As we continue to examine dividend bearing stocks, especially large caps that will be able to ride out the turbulence that is part of the new normal, we pick up the selection from Morgan Housel of the Motley Fool.
He uses Enterprise value over unlevered free cash flow. As he summarizes
- Enterprise value is market capitalization plus total debt and minority interests, minus cash.
- Unlevered free cash flow is free cash flow with interest paid on outstanding debt added back in.
The ratio of these two statistics provides a valuation metric that takes into consideration all providers of capital -- both stockholders and bondholders.
Using this metric, he selected five companies:
Enterprise Value/ Unlevered FCF
|Johnson & Johnson (JNJ)||14.9|
|Eli Lilly (LLY)||9.5|
Source: S&P Capital IQ
These are large companies, some of which are struggling and some are doing well. The question is whether this is an interesting selection going forward. In his article, Morgan gives more commentary on the selections. We will start by measuring it against our dividend bearing ETF portfolio:
|Asset||Fund in this portfolio|
|REAL ESTATE||(ICF) iShares Cohen & Steers Realty Majors|
|FIXED INCOME||(TIP) iShares Barclays TIPS Bond|
|Emerging Market||(VWO) Vanguard Emerging Markets Stock ETF|
|US EQUITY||(DVY) iShares Dow Jones Select Dividend Index|
|US EQUITY||(VIG) Vanguard Dividend Appreciation ETF|
|INTERNATIONAL EQUITY||(IDV) iShares Dow Jones Intl Select Div Idx|
|High Yield Bond||(HYG) iShares iBoxx $ High Yield Corporate Bd|
|INTERNATIONAL BONDS||(EMB) iShares JPMorgan USD Emerg Markets Bond|
- 5 Companies You Can Buy Today -- Total of $10K invested equally in each stock
- Retirement Income ETFs Tactical Asset Allocation Moderate -- Above funds using TAA (40% fixed income, 30% for each of the top two asset classes)
- Retirement Income ETFs Strategic Asset Allocation Moderate -- Above funds using SAA (40% fixed income, 12% for each of the five asset classes -- funds selected based on price momentum)
Portfolio Performance Comparison
|Portfolio/Fund Name||1Yr AR||1Yr Sharpe||3Yr AR||3Yr Sharpe||5Yr AR||5Yr Sharpe|
|Retirement Income ETFs Tactical Asset Allocation Moderate||2%||9%||10%||72%||8%||55%|
|Retirement Income ETFs Strategic Asset Allocation Moderate||1%||6%||15%||98%||2%||7%|
|5 Companies You Can Buy Today||-15%||-60%||10%||42%||0%||-2%|
This is not a very appealing selection. We know that HPQ has been in the wars and that drags down the portfolio. When looking for stocks that are value based, to a certain extent, you have to not look at the past. However, I think there are better alternatives where there has been steady progress.
Three-Month Chart One-Year Chart Three-Year Chart Five-Year Chart
As I look over the longer-time horizon, this is a portfolio that has tracked the buy and hold ETF portfolio but has had some bumps along the way. Those who are more knowledgeable about the individual companies may be convinced that there is a better future ahead. However, for me, I would pass and come back in a year's time.
Disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.