The Prudent Investor

When I look at the list of companies in the consideration list, I see some that I know will not make the cut for me, so I guess it makes sense to knock them out initially.  Although the cash (dividend) element is key, I am hoping to find a company that will do well going into the future.  If we receive a 5% dividend on a company whose stock falls 5%, then we are not using our money wisely.

Pfizer: PFE

I have owned Pfizer in my DRiP portfolio for about a decade and continue to hold it, only because of the dividend.  Indeed, the fact that the company has increased dividends for the past 41 years is quite impressive.  However, for the near future, at least, Pfizer is simply not the company that I would choose to purchase.

The numbers, at this point, speak for themselves, the PEG is nearing 2 and the P/S is over 3, both numbers I would like to see closer to 1, or lower.  Earnings and revenue growth (year over year) are negative, which is not the direction we wish to see any company go.  Most importantly for a drug company, the pipeline is not what it used to be – whereas the company had numerous drugs ready to go onto the market at the time I started my DRiP, these drugs have lost their patents and have not been replaced.  This could happen in time, but I do not currently see anything compelling that makes me want to take the plunge.

Gannett Co.: GCI

The problem with Gannett is that it is not in the right industry.  The company publishes 90 daily newspapers and about 1,000 non-daily publications, which is not a growing segment.  The fact that you are reading this outside of a printed publication is evidence that the population is moving away from newspapers and more toward online publications.  They have expanded to add websites to the company’s portfolio, but it does not own any of the large and popular sites.  Similarly, their broadcasting segment does not own any large and popular channels, and the television business is getting increasingly difficult as more small channels get added to customer’s cable choices that fill niches.  And just as a parting shot, how is it that Douglas McCorkindale takes millions of dollars from the company as a 68 year old consultant – I would think that some young blood, more attuned to the new media, would be needed to begin to turn this company around.

Old Republic International Corp: ORI

This is another company that is simply in the wrong place at the time we are looking for an addition to our portfolio.  Old Republic is in the Surety and Title Insurance industry, which has been hammered due to the subprime problems.  Accordingly, its one year chart shows that the company has approximately been cut in half.  There will come a time when this industry will come back, after all, people do need to take out loans, but I am not confident as to how this mess is going to shake out.  It seems to me that forecasting the future in this area is more speculative than I am willing to consider because this is a relatively conservative portfolio, so I will pass on this company.

Integrys Energy Group: TEG

I have not looked closely at this company, but the only reason it is being tossed from the list is that the portfolio already owns a utility, SJW Corp.  Although Integrys is a regulated electric and natural gas and SJW is water, they are both in the Utilities sector, so I will not consider it for addition to the portfolio.

UDR: UDR

The problem with UDR is simply a quick look at the numbers.  UDR operates as a self-administered equity real estate investment trust (REIT).  The PEG is at 2.75 and the P/S is almost 3.9, both numbers I would like to see closer to 1.  Debt/Equity is about 3.5, perhaps due to falling housing prices, which gives us a big question mark going into the future.  Certainly, housing prices will rise in the future, but working off that debt in the meantime could hold this company back and stunt its growth.

US Bancorp (NYSE: USB )
Bank of America Corporation (NYSE: BAC )
AT&T Inc. (NYSE: T )

One of the things that I wanted to do with this portfolio was to select companies that were relatively small, and the three above companies certainly do not fit that criterion.  Although they may be excellent additions to one’s portfolio, they simply do not fit the established purpose of this portfolio, each having a market cap of over $50 billion.  For that reason alone I am removing them from the list of considerations.

Below is a list of the remaining contenders for a place in the portfolio:
Associated Banc-Corp.
Synovus Financial Corp.
Regions Financial Corp.
Wilmington Trust Corp.
Comerica Inc.
BB&T Corp.
Marshall & Ilsley Corp.
Leggett & Platt Inc.

If you think that there is a theme here then you are absolutely correct.  All of the listed companies, with the exception of Leggett & Platt, are in the Financial sector.  We have all seen a downturn in this area, but over the course of the next decade, which is the expected lifetime of the portfolio, it should rebound nicely and make up for lost time.  As a matter of fact, it is possible that the negativity will be overshot for companies that have flowed downstream with the water of uncertainty, and if a good company is selected then the portfolio could nicely benefit.  I will be looking for the better company.

At this point I will make an executive decision.  Since the list has winnowed down to seven financial institutions, I am going to drop Leggett because it is not in the financial sector.  Simply put, this will offer an opportunity to better compare apples with other apples.  Leggett may be an excellent pick (I have not looked into this company), but for the purposes of selection at this time I am removing it from the list.

