Sunday, February 16, 2020

I Trimmed PG

This year I'm looking to improve DivGro's growth prospects by favoring stocks with higher dividend growth rates [DGRs].

To identify stocks with questionable growth prospects, I consider the so-called Chowder Number [CDN], a metric that adds a stock's current yield and its 5-year DGR. For stocks yielding at least 3%, a favorable CDN is 12 or higher. Stocks that yield less than 3% require a CDN of 15 or higher. Utilities yielding more than 4% get a special dispensation: a CDN of 8 is considered favorable.

I've identified two stocks in my portfolio that have questionable growth prospects. Rather than close them outright, I decided to trim these positions. This article details the first trade.

Here is a table of DivGro stocks with unfavorable CDNs. For me, unfavorable means stocks that are unlikely to deliver annualized returns of 8% in the future. CDNs less than 10 (for yields below 3%), less than 8 (for yields of at least 3%), and less than 5 (for utilities yielding at least 4%) are unlikely to deliver annualized returns of 8% in the future.

Rank Ticker Company Yrs VL
Safety
Rank
VL
Fin. 
Stren.
M*
Econ.
Moat
S&P
Credit
Rating
SSD
Divi.
Safety
Qual Yield 5-Yr
DGR
CDN Fair
Val.
Price (Disc.)
Prem.
1JNJJohnson & Johnson571A++WideAAA99252.53%6.3%  9  152150.13(1%)
3MRKMerck91A++WideAA99252.95%4.6%  8  8982.65(7%)
4PGProcter & Gamble631A++WideAA-99252.37%3.1%  5  116126.149%
16INTCIntel61A++WideA+96241.96%7.0%  9  7167.27(6%)
24CVXChevron331A++NarrowAA85244.69%2.5%  7  128110.08(14%)
36KOCoca-Cola571A++WideA+80232.67%5.6%  8  5559.958%
40CBChubb261A+NarrowA99221.82%2.9%  5  168164.56(2%)
44VZVerizon Communications151A++NarrowBBB+87224.20%2.5%  7  6658.51(11%)
58XELXcel Energy161A+NarrowA-79212.31%6.2%  9U6570.268%

Notice that Procter & Gamble (PG) and Chubb (CB) have the lowest unfavorable CDNs. Since these stocks yield less than 3%, their CDNs of 5 are well below the 10 required not to be in the unfavorable zone 

Now, I don't consider a low CDN to be a sufficient reason to close a position. PG and CB are great stocks with high quality scores and long histories of dividend growth. In fact, both stocks are Dividend Champions with at least 25 consecutive years of higher dividend payments, while PG is a member of the elite Dividend Kings, a list of stocks with 50 or more consecutive years of higher dividend payments. 

However, I'm looking to improve DivGro's growth prospects and it appears that PG and CB, at least in the near-term, are unlikely to deliver what I'm looking for. I've decided to trim these positions and I'll continue to monitor them as part of my portfolio. If they offer more favorable CDNs in the future, I'll consider adding shares again.

In this article, I'll detail my PG trade. 

Procter & Gamble (PG)


Founded by William Procter and James Gamble, PG is focused on providing branded consumer packaged goods in more than 180 countries. PG has five reportable segments: Beauty; Grooming; Health Care; Fabric Care and Home Care; and Baby Care and Family Care. The company was incorporated in Ohio in 1905 and is headquartered in Cincinnati, Ohio.

PG performed well in 2018 and 2019 after a long period of essentially sideways trading. But over the last ten years, PG has significantly trailed the performance of the S&P 500:


Source: yahoo!finance

Nevertheless, PG is trading at a premium valuation and is not expected to generate total returns above about 5% in the next decade. The stock's 5-year DGR is low at only 3%:


Source: Simply Safe Dividends

On the other hand, PG has a perfect quality score of 25 with a dividend that is deemed Very Safe by Simply Safe Dividends. I'm sticking with PG, albeit at a smaller than average position size. I decided to trim rather my PG position by 75%.


PG Trade Summary


I bought 25 shares of PG in February 2014, added 7 shares in July 2014, and another 68 shares in December 2016. I decided to sell the batches of 7 and 68 shares. Here is a summary of the trades and dividends received, along with a net profit analysis:

