This is the February 2013 update on four of my research-based Dividend Growth Model Portfolios. The Dividend Aristocrat+ portfolio focuses mostly on stocks with 25-year+ histories of dividend increases and equally weights sectors. The DG-SmallCap portfolio concentrates on medium and smaller-cap firms with strong dividend growth, with preference to higher yielders. The DG-IncomeGrowth model is similar, but pursues non-small caps with high yields and high dividend growth rates. The DG-HYLP model screens for high-yield, low-payout ratio stocks as value plays with safe and growing dividends. The first three models were initiated on August 16, 2011, whereas the DG-HYLP was started on January 1, 2012. The newest model, DG-LBHDGR [Low Beta, High Dividend Growth Rate], was just started in January, and I will not formally report on it until 3 months have passed. Performance figures are as of the February 28, 2013 close.
Over the last three months, all of the DG models have outperformed the S&P 500 (NYSEARCA:SPY) in absolute and relative total return. The DG models' betas have edged upward over the short term, reflecting some increased volatility in weekly returns. It is also interesting to note that the S&P Dividend ETF (NYSEARCA:SDY) actually had a higher beta than the SPY. On a volatility-adjusted basis using the M2 measure, all of the DG models outperformed both the SPY and the SDY by over 165 basis points, with the small-cap model performing exceptionally well.
Over the last 12 months, all of the DG models except for the DG-HYLP soundly beat the SPY and SDY on both a relative and absolute basis. The DG-HYLP suffered some losses in the first half of last year that negatively impacted its total return. However, on a volatility-adjusted basis, the DG-HYLP did slightly outperform the SPY.
Since inception, the original three DG models continue to greatly outperform the SPY and SDY in both relative and absolute return. The DG-IncomeGrowth model has been particularly impressive with its combination of a very low portfolio beta of 0.67 and the highest overall return of 41%. Recently, this model benefited from Buffett's buyout of Heinz (NYSE:HNZ). HNZ was sold and replaced with Clorox (NYSE:CLX), though the entire model will be rebalanced in early April. To be more comparable, I adjusted the calculation for the DG-HYLP's M2 measure to compare against the SPY effective 1/1/2012 [21.9% gain]. While still trailing by 1.2% in absolute terms, with its lower volatility, the DG-HYLP squeaked out a 0.51% relative return advantage based on the M2.
Focus on the DG-Small Cap Model
Since its December 10, 2012 rebalance, the DG-SmallCap model portfolio has beaten the SPY by 554 basis points. Unlike the other models, the DG-SmallCap has 40 stocks, as I wanted to spread the risk more given that several of these stocks are lesser-known names. I'm pleased to report that so far this year, 22 of 40 have total returns above the SPY's 7.17%, 16 of these 22 have returned over 10%, and 7 of the 22 have returned over 15%. Only 3 of 40 have negative returns, and just barely, as the lowest is -2.8%: Darden Restaurants (NYSE:DRI), Harris Corp (NYSE:HRS), and Northup Grumman (NYSE:NOC). Let's look at some of the big gainers. They came from a variety of sectors. Return figures are from December 10, 2012 to February 28, 2013.
- Crane Co. (NYSE:CR), up 25.7%. CR has been steadily heading north since mid-November, about the time it was purchased for this portfolio. It manufactures highly engineered industrial products for a variety of segments including aerospace and electronics, fluid handling, materials, controls, and merchandising systems. CR reported record full-year earnings for 2012, and expects its third consecutive year of record earnings in 2013. Its yield has dropped to 2.1% due to the run-up. Currently I do not have any sell rules based on low yield, but will consider this or the need to rebalance the DG-Small Cap model at 6 months to address this. I know some will ask "Why mess with a winner?" but from a valuation standpoint and for those wanting to increase their income stream, it makes sense to lock in this fast gain and look for another option, or at least to reduce the holding. Prior research that I have discussed also supported rebalancing.
- Sunoco Logistic Partners (NYSE:SXL), up 24.7%. SXL has pretty much done nothing but go up since 2009; so much for waiting for a dip to buy it. Its trajectory has steepened the last year though, causing its yield to fall to 3.6%. For the fourth quarter, SXL reported record levels of distributable cash flow, a 41% increase in full year adjusted EBITDA, and raised its dividend each quarter in 2012 to a level 31% above the November 2011 dividend rate. SXL's CEO mentioned an interest in pursuing acquisitions if the assets for sale fit with SXL's growth plans and made financial sense.
- Omega Healthcare Investors (NYSE:OHI), up 20.6%. OHI is a real estate investment trust [REIT] that invests mainly in long-term healthcare facilities, such as skilled nursing and assisted living facilities. Like SXL, it has had a strong run-up since November 2012, though its yield remains high at 6.5%. Since the end of 2009, OHI increased its dividend every one or two quarters, averaging around a 10% dividend growth rate. OHI increased distributable funds from operations [FFO] through new investments made during 2012, which were funded by a $700M unsecured credit facility and $400M in senior unsecured notes that paid off previous debt balances. OHI expects adjusted FFO of $2.45 to $2.50 per share for 2013, a 12%-4% increase over the 2012 adjusted FFO of $2.19 per share, so the dividend should continue to rise this year.
- Plains All American (NYSE:PAA), up 21.4%. PAA has surged 20%+ since December, but still yields around 4.1%. It has increased its dividend each quarter since October 2009. For 2012, PAA's revenue missed Zacks Consensus Estimate by about $1B, but it was up 10% for the year. Earnings exceeded estimates, due in part to one-time items. PAA's transportation segment's profits grew by 24% due to higher pipeline rates and volumes, and its acquisition of natural gas liquids assets from BP (NYSE:BP). PAA plans to invest $1.1B in projects during 2013, and expects to increase distributions by 9% to 10%.
- Flowers Foods (NYSE:FLO), up 19.2%. FLO gained in November, as investors bet that the bakery company would benefit from the bankruptcy of Hostess Brands. In January, FLO acquired Hostess' bread brands, 20 bakeries, and 38 depots for $390M. During 2012, FLO also acquired Tasty Baking, Lepage Bakeries, and the rights to Sara Lee and Earthgrains brands in California. To top it off, FLO beat revenue and earnings expectations for the fourth quarter, and increased its margins. With the recent run-up, FLO's yield is down to 2.3% and its forward PE is over 20. This seems a little pricey to me, so I could see it pulling back in the short term. The dividend is due for an increase in June, and I would hope to see it increase by more than four cents, as the forward payout ratio is at 50%.
- Cracker Barrel Old Country Store (NASDAQ:CBRL), up 22.6%. Just this week, CBRL announced a 38% rise in quarterly profits despite inclement weather, beating analyst expectations by 15%. Revenues were up, and the firm raised guidance for 2013. Restaurant sales were up, mainly due to higher menu prices. Restaurant sales at locations open at least one year rose 3.3%. According to one analyst, CBRL is "beating its nearest family dining competitor by 140bps." The firm is also utilizing IT to improve its cost structure.
The DG models have outperformed the SPY in absolute and relative total returns during the last three months, which is a little surprising since we typically expect dividend stocks to underperform during strong upticks in the market. I believe the selection process filters out weaker and overvalued firms, so that should contribute to the positive gains. There were some exceptional performers in the DG-SmallCap model during this time period, as well as in some of the other portfolios. The new low-beta, high dividend-growth rate [DG-LBHDGR] portfolio has also performed very well so far, up 10.6% YTD and I will report on it in more detail next month. I will continue to monitor and report on these funds, and welcome any feedback and suggestions for improving them.