March To Freedom Fund: Adding Lockheed Martin

|
Includes: AAPL, ABBV, ABT, AFL, BA, CMI, COST, CSCO, CVS, CVX, D, DG, DIS, GIS, HON, JNJ, JPM, KO, LMT, MA, MKC, MMM, MO, MSFT, NKE, O, PEP, PM, QCOM, SBUX, SO, SYK, T, TGT, V, VTR, VZ, XOM
by: The Dividend Bro
Summary

The March to Freedom Fund is up nearly 9%, slightly behind that of the S&P 500.

Our top and bottom-performing stocks continue to be nearly the same as they have been all year.

We added to our Lockheed Martin holding.

August dividend income is up more than 50% from last year.

The calendar has flipped to September, so it's time to look back at how the March to Freed Fund performed during the month of August. Including dividends, our total return for 2018 is 8.98%. This trails the performance of the S&P 500, which has a total return of 9.94% for the year. After catching and passing the index in July, we are now slightly behind the market in yearly gains. As always, I am more concerned with dividends and dividend growth than total returns as this portfolio will fund retirement for my wife and I in twenty years or so. Our portfolio has a current yield of 2.64%, which continues to easily top the S&P 500's yield (1.76%), but trails the 10-year Treasury Bond ( 2.86%).

Top and Bottom Performers

Listed below are the top performing stocks year to date in the March to Freedom Fund.

Stock

Year to Date Performance

Mastercard (MA)

42.42%

Apple (AAPL)

34.81%

Target (TGT)

34.10%

Nike (NKE)

31.41%

Microsoft (MSFT)

31.32%

Normally, I use this space to discuss the top and bottom performers in our portfolio, but the song remains the same for Mastercard, Target, Nike, and Microsoft. These four stocks have been among our best performers all year, and Microsoft is now the largest position in the March to Freedom Fund. I've covered these names in previous updates, so instead of repeating myself regarding these stocks, I've chosen to examine the lone addition to our top performers as well as some other stocks in our portfolio that have had sizable gains in 2018.

Before getting to those names, I want to discuss Target's second quarter earnings results. For some time, Target's company and stock seemed stuck in the doldrums, unable to find their way to success. Several years ago, the company was hacked, and some forty million customers had their credit card data stolen. This weighed on the stock, as did the continued rise in online shopping thanks to the presence of Amazon (AMZN) and Walmart's (WMT) purchase of fast growing Jet.com led many investors to shun Target as an investment. Over the last five years, Target's stock price has climbed more than 38%. But more than 34% of that gain has occurred since the start of this year. Outside of a decent dividend yield, investors didn't see much upside in owning the retailer.

After second quarter earnings, that perception should have changed. Traffic grew 6.4% during the quarter, the best result since the company began reporting this metric in 2008. Comparable same store sales grew 6.5%, the company's highest mark in thirteen years. Digital sales increased more than 40%. The second quarter of 2017 saw this category improve 32% year over year, so digital sales continue to offer high growth levels for Target. Earnings per share in the quarter grew almost 20% to $1.47. Revenue increased nearly 7% to $17.55 billion. With results like these, it's no wonder that Target hit an all-time high of $88 the day of the release. We added to Target at the end of June at ~$76, because I thought that the company was turning the corner and expected earnings to be outstanding. On a pullback, I'd entertain the thought of adding more.

Apple was the lone addition to our top performer's list. Apple reported third quarter earnings at the end of July. The company earned $2.34 per share, $0.16 above estimates and a 40% improvement from the same time last year. Revenue grew 17.4% to $53.3 billion, $870 million above estimates. The company shipped forty-one million iPhones during the quarter, which was slightly below estimates and improved less than 1% from the same time in the previous year. With 56% of sales in the quarter, a miss on iPhone shipments in year's past might have sent the stock lower. Instead, Apple now has a trillion-dollar valuation, making it the first publicly traded U.S. company to reach this milestone.

The reason shares have gained nearly 20% since earnings were released is that the company saw the average selling price of its iPhones increase 20% from Q3 2017. iPhone sales were up in all fifteen of Apple's largest markets, including 19% growth in China. In addition, Services, which include the App Store and Apple Pay, increased revenue 30% to $9.5 billion. The company's other products also impressed. 60% of the company's Macs that were shipped in the quarter were to people who had never bought one before. Apple's iPad now controls 60% of the table market in the U.S., and the company's Wearable products grew sales by almost 40%. We added Apple at the end of 2017 at $169. I would like to own more of Apple, but I will be waiting for a lower price.