2015-07-07
Bought 7 shares of PG at $82.61 per share:
$
578.27
2015-08-17
 Dividend on 7 shares at 66.28¢ per share:
 $
4.64
2015-11-16
 Dividend on 7 shares at 66.28¢ per share:
 $
4.64
2016-02-16
 Dividend on 7 shares at 66.28¢ per share:
 $
4.64
2016-05-16
 Dividend on 7 shares at 66.94¢ per share:
 $
4.69
2016-08-15
 Dividend on 7 shares at 66.94¢ per share:
 $
4.69
2016-11-15
 Dividend on 7 shares at 66.94¢ per share:
 $
4.69
2016-12-07
Bought 68 shares of PG at $82.75 per share:
$
5,627.00
2017-02-15
 Dividend on 75 shares at 66.95¢ per share:
 $
50.21
2017-05-15
 Dividend on 75 shares at 68.96¢ per share:
 $
51.72
2017-08-15
 Dividend on 75 shares at 68.96¢ per share:
 $
51.72
2017-11-15
 Dividend on 75 shares at 68.96¢ per share:
 $
51.72
2018-02-15
 Dividend on 75 shares at 68.96¢ per share:
 $
51.72
2018-05-15
 Dividend on 75 shares at 71.72¢ per share:
 $
53.79
2018-08-15
 Dividend on 75 shares at 71.72¢ per share:
 $
53.79
2018-11-15
 Dividend on 75 shares at 71.72¢ per share:
 $
53.79
2019-02-15
 Dividend on 75 shares at 71.72¢ per share:
 $
53.79
2019-05-15
 Dividend on 75 shares at 74.59¢ per share:
 $
55.94
2019-08-15
 Dividend on 75 shares at 74.59¢ per share:
 $
55.94
2019-11-15
 Dividend on 75 shares at 74.59¢ per share:
 $
55.94
2020-02-11Sold 75 shares of PG at $124.73 per share:$9.354.75
                                               
               

Capital Gain:
$
3,149.48

Dividends Received:
$
668.02

Commissions/Fees/Taxes:
$
8.20
Net Gain: $3,809.34

I made a net gain of 61.4% on the original amount invested, which is a gain of 18.5% annualized.

Selling these shares reduced DivGro's projected annual dividend income by $223.77.

Remaining PG Shares


Here is a summary of trades and dividends of the remaining batch of 25 shares, as well as an analysis of unrealized gains:

2014-02-24
Bought 25 shares of PG at $78.59 per share:
$
1,964.75
2014-05-15
 Dividend on 25 shares at 64.36¢ per share:
 $
16.09
2014-08-15
 Dividend on 25 shares at 64.36¢ per share:
 $
16.09
2014-11-17
 Dividend on 25 shares at 64.36¢ per share:
 $
16.09
2015-02-17
 Dividend on 25 shares at 64.36¢ per share:
 $
16.09
2015-05-15
 Dividend on 25 shares at 66.28¢ per share:
 $
16.57
2015-08-17
 Dividend on 25 shares at 66.28¢ per share:
 $
16.57
2015-11-16
 Dividend on 25 shares at 66.28¢ per share:
 $
16.57
2016-02-16
 Dividend on 25 shares at 66.28¢ per share:
 $
16.57
2016-05-16
 Dividend on 25 shares at 66.94¢ per share:
 $
16.73
2016-08-15
 Dividend on 25 shares at 66.94¢ per share:
 $
16.73
2016-11-15
 Dividend on 25 shares at 66.94¢ per share:
 $
16.73
2017-02-15
 Dividend on 25 shares at 66.95¢ per share:
 $
16.74
2017-05-15
 Dividend on 25 shares at 68.96¢ per share:
 $
17.24
2017-08-15
 Dividend on 25 shares at 68.96¢ per share:
 $
17.24
2017-11-15
 Dividend on 25 shares at 68.96¢ per share:
 $
17.24
2018-02-15
 Dividend on 25 shares at 68.96¢ per share:
 $
17.93
2018-05-15
 Dividend on 25 shares at 71.72¢ per share:
 $
17.93
2018-08-15
 Dividend on 25 shares at 71.72¢ per share:
 $
17.93
2018-11-15
 Dividend on 25 shares at 71.72¢ per share:
 $
17.93
2019-02-15
 Dividend on 25 shares at 71.72¢ per share:
 $
17.93
2019-05-15
 Dividend on 25 shares at 74.59¢ per share:
 $
18.65
2019-08-15
 Dividend on 25 shares at 74.59¢ per share:
 $
18.65
2019-11-15
 Dividend on 25 shares at 74.59¢ per share:
 $
18.65
2020-02-14Own 24 shares of CB at $164.56 per share:$3,949.44
                                               
               

Unrealized Capital Gain:
$
3,153.50

Dividends Received:
$
394.20
Net Unrealized Gain: $3,547.70

My unrealized gain is 80.6% on the original amount invested or 13.5% on an annualized basis. 

Concluding Remarks


PG is an exceptional DG stock with a long track record of dividend growth, a perfect quality score, and a very safe dividend. But the likelihood that PG will produce total returns in excess of 5% is low, so I decided to trim my position by 75% and to wait until the stock offers a more favorable outlook.

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