The Prudent Investor


Initial Cuts
February 1, 2008, 2:42 pm
Filed under: Update

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.

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