One company that isn't in our top five performers but has had a nice year is Boeing (BA). After soaring 89% in 2017, shares of Boeing are up a respectable 16.24% in 2018. Boeing's second quarter earnings results, which were released on July 25th, were very good. EPS of $3.33 topped estimates by $0.06 and grew 31% from the prior year. Revenue increased more than 5% to $24.26 billion, topping estimates by $240 million. The company delivered 194 commercial airplanes, a 6% increase from the prior year.

What I've really liked about Boeing is the potential for growth in the out years. The company expects that the airline industry will need 43,000 new aircraft over the next twenty years, which would be worth almost $3 trillion dollars. To help meet the company's total backlog of nearly 5,900 aircraft, Boeing is ramping up production of its 737s. Boeing is expected to increase production from forty-seven planes per month in 2017 to fifty-two in 2018. Next year, the company expects to increase production to fifty-seven planes per month.

Given that the stock has more than doubled since 2017, some investors might be looking to take profits. While potential trade war rhetoric has likely impacted shares of Boeing due to their large overseas presence, I would consider adding more of the stock to our portfolio on a pullback. Until recently, Boeing had been our largest holding.

Now that we've looked at some of our better performing holdings, let's look at the ones that haven't lived up to expectations. First, here's our bottom five performers.

Stock

Year to Date Performance

AT&T (T)

-17.85%

Altria (MO)

-18.05%

Cummins (CMI)

-19.72%

General Mills (GIS)

-22.40%

Philip Morris (PM)

-26.28%

If you've been following my updates, you know that these five stocks have been our worst performers all year. I've discussed each of these stocks and my feelings as to why they are all down as much as they are in several updates. Of these, I find Cummins to be perhaps the most attractive right now because the company's performance has been hampered by charges related to defective engines. These issues are being addressed, but I feel that investors are blinded by these one-time charges and are missing an opportunity to add a quality company on a relatively cheap valuation.

While not down nearly as much as the above five stocks, Pepsi (PEP) has declined 6.6% in 2018. The company's second quarter earnings, which were released on July 10th, produced solid results. Earnings per share grew 7.3% year over year to $1.61. Revenue increased 2.4% to $16.1 billion. Both totals surpassed analysts' estimates. Organic growth was 2.6% during Q2, with Frito-Lay North America posting revenue growth of 4%. While North American Beverage, Pepsi's largest division, did see sales fall 1%, this is an improvement upon Q2 2017's 6% drop.

Pepsi is a cash generating machine and expects to have $6 billion in free cash flow this year. Management has guided towards a midpoint for 2018 earnings per share of $5.70, 9% above 2017's EPS. Based off of Friday's closing price of $112.01, the stock trades with a forward P/E of 19.7. This is below the company's five-year average P/E of 20.7. The selloff might be due to longtime CEO Indra Nooyi announcing she is stepping down in October. Nooyi has been at the helm of Pepsi for twelve years and has led efforts to diversify the company away from just sugary drinks and snacks. "Better For You" products, those with less than 70 calories from added sugar, make up approximately 45% of sales.

Pepsi has increased its dividend for the past forty-six years and a stock I consider to be a core holding. We've purchased Pepsi on three occasions since the start of 2017. If the stock price continues to decline, I would be happy to add more of the food and beverage company to our portfolio.

Lastly, Johnson & Johnson (JNJ) has seen its shares decline 3.6% since the beginning of the year. When you look at the company's earnings, it is hard to identify why the stock has turned lower. EPS grew 15% to $2.10. Sales increased 10.6% to $20.8 billion. The company beat on both the top and bottom line. Pharmaceuticals grew a robust 20%, with the $40 billion acquisition of Actelion contributing 6.6% of this growth. Immunology pharmaceuticals increased 11% year over year, while oncology showed 42% growth. The Medical Device division grew 3.7%, while Consumer sales inched 0.7% higher from the previous year. Neither division showed lights out growth, but they at least had sales increases.

On July 12th, a jury in Missouri awarded twenty-two women and their families $4.7 billion in damages as they found that Johnson & Johnson's talcum powder contributed to their ovarian cancers. More than 9,000 women have sued Johnson & Johnson saying that the asbestos in the talc powder contributed to cancer. The company is appealing the ruling and has been successful in similar cases. This ruling is likely the cause of Johnson & Johnson's stock being in the red, but perhaps this is an opportunity to add a quality name on recent news. Johnson & Johnson has a dividend growth streak of fifty-five years, one of the longest available to investors. We purchased shares of the company back in April. Even though it is our third largest holding, I would jump at the chance to add more Johnson & Johnson due to the company's diversified business model and dividend growth history.

