Dividend Growth Portfolio Reality Check, Part I

Includes: BBL, HRS, INTC, PEP, PG
by: Matt Cilderman

Understanding Literature Pays Dividends

Have you ever read Animal Farm by George Orwell? I have to admit, it is one of my favorite books. As I was thinking about it the other day, I realized that a lesson from the book parallels a lesson that is important to investors. In the book, when Napoleon kicks out Snowball and outlaws any other opposing views, the reader can see that the end is near, that the farm will soon spiral out of control. This reminded me that in investing, the minute we "outlaw opposing views," in this case, arguments about the risks associated with our investment, we are in trouble. Too many investors create their own propaganda for their investments and are not realistic about potentially negative outcomes.

Reality Check

So, to that end: This is my "reality check" of 5 stocks in my portfolio. It includes some valuation metrics and a brief explanation of some of the positives and negatives.

BHP Billiton's British-listed ADRs (NYSE:BBL)

Bull: BHP is a large, diversified natural resource company. It allows investors to take part in the commodity bull market, and provides protection against inflation. Additionally, while it may still trade with the other mining companies, roughly 23% of its revenue comes from its oil and gas segment.

  • P/E 7.7
  • 5 yr. P/E 11.9
  • P/FCF: 20.18
  • Yield: 3.35%
  • 5yr. DGR: 33%
  • Payout Ratio: 25.6%

Bear: Although they are well-diversified, they trade based on numbers out of China and this contributes to their volatility. It also must be noted that they recently made two natural gas related purchases that seem to be over-priced and ill-timed. Here is an interesting article I read recently about possible threats to its profitability.

Sentiment/Final Thoughts: I am satisfied with my current average price, but will look to buy more on weakness.

Intel Corporation (NASDAQ:INTC)

Bull: Intel seems to be starting to make progress in the cell phone market and has recently announced new partnerships. It also pays a nice dividend and is still cheap based on the following numbers.

  • P/E 11.2
  • 5 yr. P/E 17.1
  • P/FCF: 13.66
  • Yield: 3.15%
  • 5yr. DGR: 13.3%
  • Payout Ratio: 31.44%

Bear: Questions still linger over whether it can dominate the cell phone market, if the Ultrabooks will be successful, and if all that money it has been pouring into R&D will pay off.

Sentiment/Final Thoughts: Buy on pullbacks.

Procter & Gamble (NYSE:PG)

Bull: P&G is a company that needs no introduction for dividend growth investors, but it is always nice to be reminded that it has increased its dividend for 55 consecutive years. It recently announced a new cost-cutting plan that has been well-received by the market and is an important step to maintaining future dividend payments.

  • P/E 19.6
  • 5 yr. P/E 18.5
  • P/FCF: 51.41
  • Yield: 3.15%
  • 5yr. DGR: 10.4%
  • Payout Ratio: 57%

Bear: P&G currently seems expensive. Additionally, margins are shrinking and they have had to reduce prices to remain competitive. Their most recent dividend increase was only 8.9%, the lowest in some time, and deserves attention to see if it becomes a trend.

Sentiment/Final Thoughts: While I am feeling somewhat cautious about the company's future, it has grown and paid dividends through many years and different market cycles; for me, this is a company that gets the benefit of the doubt. I intend to incrementally add to my position on pullbacks.

Harris Corp (NYSE:HRS)

Bull: Harris Corp, for those of you who are unfamiliar, is a global communications and information-technology company. It recently announced an 18% dividend increase, payable on March 7th. The price has run up quite a bit, but I think the following numbers point to the fact that it is still undervalued.

  • P/E 9.9
  • 5 yr. P/E 14.4
  • P/FCF: 19.24
  • Yield: 2.6%
  • 5yr. DGR: 20.6%
  • Payout Ratio: 24.02%

Bear: So, why is it selling so cheaply right now? Mainly because a large portion of their revenues come from government spending, and governments in developed nations are expected to cut their spending over the next couple of years. Also, management has made some questionable decisions in regard to stock buybacks. Tom Armistead has a great article on the subject.

Sentiment/Final Thoughts: Harris is a non-core, somewhat speculative holding of mine. I took a small position because it was undervalued. I will nibble a little more on a significant pullback, but otherwise, I will wait and see what the future holds.

PepsiCo (NYSE:PEP)

Bull: Pepsi is another dependable company that has been increasing its dividend for 38 years. In addition to its well-known soda and salty snack business, the company has begun executing plans to take advantage of the trend towards healthier drinks and snacks.

  • P/E 15.9
  • 5 yr. P/E 17.8
  • P/FCF: 40.43
  • Yield: 3.25%
  • 5yr. DGR: 12%
  • Payout Ratio: 49.25%

Bear: The 5 yr. DGR doesn't tell the whole story. Other than big increases in 2007 and 2008, Pepsi's dividend growth rate has been slowing rapidly and its most recently announced increase was only 4.3%.

Sentiment/Final Thoughts: Pepsi has managed to navigate many different market environments and still return value to its shareholders. With the recently-announced cost-saving plans, it seems to me that management is trying to remind investors that it still knows what it's doing. Unless a significant pullback occurs, I think there currently are better places to invest.


This is just an example of the periodic "reality check" that I give my portfolio. Dividend Growth Investors: Don't let yourself be brainwashed into thinking that "Buy and Hold" works. Remember: "Buy and Hold" is dead. Long live "Buy and Monitor!"

Sources: Data used from close of Market on 2/24/12, acquired from Finviz, Morningstar and Seeking Alpha.

Disclosure: I am long PG, PEP, HRS, INTC, BBL.

Disclaimer: These are my thoughts/sentiment pertaining to some of the stocks in my portfolio. Do your own due diligence.