Saturday, October 1, 2016

Recent buy: MO, NKE, SBUX, V ...

The trades have been configured and the cash is ready. They will go live at around 11am Eastern Time on Tuesday (10/4) morning. This week a larger order will be placed as I finish re-balancing my portfolio and collecting tax loss harvesting for 2016.

In today's world, high yield names are very over valued due to the low interest rate environment. Many blue chip high yielders have ridiculously high P/Es when they have slow to non-existent growth. Just look at Kimberly-Clark, Procter & Gamble, 3M, ADP, Colgate Palmolive... I felt that if I have to "pay up" for such high P/E in slow growth why not just pickup the ridiculously high growing companies (growing earnings, growing revenues, growing dividends) with the same P/E. The downside is that the fast growers have a lower yield as their payout ratios are usually lower to sustain their expansion.

Summary:
The purchase this week was primarily funded by re-balanced funds from slow high yielding names. I wanted to pursue more growth in my portfolio since my portfolio was heavily defensive and I feel that for my age (26) this was too conservative. My purchases recently emphasize potentially higher share price growth, higher dividend growth, higher earnings growth, and lower yield. I still try to maintain a decent yield by purchasing some higher yielding names like Altria. Altria has done historically extremely well (last 60 years) and has been able to maintain a high dividend while doing so.

I also purchased a $9100 stake in Home Depot last week and HD yields decently around 2.2% and is also expected to have high growth in revenue, earnings and dividends. I really like companies that have high yields and still grow the bottom line which leads to share price growth. You get the best of both worlds (growth and periodic dividend payments for waiting) but they are hard to find. I still want to try and maintain a overall portfolio yield of around 2.5-2.6% going forward so my Altria and Home Depot purchases helped move the yield needle up while still ensuring I get good growth.

This week I purchased hyper growth companies such as Nike, Ross Stores, TJX, Starbucks, MasterCard, and Visa. Their yields are around 1-1.5% and the dividend growth is over 15-20%. Around $14,600 this week will go to these very low yielding companies. These companies have rapidly growing earnings and revenue. The downside is that many of these companies have P/Es over 20 so they may experience P/E compression which will drive shares down even if the business is still growing. This can be seen with Nike and Starbucks recently as their P/Es have shrunk despite still growing the top and bottom line nicely. I am taking this opportunity to add to Nike and Starbucks. If they decrease further it will be more incentive to add.

I added a large stake in Altria since it has been a stable performer for the last 50 years while maintaining a high dividend. Altria has pulled back and now it's close to a 4% yield. They grow the dividend at a huge 8% rate while keeping a very steady 80% payout ratio. Cigarettes is extremely anti-cyclical and the user base is very loyal. Even if the US crashes in to a recession, tobacco usage will remain steady.


Although the cigarette volumes are declining in the USA I believe Altria still has readily achievable growth available from performing large share buybacks, increasing pricing, and improving operation margins in their primary tobacco smoke business. The lower gas price is also help fuel American consumption of cigarettes at the pump. I believe low gas prices are here to stay for a long time and this will help reduce the effect of decreasing cigarette volumes.

Altria has been taking cost cutting measures to improve profitability (they announced a $300 million dollar productivity program that is expected to be finished by the end of 2017). Altria is also seeing growth in their alternative segments (although not a large majority of their revenues) like wine, smokeless tobacco, and their huge stake in SABMiller which is being bought out by BUD. Although my MO position seems large right now, my overall portfolio value will be growing considerably in the next few years and the position will eventually be small (I predict less than 6% weight in 2020). Ultimately I am willing to bet on Altria management to steer the company in the right direction. They have continuously for many decades been able to create shareholder profits even when cigarette volumes have been on the decline.


Overall Summary of Buys:

9/29/2016 Purchases:
HD                     Home Depot Inc               $9,166.10

10/4/2016 Purchases:
Your Plan Investments
SymbolDescription
Total
MAMASTERCARD INC$1,000.00
MOALTRIA GROUP INC$17,900.00
NKENIKE INC CL B$3,020.00
ROSTROSS STORES INC$3,600.00
SBUXSTARBUCKS CORP$2,700.00
TJXTJX COS INC$1,700.00
VVISA INC COM CL A$2,600.00
Overall my breakdown for the re-balance exercise was $41,680 in funds and my purchases averaged 2.47% yield. The breakdown of the purchases are the following:
  • I went big on Altria (43% of funds)
  • Home Depot was also quite large (22% of the funds)
  • The remaining 35% of the funds went to super high growth low yielding companies. I diversified in more names in these lower yielding companies to reduce the risk and they all have very high similar growth values.