August Purchases

Our loan purchase for the month occurred on August 30th, when I took my own advice and added to our position in Lockheed Martin (LMT) at $321.23. You can read more about why I chose to add to Lockheed Martin by clicking the link, but I found the company's business performance to be too compelling and dividend growth track record too attractive to pass up.

Here's how I valued Lockheed Martin at the time of purchase. Based off expected earnings per share of $16.95, we bought Lockheed Martin at price to earnings multiple of 19. This is 5.6% above the stock's five-year average P/E of 17.9. CFRA has a one-year price target of $420, which would offer almost 31% of upside potential from our purchase price. CFRA's fair value is $220.70, more than 31% below where we added to our position. Morningstar says fair value is $327, offering upside of 2% above what we paid. Value Engine's one-year price target is $312.76, meaning we overpaid for Lockheed Martin by 2.6%. Value Engine's fair value is $341.54, meaning we got shares at a 6.3% discount to fair value. Averaged out, we paid about what I consider to be fair value for Lockheed Martin. I am willing to pay 5% above fair value for companies with a dividend track record like Lockheed Martin's, so any price under $338 would have qualified the stock for purchase. This was our third purchase of Lockheed Martin since the start of 2017.

I should note that CFRA's fair value is so far below all of my other sources, that I considered excluding that data. Had that been the case, we would've bought Lockheed Martin at a 6.14% discount to my fair value.

Current Positions

After this month's activity, our portfolio now consists of the following 40 companies:

3M (MMM), Abbott Laboratories (ABT), AbbVie (ABBV), Aflac (AFL), Altria, Apple, AT&T, Boeing, Chevron (CVX), Cisco (CSCO), Coca-Cola (KO), Costco (COST), Cummins, CVS Health (CVS), Disney (DIS), Dollar General (DG), Dominion Energy (D), Exxon Mobil (XOM), General Mills, Honeywell International (HON), Johnson & Johnson, JPMorgan Chase (JPM), Lockheed Martin, MasterCard, McCormick & Company (MKC), Microsoft, Nike, PepsiCo, Philip Morris, Procter & Gamble, Qualcomm (QCOM), Realty Income (O), Southern Company (SO), Starbucks (SBUX), Stryker (SYK), Target, Ventas (VTR), Verizon (VZ), V. F. Corp (NYSE:VFC) and Visa (V).

August Dividends

And now for my favorite part. The part where I look back and continue to be in awe of how far our dividends have come since I started keeping much better track of our income in 2014.

Previous July

Year Over Year Increase

Year to Date

Year Over Year Increase

August 2014

285.98%

2014

236.64%

August 2015

119.29%

2015

124.54%

August 2016

108.51%

2016

83.85%

August 2017

51.47%

2017

32.13%

August's dividend income has almost tripled compared to August 2014. By August 2019, I expect that this will become the case. August's 51% year over year dividend increase is the highest year over year gain so far in 2018. Adding once to Verizon and twice to AT&T since last August surely had something to do with that.

Up until last month, we had simply reinvested all of our dividends received. This has helped to purchase new shares which have created more dividends. Now that my wife has stepped back from teaching for the moment, we have elected to take our dividends in cash and make purchases with that capital. Dividends collected helped to pay for our purchase of Lockheed Martin this month.

While September isn't always a favorite for us in the education field, I am looking forward to what our dividend growth looks like. Twenty companies, half of our portfolio, are scheduled to pay out dividends. September will likely be our best month ever for income.

The eleven companies that paid us dividends during the month of August include: AT&T, General Mills, Verizon, CVS Health, MasterCard, AbbVie, Procter & Gamble, Apple, Realty Income, Starbucks, and Abbott Laboratories.

Conclusion

The March to Freedom Fund continues to post solid portfolio growth. The stocks that have led our portfolio higher continue to do so, partially offset by the same cast of characters that have struggled in 2018. No matter the rise or fall of our portfolio value, it is the dividend income that my wife and I are most concerned with. And with the best August ever in the books, we are extremely happy with where we are at currently. Our addition of Lockheed Martin adds more shares of a quality company with an impressive business execution and impressive dividend growth history.

What are your thoughts on us adding Lockheed Martin? How's your portfolio and income stream performing this year? Feel free to leave a comment. If you liked what you read, please consider hitting the "follow" button at the top of the page.

Disclosure: I am/we are long ABBV, AFL, CMI, CVX, GIS, HON, JPM, KO, XOM, MA, MMM, MO, MSFT, PG, PM, QCOM, T, TGT, V, VFC, VTR, AAPL, BA, CSCO, CVS, DIS, JNJ, O, PEP, SBUX, VZ, NKE, LMT, D, COST, ABT, MKC, SO, DG, SYK.

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.