Preparing Our Portfolio For The Next Bear Market

The stock markets are in a mature bull phase, and I was thinking about how to improve our portfolio to adapt to this situation. I don't know when will come the next bear market, and I think that nobody can predict it. Because of it I can only do what I have influence on: change our portfolio to fit for an unpredictable future.

There are a lot of good shares, what we can buy at a reasonable price, but we try to choose those, that are working in non-cyclical industries. If I see two good opportunities I will choose for our portfolio the one that works in non-cyclical industry. The non-cyclical companies will perform better in the next economic recession, and we will have more reliable dividend income from them.

Because we have large positions in cyclical shares like Royal Dutch Shell (RDS.A), BHP Billiton and BMW we had to build sizable positions in non-cyclical companies. In June we bought the shares of Walgreens Boots Alliance (WBA) and CardinalHealth (CAH) companies. Now WBA is our second largest position. The shares of BHP Billiton and Royal Dutch Shell (which is our largest position) were bought during the oil price downturn in 2015-2016.

To streighten our portfolio we can buy consumer staples, what would be really great, but I think that the threat of Amazon created a good opportunity to buy healthcare related shares and they provide better valuation than the most consumer staples.

WBA and CAH are the members of David Fish's list. Cardinal Health increased it's dividend in the last 21 years and WBA is a dividend aristocrat, which increased it's dividend in the last 42 years. I believe, that both of them will be good investment for the next decades.

Disclosure: We have Royal Dutch Shell, BHP Billiton, BMW, Walgreens Boots Alliance and Cardinal Health shares.

Recent Sell - Macy's

I bought a few shares of Macy's at $19.02 seven months ago. At that time, the panic about the impact of the Amazon on the offline retailers was really high. Almost every financial newspapers write about it, and it was a good opportunity to buy an undervalued good company. I saw, that the company worth more, and it can easily pay out the dividends from it's FCF. I thought that I can collect my dividend payments until the market realize, that the company worth much more. So I had a great, 7.94% dividend yield, while I am waiting.

Yesterday I sold all of my shares at $39.79. It was a really good business for me, because I can double my initial investment. If I would not sell it, now I can collect 3.77% dividend yield. This yield is not so good for me for a fairly valued company. I think, that there are much better investment possibilities at todays market. I hope, that I can find some undervalued dividend growth stock in a few days.

Profit of Hungarian Shares in the Last 10 Years

I calculated the profit of the largest publicly traded Hungarian companies. I used the share prices from the end of 2007 as a starting point. So, it is before the Great Recession of 2008-2009, that's why, the beginning valuation is really high, and the profits are not so good for a ten year period. (If I would start from the end of 2008, it would show us much better profits.)

Data sources: Budapest Stock Exchange, Sectors and Industries from investing.com.


I found really interesting, that there are plenty of high dividend paying shares among the top of the table. The share price of Zwack, Emasz or Elmu changed only a little, but the high dividend brought good returns for the shareholders. That's why I like so much the dividend paying stocks.

Disclaimer: long ANY

Recent Buy – November – Fresenius

November was a calm month for my investments. I got my dividends from Next Plc and CVS Health and I bought a few shares of Fresenius SE (Xetra: FRE) at €62.28 which gives me 0.99% dividend yield. Fresenius is a global healthcare group, and offers products and services for dialysis, hospitals and outpatient medical care. It focuses on the hospital operations and offers engineering and services for hospitals and other health care facilities.

Fresenius increased it's dividend in the last 24 years, which is really rare among european companies. As I look at the numbers and valuation of Fresenius, I think its a great company at a fair price. It shows great growth in the last 10 years and I believe that it can maintain this growth in the next decade.

Full disclosure: Long CVS, Next Plc, Fresenius

Whitbread - A Quality Company from the UK

I'm following a lot of companies from the US, like Kroger and TEVA, but this time I would like to introduce a quality company from the UK. Whitbread Plc (WTB) is the UK's largest hotel, restaurant and coffee shop operator serving millions of customers every week. They serve their customers through their two businesses: Premier Inn & Restaurants and Costa. Premier Inn has over 760 hotels in the UK, and also has hotels in the Middle East and Germany. Costa operates more than 3,500 coffee shops. It's brand include Premier Inn, Beefeather, Table Table, Taybarns and Costa Coffee.

