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Growth at reasonable price, healthcare, long-term horizon, value
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Summary

  • In a market categorized by a start/stop pattern, dividend yield becomes even more important.
  • My portfolio was adjusted in the first quarter to increase exposure to higher-yielding companies.
  • Growth wasn't abandoned, as certain companies were discarded for ones that exhibited higher share growth potential.
  • The goal of this article is to offer the readers a window into my thought process when making the decision to add and subtract companies.

2014 has already managed to distinguish itself from 2013 in a less than appealing fashion. The year has been marked by what I would categorize as a start/stop pattern where we establish a new high, yet manage over the next couple of trading days to give up all the gains and trade lower. This action would best be described as a trading range which seems to be stuck at the time of this writing between 1840 through 1880 on the S&P 500 with a very brief foray below 1750. In an environment such as this, dividend yield will prove to be crucial, as capital gains will become exceedingly more difficult to generate. In the article below, I will detail the trades made in my account for the first quarter along with the rationale behind the moves.

Tech

Consumer

Energy

Financial

Healthcare

Insurance

Defense

IBM (NYSE:IBM)

Coca-Cola(NYSE:KO)

Ensco (NYSE:ESV)

Citigroup (NYSE:C)

Amgen (AMGN)

Admiral Group PLC (OTCPK:AMIGY)

Northrop Grumman (NYSE:NOC)

Apple (NASDAQ:AAPL)

Colgate Palmolive (NYSE:CL)

Schlumberger (NYSE:SLB)

Wells Fargo (NYSE:WFC)

Glaxo (NYSE:GSK)

Oracle (NYSE:ORCL)

Philip Morris (NYSE:PM)

Exxon (NYSE:XOM)

Bank of NY Mellon (NYSE:BK)

Bristol Myers Squibb (NYSE:BMY)

Retail

Telecom

Directv(NASDAQ:DTV)

Coca Cola Enter. (NYSE:CCE)

BP (NYSE:BP)

Visa (NYSE:V)

Amerisource Bergen(NYSE:ABC)

Target (NYSE:TGT)

AT&T (NYSE:T)

Mattel (NASDAQ:MAT)

Current Holdings as of March 25, 2014

I managed to make seven different transactions for the period, which is a bit unusual for me. The first transaction was initiated on the very last trading day of December, when I exited my long held position in Paychex (NASDAQ:PAYX) and initiated a new position in AT&T (T). PAYX is quite simply a wonderfully run company that simply has gotten too expensive. The security was trading for a forward P/E in excess of 25 with mediocre growth prospects for 2014. Management has certainly proven to be extremely shareholder friendly as evidenced by an earnings payout ratio greater than 80%, however this leaves little room for future hikes. Furthermore, in my opinion management is being somewhat prudent by initiating a share buyback here to prevent dilution from employee option exercise, however at a P/E greater than 20, buybacks tend not to add to shareholder value. The best time to repurchase shares is quite simply when they are depressed, not when richly priced, as is the current case with PAYX.

It is exceedingly rare to be able to exchange an above average dividend yield for one that is not only significantly higher but also undervalued. That is exactly the opportunity that T currently offers investors. T is a DOW 30 company that offers investors a yield that is higher than most corporate bonds. Let's contemplate the above statement for a second; the security has a higher yield than most bonds while managing to raise the dividend on a yearly basis, thus providing an inflation hedge. In my view, the deal was simply too good to pass up, and the shares were added to my portfolio. I have managed to write more extensively about T the past 3 months which can be seen here and here. Feel free to review for a more in-depth review of T's prospects; the information in the articles remains timely.

The second transaction was done with an attempt to generate higher capital gains in the portfolio. I parted ways with Campbell's Soup (NYSE:CPB) and used the proceeds to open a new position in Amgen (NASDAQ:AMGN), the largest biotech company in the world. The attraction for me was quite simple. AMGN has a large stable of phase III candidates that should power profits higher over the course of the rest of the decade. AMGN continues to announce positive results from the multiple phase 3 studies which are currently ongoing. The continued positive results add to my faith that the new compounds they are attempting to develop will ultimately be approved. I wrote a more in-depth review on AMGN prospects which can be seen here. The dividend yields of both companies were similar, which made the move even easier to make. CPB was held for less than 3 months with a total gain of roughly 10%, certainly not a shabby return for such a short period of time.

The third transaction was initiated to take advantage of absolute negative sentiment that had engulfed a very steady dependable performer. The company in question is Target (TGT), with its well-documented woes stemming from a data breach. The stock has sold off quite briskly and was trading at a level that guaranteed a yield of over 3%. In the period since, management was able to beat lowered earnings projection while making a pledge to raise the dividend an additional 20% this year.

