This is the May 2013 update on my five research-based Dividend Growth [DG] Model Portfolios. I thought April would be my last update, but since I am still not working for an advisory firm yet, I can squeeze in one more update and maybe a rebalance article for the DG-Small Cap model. 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 moderate to 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 initiated in January 2013. Performance figures are as of the May 31, 2013 close.
Over the last three months, the DG models had mixed results relative to the S&P 500 (NYSEARCA:SPY). Using the M2 measure, only the DG-HYLP and DG-LBHDGR models outperformed the SPY, thanks to some strong gains by Microsoft (NASDAQ:MSFT), Cracker Barrel (NASDAQ:CBRL), and Nu Skin Enterprises (NYSE:NUS). All of the models continued to present lower betas than the SDY. The DG-Small Cap and DG-IncomeGrowth models had higher drawdowns, in part due to poor performance from Digital Realty Trust (NYSE:DLR).
Over the last 12 months, all of the DG models with 12+ months of history outperformed the SPY on a relative basis. The DG-HYLP suffered some losses in the first half of 2012 that negatively impacted its total return, though it is just slightly below the SPY in absolute terms. The DG models achieved this return with betas of around 0.80 and smaller maximum drawdowns than 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 0.68 and a total return 800 basis points above the SPY. To be more comparable, I adjusted the calculation for the DG-HYLP's M2 measure to compare against the SPY effective 1/1/2012 [32.01% gain]. While still trailing by 1.67% in absolute terms, with its lower volatility, the DG-HYLP squeaked out a 1.35% relative return advantage based on the M2 measure. Compared to the SPY, all of the models had lower beta and lower maximum drawdowns. The DG-LBHDGR's M2 measure compares against the SPY as of 1/1/2013 [19.18% gain].
Focus on the DG-Small Cap Model
Since its December 15, 2012 rebalance to June 3, 2013, the DG-Small Cap model portfolio [+16.78%] has nearly matched the SPY [+17.00%] in total return, but with much lower beta. 17 of the 30 holdings had returns above the SPY's 17.0%, and only 2 holdings had negative returns. Stronger sectors included industrials, energy, and consumer discretionary. Info tech, utilities, and financials were weaker.
Let's look at some of the gainers and decliners. Return figures are from December 15, 2012 to June 3, 2013. The percentage gains reflect only the price appreciation, not the paid dividends.
- Cracker Barrel , up 55%. Let's just jump to the latest news from CBRL. On Monday, CBRL beat earnings expectations by about 25%, reported higher sales thanks in part to higher menu prices, raised its outlook for the year, AND raised its dividend by 50%! This is welcome news, as with the 50% stock price run-up, CBRL's yield was near 2% and I was thinking it was time to swap it out. With the dividend increase, the stock's yield is around 3.3%.
- Omega Healthcare (NYSE:OHI), up 40%. OHI increased its quarterly dividend to 46 cents per share in April 2013. In May, OHI reported 62 cents per share of FFO, so the dividend appears to be covered. OHI has taken advantage of the low interest rate environment to refinance and retire higher yield senior notes. This will reduce interest payments on those debts going forward. Moody's also raised the company's senior unsecured debt rating to Ba1.
- Flower Foods (NYSE:FLO), up 40%. FLO is the second largest producers of fresh packaged bakery foods in the U.S. In mid-May, FLO reported higher earnings, up 64% YoY, and higher sales, up 25.9%. Sales growth was attributed to higher volumes (+19%) and acquisitions. Earlier this year, FLO acquired the Sara Lee and Earthgrains brands for sliced breads, buns, and rolls in the California market. CEO George Deese noted that the results were "the best performance in the company's history." Shareholders will benefit from this performance, as FLO recently announced a 3-for-2 stock split and a 5% dividend increase.
- Crane Co. (NYSE:CR), up 39%. In April, CR missed earnings expectations by one penny, but reported record first quarter results. Revenues were down slightly, particularly in its aerospace and electronics group, but CR reduced costs even more, leading to higher earnings. Management reaffirmed earnings guidance for 2013 in the range of $4.10 to $4.30 per share versus $3.70 in 2012. With its price run-up this year, CR's yield is now below 2%. It is due for an increase next quarter.
- Digital Realty Trust , down 10%. DLR's price decline can be traced back to May 8, when Jonathon Jacobson of Highfields Capital Management presented his arguments for why DLR should be shorted. He claimed that DLR relied on capital markets to fund its dividend, that pricing was declining, and competitor is increasing, hence DLR was overvalued. Jacobson has a short position in DLR. The firm stated that Jacobson drew "inaccurate conclusions from [its] accounting and financial disclosures" and that its dividend is well covered. DLR continues to acquire and open facilities, most recently in Texas and Massachusetts respectively. Most REITs went through a correction the last few weeks, as Treasury rates increased. If you believe the company, DLR may be a good pickup now, as it is yielding over 5%.
- Eisai Co (OTCPK:ESALY), down 9%. ESALY is a Japanese pharmaceutical firm. It has declined the last few weeks, but I couldn't find any company news to explain the drop. A Citigroup analyst lowered ESALY to a sell rating on May 29th, but the stock had already declined by then. On May 30th, ESALY sold 105,400 shares of its treasury stock in a private placement.
There were no stocks triggering the -20% stop-loss rule, in the last month. However, Universal Health Realty Income (NYSE:UHT) has been at this level for two weeks now, and may trigger the stop-loss in the near future. DLR has also just entered the -20% range.
On May 24, 2013, National Research Corp (NRCI) was sold after it completed its stock split and new issue of Class A and B shares. The funds were invested in Becton Dickinson (NYSE:BDX).
On May 30, 2013, NV Energy (NYSE:NVE) was sold in the DG-HYLP model, after Warren Buffett announced plans to take over the firm. We made a fast 22%+ gain in just under 3 months. The utility was replaced with SCANA Corp (NYSE:SCG), which was the next stock on the HYLP screen list.
The DG models continue to perform well, despite some corrections in the REITs and larger-cap dividend stocks. Valuations were getting a bit high, so it was not surprising to see prices come back down around 10%. Many of the DG model holdings have already had dividend increases this year, so overall the businesses continue to grow and reward investors.
With the large market run-up this year, it is time to rebalance the DG-SmallCap model. I will try to do this in the next week!