(Source: Capital Market Day 2016 presentation)

The shares of Whitbread Plc are on the London Stock Exchange. The FTSE 100 and the FTSE 350 contains them.

Whitbread Plc increased it's revenue from 1.411 billion GBP to 3.106 billion GBP over the period spanning fiscal years 2006/2007 to 2016/2017. That's a compound annual growth rate (CAGR) of 8.21%.

Over the same 10-year period, the company's diluted earnings per share grew from 1.22 GBP to 2.31 GBP, which is a CAGR of 6.55%.

I think that it's really impressive from such a large company, so take a look at it's dividend.

The company increased it's dividend in the last 12 years, with a ten year CAGR 12.22%. The dividend yield is 2.59% with the yesterday's closing price. (37.02 GBP) The payout ratio is only 41.49%.

I think, that if I look at these numbers I see a good company, which worth further research.

Disclaimer: Long Kroger and TEVA

Recent Sell – Allianz AG

I bought a few shares of Allianz AG in 2016 after the Brexit referendum. That was a good timing, because of the panic at the stock market. I sold that shares a few days ago, because I think, that the valuation of the company's shares are really high.

When I bought the shares, the P/BV was 0.85 and the P/S was 0.52, but now I calculate P/BV 1.31 and P/S 0.75. If I look at the historical data, I can only see such high values in 2007. So this two ratios show me, that it is better to realize my profit.

But what I would expect from the company if I hold the shares? Allianz increased it's revenue from €92.183 billion to €110.500 billion over the period spanning fiscal years 2007 to 2016. That's a compound annual growth rate (CAGR) of 0.89%.

Over the same 10-year period, the company's diluted earnings per share decreased from €17.71 to €15.00, which is a CAGR of -1.12%.

 I think that it's not so impressive from a company, so take a look at it's dividend.

The company increased it's dividend in the last 4 years, with a ten year CAGR 7.18%. The dividend yield is 4.12% with my selling price. (€184.35) The payout ratio increased in the last 10 years.

These numbers show me, that the company's numbers are stagnating, and I won't expect great long-term returns from it. It was a good value play for me, but at today's prices I think that I will find muh better investment opportunities for my money in the next few months.

Watch List for September

In the last days I was thinking about what share would I buy in September. I am monitoring a lot of candidates, but I choose four dividend paying companies.

Qualcomm (QCOM) engages in the development, design and provision of digital telecommunications products and services. It operates through the following segments: Qualcomm CDMA Technologies (QCT), Qualcomm Technology Licensing (QTL), and Qualcomm Strategic Initiatives (QSI). Qualcomm pays out $2.28 dividend per share, and increased the dividend in the last 15 years, with a ten year CAGR 16.50%. The dividend yield of the company with the last closing price is 4.38%.

W. W. Grainger (GWW) is a distributor of maintance, repair and operating (MRO) supplies and other related products and services. The company raised it's quaterly dividend by 4.92% to $1.28 per share. This marked the 46th consecutive annual increase for W. W. Grainger. Over the past decade GWW has been able to boost annual dividends at a rate of 15.80% per year. This was supported by an increase in earnings from $4.94/share in 2007 to $9.87/share in 2016. The company has a sustainable dividend payment, and is fairly valued at 15.40 times forward earnings, while yielding 3.20%.

Kroger Company (KR) operates supermarkets, multi-department stores, jewelry stores, pharmacies, fuel centers and convenience stores in the United States. The company increased it's dividend in the last 12 years, with a ten year CAGR 16.50%. The dividend yield is 2.30% with the Friday's closing price. ($21.74) The payout ratio is really low, it's only 27.60%.

The Walt Disney Co. (DIS) is a diversified international family entertainment and media enterprise. It operates through four business segments: Media Networks, Parks & Resorts, Studio Entertainment and Consumer Products & Interactive Media. The company increased it's dividend in the last 7 years, and the ten year dividend growth rate is 18.80%. The dividend yield is 1.52% with the Friday's closing price. ($102.41) Generally I like companies which have at least 10 years consecutive dividend increases but DIS is an exception. It has powerful brand what doesn't need explanation if you have a child.