The next post will see the elimination of more companies from the consideration list.

I spoke with some people towards the end of last year and made the case that 2008 would be a down year for the market. There is no need to go into the reasons here, but the important thing is that this portfolio needs to have a little protection in the form of dividends. Dividends allow one to be more patient with a company when the stock price is not appreciating at rate we would like to see.

The only real problem with relying on dividends is that the company can always cut them. This means that one might purchase a company for the purpose of receiving the dividends, then have their purchase undermined when the company decides to slash the dividend. It would be nice to have some protection against that happening.

Fortunately, this is a situation where a company’s past decisions can bring one some comfort – although a company can slash its dividend at any time, if they have a history of increasing dividends over the course of several decades, then chances are that they will not begin slashing now. The only problem comes with finding those companies with such consistent records.

Fortunately, Dave Fish of MoneyPaper has compiled a list of U.S. Dividend Champions that is regularly updated and located at dripinvesting.org/tools/tools.htm.

So the next company that will be selected will come from this list. The list currently contains about 140 companies that have increased dividends over at least the past 24 years, which is quite an impressive record, and one that gives the investor confidence that the dividends will continue in the future.

Next post I will begin to eliminate some of the companies that obviously do not fit the needs we have for selection into this portfolio.

As we start the new year it’s time to look back at our purchases and sales to see what worked and what didn’t.  This should apply to all portfolios, and the balance within the portfolios should be examined to make sure that they are proper.

Additionally, plans should be made for the coming year, and my plans are to add two companies to this portfolio, one within the next couple of months, and the other sometime during the summer.  After this is done I will make the decision as to whether or not a sixth company should be added.

The January purchase has been to buy three shares of CPO.  I would like to get this company and CHTT closer to the value of SJW and InvestMete  guided me towards CPO.

I would like to get both Chattem and Corn Products up to the level of SJW Corp. so this month I decided to select between the two of them for the purchase. Both companies have taken a tumble and both are recovering their losses, but I chose to purchase Corn Products because they had fallen further.

As I write this, the portfolio has gained 4% (dividends included). Chattem has a nice gain of over 15%, though unfortunately it is the smallest position of the three companies. The other two companies average each other out and bring the portfolio down to its current value. All things considered, I am satisfied with the progress so far. The portfolio was never intended to be a high flyer, but a long term holding, and all three companies are moving strongly into 2008.

A few days ago the shares of CPO dropped dramatically - about 13% – because they missed earnings projections. I would have purchased more shares because this is an excellent company and this is a long term portfolio. However, I make my purchase on the 7th of each month, and as it turned out, the shares today have gained through an analyst upgrade. Such is life – had the upgrade occurred tomorrow I would have made the purchase before the more than 4% gain. But having made hundreds of purchases through DRiPs, I know that this sort of thing evens out over the long haul. Perhaps this purchase was a counter balance to last month’s purchase. The full $100 this month goes to Corn Products.

I have had computer problems for the past two weeks, something that has been driving me crazy (after all, I have four personal websites and two podcasts).  For that reason I was not able to make my purchase earlier in the week.  Sometimes one gets lucky in that way.  I finally had a chance to get to Zecco late yesterday to place my order.  I saw that CPO had fallen quite a bit and made the decision to purchase two shares, which would cost about $100.  My limit order of $47.15 was placed at 4:25pm, which was too late.  As I had make the duration Good To Close, I figured that if the stock was still down at the open then hopefully my order would be executed.

As fortune had it, the purchase was made this morning at $46.89.  I see that the low of today was only two cents below the purchase price, and the stock has rebounded handsomely.  For all I know, the price could fall dramatically tomorrow and I will have wished that I had waited a little longer before making my purchase.  However, in attempting to take the timing issue out of the mix (for the most part), sometimes one simply gets dumb lucky.

I purchased three shares of SJW at $30.64 yesterday.  I decided to put all of the money into SJW because of the drop it had seen, but I am at the point now where it represents half of the portfolio, so future money will need to be spread out.

I am currently on vacation and have not been listening much to the financial reports.  The volitility reminds me of the late 1990’s, although the valuations are not nearly as wild as they were then.

 We were due for a correction and a good 5% shock to the system appears to have done the job – hopefully.  I will not be surprised to see things slide down a little more, but there were a number of things that needed to be purged from the system.  It will be a while before the full effects of the credit crunch can be determined, so without a clear direction it is not surprising that wild swings will be the result for a while.  As far as I’m concerned, I’ll just keep plugging along without the volitility bothering me too much, as I am more focused on the distant future.