We continue to investigate equities that are being recommended to us in the light of the turbulent times we are facing. Rex Moore picks up Jeremy Siegel's book, The Future for Investors, which focuses on his all-important "basic principle of investor return": "The long-term return on a stock depends not on the actual growth of its earnings, but on the difference between its actual earnings growth and the growth that investors expected."
Building on this, Rex set up a filter that searched for companies that have a reasonable chance of exceeding expectations over the next decade and screened based on the consistency, valuation, and dividend growth Siegel highlighted. Specifically, these companies:
- Beat EPS estimates for fiscal 2010 (and 2011, if reported). This is as far back as my screening data goes.
- Have an annualized EPS growth rate of at least 5% over the last 10 years.
- Exhibited growth in dividends per share of at least 5% over the last five years.
- Show signs that payout growth can continue, with a payout ratio less than 60% of earnings.
- Have manageable debt, with a debt-to-capital ratio below 60%.
- Have a current P/E below 27 (the current S&P 500 average is 14).
In addition, he required an ROE of 15% or better over the past three years. To show you how tough this requirement is, it cut the list of passing companies down from 162 to 44.
His highlighted 10 names that passed the screen, sorted by dividend yield:
Market cap (in millions)
EPS Growth (10-year CAGR)
|Raytheon (NYSE: RTN)||$13,968||13%||8.4||4.4%|
|Petroleo Brasileiro (NYSE: PBR)||$133,716||11%||6.3||4.4%|
|DuPont (NYSE: DD)||$35,892||13%||15.0||4.3%|
|United Parcel Service (NYSE: UPS)||$61,025||6%||16.6||3.3%|
|Diageo (NYSE : DEO)||$46,397||14%||20.5||3.3%|
Microsoft (NASDAQ: MSFT) |
|ExxonMobil (NYSE: XOM)||$345,940||11%||8.9||2.6%|
|Schlumberger (NYSE: SLB)||$77,886||22%||22.9||1.7%|
|Joy Global (Nasdaq: JOYG)||$6,357||26%||12.1||1.2%|
|PotashCorp (NYSE: POT)||$35,740||31%||17.8||0.7%|
Source: S&P Capital IQ.
This is a well constructed filter that gives names in a diversified set of categories with significant heavyweights included. It will be interesting to compare this with our ETF benchmark of a balanced portfolio of Dividend producing ETFs.
|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)|
- 10 Stocks for the Next 10 Years -- 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/Fund Name||1Yr AR||1Yr Sharpe||3Yr AR||3Yr Sharpe||5Yr AR||5Yr Sharpe|
|Retirement Income ETFs Tactical Asset Allocation Moderate||-4%||-41%||9%||68%||8%||54%|
|10 Stocks for the Next 10 Years||1%||4%||14%||37%||11%||27%|
|Retirement Income ETFs Strategic Asset Allocation Moderate||-2%||-12%||11%||50%||2%||10%|
From the table, we see that this portfolio sits in the middle of the performance band. With only ten stocks in the portfolio, there is additional volatility to be expected as this would only be part of the overall portfolio.
The more detailed analysis and graphs give you a visual view of the volatility.
The graphical data gives me more pause as one sees similar behavior in the two financial crises -- there is strong performance leading up to the turbulence but a lot is given back when the troubles come. This could be an interesting part if this is balanced out with treasuries or something that does well (gold for example) when stress comes.
This is a strong selection for the long term that is worth consideration.
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.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.