★★
Altria Group (MO)
 • premium   6.3%
• rank   #7 •  ★★★★★
General Dynamics (GD)
 • premium   6.3%
• rank   #8 •  ★★★★★
Nike (NKE)
 • premium 15.5%
• rank   #9 •  ★★★★★
Target (TGT)
 • discount    0.9%
• rank #10 •  ★★★★★

The top-ranked stock, CVS, earned a 7-star rating. As for the rest, all but the tenth ranked stock earned 6-star ratings. Generally, stocks rated 5-stars or better are worthy of further consideration. Only three of the top ten ranked stocks are trading at discounts to fair value.

Discounted Stocks

I prefer to buy stocks trading at discounts of at least 10%.

Here are the ten DivGro stocks with the largest discounts to fair value, as of 17 November 2017. In addition to each stock's discount and a 7-star rating, I include the stock's rank out of 50 DivGro stocks:

CVS Health (CVS) • discount  20.6% • rank #  1 • ★★★★★
Walgreens Boots Alliance (WBA) • discount  10.7% • rank #  3 • ★★★★★
AT&T (T) • discount    8.5% • rank #32 • ★★★★
Verizon Communications (VZ) • discount    7.1% • rank #34 • ★★★
General Electric (GE) • discount    6.1% • rank #48 • ★★
Omega Healthcare Investors (OHI) • discount    3.8% • rank #49 • ★★★
International Business Machines (IBM) • discount    3.6% • rank #12 • ★★★★★
Ford Motor (F) • discount    2.2% • rank #39 • ★★★★
Gilead Sciences (GILD) • discount    2.1% • rank #38 • ★★★★
Target (TGT) • discount    0.9% • rank #10 • ★★★★★

I'm not really interested in adding to positions of stocks rated 5-stars or worse. So, the only candidates on the discount list are CVS and WBA.

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):
Only ten of my stocks are trading at a discount to fair value, versus twelve stocks that traded at a discount last month. With the markets continuing to make new highs, it is challenging to find good dividend growth stocks trading at or below fair value.

Position Sizes

From time-to-time, I like to look at the size of my DivGro positions. Stocks that are underweight are good candidates for further investment. While I prefer to see a more balanced portfolio, I sell covered calls on a selection of my DivGro stocks. To do so, I need to own 100 shares or multiples of 100 shares, so several of my DivGro positions are larger than those not involved in covered calls.

The red dashed line represents the average position size (1.57%) in my portfolio. Stocks with weights less than 1% is underweight are good candidates for further investment.

Positions To Close

GE is by far my worst performer, especially after Monday's announcement of a 50% dividend cut caused a further 10% drop in the stock price. With losses totaling about 40%, I'm hesitant to close my position and take an immediate hit. So I've decided to wait and see if the stock price consolidates a bit. There's a distinct chance that the stock continues to slide, though, so I'll reconsider my decision again next month and possibly close my GE position for a loss, offsetting some of the capital gains I've made in 2017.

Positions To Boost

Novembers's top 10 list includes four DivGro stocks:
As mentioned earlier, CVS is this month's top-ranked stock and also the number one discounted stock. WBA (ranked #3) also looks good with its 10.7% discount. Both these stocks are trading at the lower end of their 52-week trading ranges, so I think they are good candidates for additional investment. 

New Positions?

Of the six stocks in November's top 10 list that I don't own, Lazard (LAZ), TJX Companies (TJX), and Cardinal Health (CAH) all look interesting. But I mentioned in my article that TJX looks most interesting, as evidenced in its recent F.A.S.T. Graphs chart.

Here, the black line represents the share price, and the blue line represents the calculated P/E multiple at which the market has tended to value the stock over time. The orange line is the primary valuation reference line. It is based on one of three valuation formulas depending on the earnings growth rate achieved over the time frame in question. (The Adjusted Earnings Growth Rate represents the slope of the orange line in the chart).

Soon I'll do some research on the candidates mentioned to see which one(s) to invest in. 

Thanks for reading and take care, everybody! And to my American readers, I hope you have a great Thanksgiving!


  1. Target seems to always be on my watchlist. I am holding onto my GE stocks for now and will await a rebound just like my other losses. As long as I get some dividend each quarter from them it doesn't hurt as much (div cuts).

    1. I hate dividend cuts, but I'm with you on GE -- I'll wait to see what happens with the stock price. All the best and happy investing!


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