Full disclosure: Long KR.

Related Posts:

1. Recent Buy – Kroger

Recent Buy – TEVA

Teva Pharmaceutical Industries Limited (TEVA) is a pharmaceutical company. The Company is engaged in developing, producing and marketing generic medicines and a portfolio of specialty medicines.

Yesterday TEVA reported second quarter 2017 financial reports, lowered the 2017 business outlook and announced second quarter 2017 dividend of 8.5 cents, down 75% from 34 cents in the first quarter of 2017. Because of the negative news the share price of TEVA presented a huge decline, and it closed on $23.75 (-24.00%).

As I saw this decline of the share price, I decided to buy a few shares of TEVA and I successfully bought it at $23.97.

The company has 224.06 P/E ratio, but the forward P/E ratio is 5.05. TEVA has 0.76 Altman Z-Score, which means that it is in Distress Zone. The Debt/Equity ratio stands at 1.14, but most of them are long-term debt. (LT Debt/Equity: 1.08) I understand that the most of the investors don't like the dividend cut, but I think that the dividend cut will help the company to decrease the debt pile. I know that it is a very risky investment, but I believe that the company worth more.

Full disclosure: Long TEVA.

Related Posts:

1. Recent Buy – Kroger

A Good Article to Read: Buying Stocks Solely For Dividend Yield Is a Poor Bet

What are the main variables of the return you receive from a stock? The return of a stock depends on three variables: earnings growth, P/E change, and dividends. You need all of them for a good return. If you think that you need only a good dividend yield, I recommend you to read the Marketwatch article: Buying stocks solely for dividend yield is a poor bet.

Archer Daniels Midland – A Fairly Valued Dividend Growth Stock

The company founded in 1902 as Daniels Linseed Co. in Minneapolis, and changed name to Archer Daniels Midland Company in 1923. Today, they are one of the world's largest agricultural processors and food ingredient providers, with more than 32,000 employees in more than 160 countries. The company's primary business segments are Agricultural Services, Corn Processing, Oilseeds Processing and Wild Flacors and Specialty Ingredients.

Archer Daniels Midland (ADM) is a dividend aristocrat, which increased it's dividend in the last 41 years. So I think it has really good track record to look at it's numbers.

ADM increased it's revenue from $44.018 billion to $62.346 billion over the period spanning fiscal years 2007 to 2016. That's a compound annual growth rate (CAGR) of 3.94%. 

 

Over the same 10-year period, the company's diluted earnings per share decreased from $3.30 to $2.16, which is a CAGR of -4.60%.

It's not so impressive, but take a look at a little longer period. ADM increased it's diluted EPS from $0.76 to $2.16 over the period spanning fiscal years 2004 to 2016. That's a compound annual growth rate (CAGR) of 9.09%. I saw that the company's EPS showing great changing from one year to another.

Despite of the changing EPS, the company is paying out a much more predictable dividend. As I mentioned earlier the company increased it's dividend in the last 41 years, with a ten year CAGR 12.08%. The dividend yield is 3.11% with the last closing price. ($41.14) It's higher than the ADM's five year average. (2.4%)

The payout ratio is 51.20% now, which is managable.

Because of the decreasing EPS and increasing dividend the payout ratio increased constantly in the last 10 years. (In the fiscal year 2007 the payout ratio was only 13.03%.)

The Debt/Equity ratio is 0.42, which is really good.

ADM has a 17.4 P/E ratio, which is slightly lower than the ADM's five year average (18.1) and it's below the stock market's P/E ratio. The forward P/E ratio is 13.92, so the company is expecting a better financial performance in fiscal year 2017, than in 2016.

What is the value of ADM?

I valued shares using the dividend discount model. I factored in a 10% discount rate and a long-term dividend growth rate of 7%.

That growth rate is roughly on par with the company’s long-term EPS growth rate, and I think it’s reasonable when also looking at the recent dividend growth or payout ratio. The DDM analysis gives me a fair value of $42.67.

Disclosure: I have no position in ADM.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Dividend Increase - Kroger

Kroger (NYSE: KR) announced that its Board approved a dividend increase from 48¢ to 50¢ per year. The next quarterly dividend of 12.5 cents per share will be paid on September 1, 2017, to shareholders of record on the close of business on August 15, 2017.