Old vs New Portfolio Breakdown:
I did some analysis to see how my new portfolio will compare with what I had 2 weeks ago. I plotted a Treemap of the old vs the new. The old was more heavily emphasized on stability and slow growth. The new portfolio will be more weighted to high growth but also still emphasizing blue chip slow growth as a foundation.
  • Nearly 1/2 of my old portfolio was slow growth and only around 1/4 was high growth. 
  • The new portfolio will be around 1/2 high growth and 1/4 slow and 1/4 regular growth.
In my future contributions in the coming months I will try to balance my contributions to 1/2 high growth, 1/4 slow growth and 1/4 regular growth (will depend on ultimately which area has better value buys) to keep this balance.

This weighting should help achieve my $1,000,000 net worth goal 6 months to a year earlier. It's not that much of a difference to be honest. But ultimately this weighting will help achieve my second million $ goal much faster. The first million will always be slower to achieve than the second million and third million since you have to rely more on periodic contributions than on having the money do the heavily lifting work for you. 

My first $1,000,000 goal will be less emphasized by portfolio returns. It will be more influenced by my continuous contributions since I contribute heavily compared to the returns I get from my portfolio every year (i.e. if you have a $10,000 portfolio and contribute $100,000 a year your portfolio performance really doesn't have a say in influencing your total net worth). It is only after my total portfolio value dwarfs my periodic contributions will portfolio performance ultimately matter. I believe after my portfolio is $1,000,000 the time it takes for me to reach the second million will be more influenced by portfolio returns.

Ultimately I decided it is worth taking the risk when I am still 26 years old. As I grow older my portfolio will likely become more conservative.




Happy investing.
-YD

7 comments:

  1. I like your thinking about weighting more towards high growth stocks. You're young and you'll get the benefits in the long run. Good job and keep up the good work!

    Cheers
    FerdiS, DivGro

    ReplyDelete
  2. I agree that some of the best blue chip names that yield 3% or more are trading at crazy valuations which, of course, makes them less compelling to buy at this time and there's little to no growth too to get excited about. Your "new" portfolio weighting looks very solid to me with many high growth names attached. It's nice to see a young portfolio that's not chasing high yield fantasies.

    ReplyDelete
  3. I like this rebalancing of your portfolio. Based on your age the addition of the growing stocks are great. You actually added several companies that I have been wanting to add to my portfolio as well. Nice article. Thanks for sharing!

    ReplyDelete
  4. Great purchase on all of the above companies! Thank you for sharing your activity!

    ReplyDelete
  5. I really like your blog. I've learned a lot from your articles. Thanks for sharing.
    Shane

    ReplyDelete
  6. Since adjusting your strategy have you adjusted your watchlists? I notice you have AFL on there and that is one I am currently looking into. How do you feel about it? side note I also notice you have WFC. How do you feel about them at them now?!!!
    I'm glad to see you have HRL. I have been watching them but I thought their p/e was too high so it is interesting to read your comments in contrast to KMB, PG, etc. That statement makes a lot of sense. My parents neighbor recently retired from HRL he seems to be pretty happy.
    Thanks for your blog. I find it really fascinating.

    ReplyDelete
    Replies
    1. AFL is a great company but not for me for several reasons. The earnings are not growing since 2011-2012. They are heavily tied to Japan and has to deal with the Yen fluctuations.
      Wells Fargo I wouldn't buy even before the scandal. And I really wouldn't buy it now after the scandal. I'm quite sure other banks are doing what Wells did but haven't been caught. The banking industry isn't known for having clean hands and I also do not like the lending business. I do not feel confident having to rely on people and companies paying back their debts with interest. Some can't do it during a recession and banks get hurt big time. Banks can go wild with risky lending as seen in the housing crisis. I only prefer 'middleman' financials such as Visa and MasterCard which have no lending risk and only collect a small fee for every swipe of a financial transaction. That type of business is low risk and high margin and I see a bright future for both V and MA.

      HRL has high growth but a lower yield. I expect much better ROIC even with dividends from HRL over KMB, PG, and the others like CL PEP KO. I like to balance this with slower growth and higher yield like KMB and PG. These 3 are all very high quality and I rate them as HRL -> KMB -> PG from lowest to highest quality.

      Delete