I realize I harp on dividend rates, yet it really is one of the key determinants for long term equity gains, especially in this pathetically low rate environment. If an investor were to purchase a ten year bond today, they would be guaranteed a rate of return of roughly 2.7% per year. I have two issues with the return, the first being its absolute paltry level and the second being its absence of any sort of inflation hedge. Now juxtapose this with TGT and its current situation, I certainly expect them to be in business over the next ten years. I further expect them to fully recover from the security breach incident and post far higher returns in the coming decade. Furthermore, in the same time frame, they will continue to pay an ever higher dividend rate, which will provide the all-important inflation hedge which is tantamount to preserving buying power. I wrote a more in-depth review of TGT's prospects which I dubbed "Be greedy while others are fearful". The moniker still applies today, even with TGT trading at a higher level than what I originally entered into the position at.

For the more aggressive traders, TGT offers some covered call premium potential, as the shares seem to be locked in a trading range. Premium selling should continue to be profitable, however I wouldn't sell any sort of calls going into the next earnings report. The shares may very well generate positive momentum as the costs associated from the breach begin to become more apparent. To make room for the TGT purchase, Kroger (NYSE:KR) was removed from the portfolio after a stellar 38% return over the course of a year. KR is a superbly run grocery chain, however their upside pales in comparison with what TGT currently offers. TGT's dividend rate is also nearly double what is currently offered by KR, making the decision even easier for me to make.

The fourth transaction revolved around generating a higher dividend yield for the portfolio. I trimmed some of my Oracle (ORCL) position and used the proceeds to purchase a new stake in Mattel (MAT). The rationale for this move is as follows: ORCL was purchased for roughly $30 in June of 2013 after what was perceived to be a disastrous earnings report. In typical Wall Street overreaction, ORCL bottomed that day and managed to make a steady climb surpassing $39 per share where I trimmed some of the shares. I am still very much a fan of the company and will remain long, as I view the shares as a core long term holding. By cashing in after a 30% gain and using the proceeds to purchase another well-established company yielding north of 4%, I have managed to generate a greater than 2% yield on the total dollar amount invested. The move also allows me to speculate on a rebound in the fortunes of MAT. In my view, the setup on MAT is very similar to what was seen in ORCL last year, a well-established dominant company that temporarily stumbled, allowing the patient long term shareholder an attractive low risk entry. MAT and ORCL both repurchase a large amount of their shares, with MAT paying out a very generous dividend. ORCL has come a long way in the dividend department, and I expect it to continue to raise it quite aggressively over the course of the rest of the decade.

The fifth transaction revolves around an interesting low risk way to capitalizing on the Federal Reserve's intent on raising the Fed funds' rate over the course of the next 12 months. I exited my position in Starz (NASDAQ:STRZA) and initiated a position in Citigroup (C). My purchase of STRZA was a speculation on content with the expectation that content providers, especially with original content, will become even more valuable. STRZA is transitioning itself from a company that strictly rebroadcasts other content, such as major blockbuster movies, by adding a significant amount of original content. The speculation paid off, with STRZA rising 18% from September of 2013, which is certainly a more than acceptable performance.

Citi is quite simply the cheapest of all the money center banks, trading at a significant discount to its book value. I expect the discount to evaporate over the next 18 months, generating very acceptable capital gains. To further add to the appeal of the shares, by the end of the first quarter, the Fed is expected to announce the approval of Citi's capital return plan, which should include a significant dividend hike. I suspect once the dividend is hiked, the shares will become more appealing to Wall Street, which will drive shares higher. For a more in-depth review on C's prospects, feel free to click here.