This means, that my YOC increased from 2.27% to 2.37%.

I think that today's prices offer a great opportunity for the management to repurchase the shares of the company. That's why I'm really satisfied with the announced $1 billion share repurchase program.

Related Posts:

• Recent Buy - Kroger

Disclosure: Long KR.

Coca-Cola – An Overvalued Dividend Aristocrat

Coca-Cola (KO) is a wonderful company and made many investor rich. KO has been increasing it's dividend since 1963. Everybody knows it's powerful brands and I think that it will be in the business in the next decades.

Because of the low interest rates more and more investors are looking for safe investments with a small, but stable yield. My opinion, that this reflects in the valuation of Coca-Cola. The dividend yield of KO is 3.27%, which is much higher than the yield of a bank account. But will it be a good investment?

KO has a 31.8 P/E ratio, which is much higher than the KO's five year average. (22.7)

The company's revenue decreased in the last five years from $48,017 million to $41,863 million. The diluted EPS decreased at the same time frame from $1.97 to $1.49. If this decreasing is not changing it will be more and more difficult to pay out such a high dividend. 

KO pays out $1.40 in the last financial year. The payout ratio of the company is 83.6%, so I think there is only a small space to increase it's dividend.

I think that the valuation is not reflecting the growth characteristics of Coca-Cola, so I won't buy it at today's prices.

Full disclosure: Long PEP.

Nike – A Fairly Valued Share

It's really hard to find a good investment at today's overvalued financial markets. The S&P 500 is at a 24.08 TTM P/E ratio, which is historicaly really high. Nike (NKE) has a TTM P/E 22.32, while it presented a really inpressive growth in the last ten years. Nike's revenues increased 8.03% annually in the last ten years. (CAGR, 2006-2016) At the same time frame, the EPS increased 12.59% and the annual dividend increased 15.44%.

As I'm looking at these growth numbers, I'm seeing a wonderful company, so I bought a few Nike shares last week. Nike has 1.35% dividend yield, which is really low, but I like it's growth prospects and I believe that my yield on cost will increase significantly in the next few years.

How to Analyse a Dividend Growth Stock - Video

Jason Fieber (Mr. Free At 33) made a really good video about how to analyse a dividend growth stock. I think it can be really usefull for every investor.

GlaxoSmithKline - A Potential Dividend Cut

A few years ago I bought a few shares of GlaxoSmithKline (GSK) because of it's good dividend yield and dividend-paying track record. I felt myself really good while I was receiving the dividends. But a few month ago, I read the company’s 2016 Annual Report. I saw that the EPS was £0,19 and the dividend was £0,80, so the EPS didn’t cover the dividend. It was not a good news for me, so I read more to see the chairman’s words about it. I found this:

“Ordinary dividends of 80p per share have been declared for 2016, the same level as 2015. The company expects to maintain the same payment in 2017, in accordance with the statements made in 2015. This level of distribution still exceeds the free cash flow generated by the business despite the material improvement in cash generated in 2016 referred to above. Given that 2017 is the last year of the three year dividend commitment made in 2015, the Board will be considering the appropriate dividend policy for 2018 and beyond during the course of the year. ”

(Source: Annual Report 2016 – GSK, 04.p.)

I think that the Board will cut the dividend in 2018. The GSK needs a really good financial performance in 2017 to avoid the dividend cut. The first quater of 2017 was a good beginning, but I sold my shares, because I'm more relaxed to watch it from a little distance.

Full disclosure: I have no position in GlaxoSmithKline.

A Few Words About Me

Today is a great day for me. I have decided to make a blog and write about my financial journey. As a frugal man I put aside at least half of my salary, and I made a few investments over the last two decades. I bought my first shares in 2000. I saw the collapse of the tech bubble and the 2008-2009 crisis. I collected some valuable expreience about investing while I bought and sold shares. I would like to share my thoughts and my experience with my readers on this blog. 

In the last two years I read a lot about dividend growth investing, which greatly inspired me. Nowadays I have an investing style which is the mixture of dividend growth investing and value investing.