Dividend History

Dividend pence per share

Year

Type

Ex Dividend date

Record date

Payment date

Total

Normal*

Special

2014

Final

30/04/2014

02/05/2014

30/05/2014

50.6

24.4

26.2

2013

Interim

11/09/2013

13/09/2013

11/10/2013

48.9

22.5

26.4

2012

Final

01/05/2013

03/05/2013

24/05/2013

45.5

21.4

24.1

2012

Interim

12/09/2012

14/09/2012

12/10/2012

45.1

21.3

23.8

2011

Final

02/05/2012

04/05/2012

01/06/2012

36.5

17.5

19.0

2011

Interim

28/09/2011

30/09/2011

21/10/2011

39.1

19.4

19.7

2010

Final

18/05/2011

20/05/2011

10/06/2011

35.5

17.3

18.2

2010

Interim

06/10/2010

08/10/2010

20/10/2010

32.6

15.1

17.5

2009

Final

10/03/2010

12/03/2010

01/04/2010

29.8

13.7

16.1

2009

Interim

07/10/2009

09/10/2009

21/10/2009

27.7

12.8

14.9

2008

Final

06/05/2009

08/05/2009

27/05/2009

26.5

12.4

14.1

2008

Interim

27/08/2008

29/08/2008

25/09/2008

26.0

12.2

13.8

2007

Final

09/04/2008

11/04/2008

07/05/2008

23.2

11.6

11.6

2007

Interim

19/09/2007

21/09/2007

17/10/2007

20.6

10.3

10.3

2006

Final

18/04/2007

20/04/2007

24/05/2007

24.0

9.5

14.5

2006

Interim

20/09/2006

22/09/2006

18/10/2006

12.1

8.4

3.7

2005

Final

19/04/2006

21/04/2006

25/05/2006

14.9

7.8

7.1

2005

Interim

14/10/2005

16/10/2005

05/10/2005

9.7

6.8

2.9

2004

Final

27/04/2005

29/04/2005

25/05/2005

9.3

3.1

6.2

Info taken from the Admiral Group PLC investor Page.

The sixth transaction revolved around capturing a much higher dividend rate from a very innovative insurance company. The company is Admiral Group PLC (OTCPK:AMIGY), which is one of the largest providers of auto insurance in Great Britain and other parts of the European Union. The company is superbly run by a highly experienced management team that has managed to significantly grow the company over the past ten years. Growing policies under force (revenue) is only half the battle, as you can easily increase sales by under pricing policies which will undoubtedly come back to haunt the company down the road as claims begin to trickle in. AMIGY really stands out in this regard, as they operated with a combined ratio (operating ratio plus loss ratio) of 82.5% for 2013, which was down from 89.4% in 2012. To add further context to the numbers, the UK market operated at a ratio of 105% for 2013. AMIGY continues to show an underwriting profit, which is indicative of its low cost provider status in the market. As its competitors face the reality that they have mispriced policies and are forced to raise their respective prices, I expect AMIGY to show a significant revenue boost, which will undoubtedly flow to the bottom line. For those who are interested in this unique company, I suggest you visit the corporate website which can be found here. To make room for the purchase of AMIGY, Allstate (NYSE:ALL) was culled from the portfolio after registering a roughly 5% gain. ALL is a fine company; however I view AMIGY, with its low cost, agent-free model to be a similar company to GEICO before it grew into the behemoth it is today. I expect to be a long term shareholder and will reinvest the dividends myself once they are received.

The final transaction was an exchange in the healthcare sector. I exited my position in United Healthcare (NYSE:UNH) after a 30% gain to initiate a new position in drug wholesaler AmerisourceBergen (ABC). The move was done with an eye towards a higher overall return, as both companies exhibit similar dividend rates. In the case of UNH, healthcare has become extremely political, with rate hikes becoming increasingly difficult to pass along to consumers. The reality of the sticker shock to consumers combined with the cuts to the popular Medicare advantage plans has led me to alter my thinking on continuing to hold UNH shares, especially after a nice run.

ABC offers a unique way of capitalizing on the growth of consumption of drugs in this country. ABC inked a 10 year deal to become the exclusive supplier of the Walgreens-Allied Boots (WAG) alliance with a geographical reach in the US and in Europe. The alliance will be issued warrants allowing them to purchase up to a 16% stake in ABC. ABC further increased to their list of customers by adding Express Scripts (NASDAQ:ESRX) to the fold as well, which should significantly boost earnings over the course of the next few years. Interestingly, McKesson (NYSE:MCK) announced a purchase of a drug wholesaler in Germany named Celesio shortly after the deal with ABC was announced. The trend to me seems clear that the major drug wholesalers will look to further growth by pursuing overseas opportunities namely in the European Union. I anticipate that over the next five years that ABC may very well double in price as the price and consumption of drugs continues here and in Europe.

In summary, I have made quite an unusual amount of transactions, as I have attempted to shift the portfolio for higher overall returns. I hope the above explanations will help others in making their own decisions when constructing their own portfolios. Thanks for reading, and I look forward to your comments.

Disclosure: I am long T, ORCL, AAPL, IBM, NOC, TGT, AMIGY, CL, KO, PM, CCE, , MAT, , ESV, , SLB, XOM, BP, C, WFC, BK, V, AMGN, GSK, BMY, ABC, DTV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.