March To Freedom Fund November Update

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

The March to Freedom Fund has a total return of nearly 10% for 2018.

While some of our leadership stocks have changed, our laggards remain the same.

We added to our Realty Income and Altria positons in October.

Our dividend income continues to grow at very high rates.

We are now in the home stretch for 2018 and our portfolio has performed quite well this year. The March to Freedom Fund has a total return for the year of 9.63%. As always, this includes just share price appreciation and dividends received, but not the contributions that we’ve made. The S&P 500 has a total return of 5.11% since the beginning of 2018.

We have played catch up to the market for much of the last year, but we’ve recently made up ground on the index. Since I started tracking our portfolio’s performance in 2015, we are up a total of 51%, while the S&P 500 has gained just over 34%.

More important to me is that the dividend yield for the stock portion of our portfolio is 2.67%. Including retirement plans through work, where we are allowed to hold just mutual funds and not stocks, our yield is 2.31%. In either case, the yield is higher than that of the S&P 500 ( 1.9%). Through the end of November, the companies in our portfolio have increased their dividend an average of 10.7% this year. By weight, that average climbs to almost 12%.

Top and Bottom Performers

The last time I updated our portfolio’s performance here on Seeking Alpha was at the end of August. At that time, our top performing positons were in order: MasterCard (MA), Apple (AAPL), Target (TGT), Nike (NKE) and Microsoft (MSFT). As of the end of November, our top performers are:

Stock

Year to Date Performance

McCormick & Company (MKC)

47.19%

MasterCard

32.84%

Abbott Laboratories (ABT)

29.75%

Microsoft

29.64%

Cisco Systems (CSCO)

24.99%

Oh, how things have changed in just a few months. While all three stocks are still positive for the year, Apple, Target and Nike has fallen from our top performers list. In their place, three stocks that have done well all year have moved into our lead positions.

Higher by more than 47%, McCormick is far and away our best performing position through the end of November. The company released financial results for the third quarter on September 27th. The company produced $1.28 in earnings-per-share (EPS), an improvement of more than 14% from the third quarter of last year and $0.01 above what analysts were looking for. Revenue grew 13.4% to $1.4 billion, a $10 million miss of estimates.

Driving this growth was McCormick’s much disliked (at the time) acquisition of RB Foods, which brought the company Frank Red Hot, French’s Mustard and other condiments. We actually purchased the stock right after the sell off on July 20 th, 2017 at $92.37. Through the first three quarters of 2018, RB Foods has added at least 10% to sales every quarter. It looks like the market undervalued the addition of RB Foods. McCormick makes up a little more than 1.7% of our portfolio. We added to the position on March 28th at $106.05. We will be looking to add to the name as we head into 2019.

MasterCard was just one of two of our top performers from August to remain on our leader board this month. Though down slightly since our last update, the electronic payment processer has returned almost 33% for the year. MasterCard reported third quarter results on October 30th. The company earned $1.78 per share, $0.10 above estimates and growing 33% from the same time period of 2017. Revenue increased almost 15% to $3.9 billion, $40 million higher than the average estimate.

MasterCard’s transaction volume grew 12%, but that number increases to 16% if you remove Venezuela. Gross dollar volumes climbed 13% to $1.5 trillion. Domestic dollar volumes improved 9% while international volumes were higher by 15%. I should note that tax reform passed at the end of 2017 forced companies to book revenue and expenses sooner than previously required. This added 3% to the company’s sales increase. Gross margins improved more than 200 basis points. MasterCard clocks in at 2.63% of our portfolio, making the stock our tenth largest holding. Despite the gains over the past few years, I don’t find MasterCard to be all that expensive currently, so I wouldn’t mind adding more of the stock at some point in 2019.

Abbott Laboratories, a company whose stock I like very much, released financial results for the third quarter on October 17th. Abbott Laboratories earned $0.75 per share, in line with estimates, but showing a 13.6% increase from the previous year. Revenue grew more than 12% to $7.7 billion, above estimates by $10 million. Organic sales growth was 7.8% during Q3.

Abbott Laboratories’ purchase of St. Jude helped the diagnostic division see 42.6% sales growth. On a comparable basis, sales were up 7.5%. The medical device segment posted 10% revenue growth. Abbott Laboratories’ FreeStyle Libre, which allows patients to measure glucose levels without the use of finger sticks, was a leading contributor to growth. The FDA recently approved a 14-day sensor, making FreeStyle Libre the longest lasting wearable glucose sensor in the market.

Abbott Laboratories was one of the stocks we bought after we sold General Electric (GE) back in July of 2017. Given GE’s price decline and dividend cuts, it looks like we made the right choice going with Abbott Laboratories. We’ve bought the shares of Abbot Laboratories twice: first on July 24th, 2017 at $50.91 and then again on August 14th, 2017 and $48.97. The position makes up just 1.8% of our portfolio so I would welcome an opportunity to add to Abbott Laboratories at some point during the year.

Microsoft was the only other stock from our August update to remain a top performer. The company reported results for the first quarter of fiscal 2019 on October 24th. EPS came in at $1.14, topping estimates by $0.20 and growing 36% from the previous year. Revenue was up 18.6% to more than $29 billion.

Sales were up in almost every segment of Microsoft. The company’s cloud business increased 24%. Sales for Office products improved 16% while Azure’s revenues were up 76%. LinkedIn, which I wrote in this article for Sure Dividend could make Microsoft a social media company, saw sales increase 33% year-over-year. Making up 4.82% of our portfolio, Microsoft is our largest stock positon, a title it has traded with Boeing (BA) throughout this year. Due to its size, we are unlikely to add to the position as there are many smaller holdings that will have our focus in the upcoming year.

Cisco Systems released financial results for the first quarter of fiscal 2019 on November 14th. Cisco earned $0.75 per share. This was $0.03 above the average estimate and represented 23% growth from the previous year. Revenues grew almost 8% to $13.1 billion, $240 higher than what was expected.

Most divisions within Cisco contributed growth, including product revenue, which grew by 9%. Applications were higher by 18% while service sales increased 3%. U.S. sales were up 5%, but it was international sales that were the real star during the quarter. The Europe/Middle East/Africa region had 11% growth while Asia Pacific/Japan/China geographies were higher by 12%. Cash flow from operations climbed by more than 20% to nearly $4 billion. The one area where Cisco struggled was a 9% decrease in deferred revenue. This total came to $16.8 billion. Cisco ended November representing just under 2% of our total portfolio. The stock is our twenty-first largest holding, so I am looking to add to the stock at some point during the next year.

While there has been some movement at the top of our leaderboard, our underperformers remain exactly the same. The only difference is their order.

Stock

Year to Date Performance

Cummins (CMI)

-14.48%

Philip Morris (PM)

-18.1%

AT&T (T)

-19.65%

Altria (MO)

-23.22%

General Mills (GIS)

-28.64%

Cummins reported third quarter financial results on October 30th. EPS during the quarter was $4.05 per share, $0.28 higher than what was expected. This was a nearly 50% increase from the third quarter of 2017. Revenue was up more than 12% to $6 billion, slightly ($10 million) below estimates. Cummins has now produced six quarters in a row of at least 12% revenue growth.

Each of the Cummins’ divisions showed growth in Q3, led by the Engine division, which saw higher demand for truck engines in North America. Sales for this division grew 17%. The distribution division improved sales by 10% while Components grew 14% due to higher volumes. Sales for Power Systems were up by 5%.

While the quarterly sales and earnings were solid, Cummins has been hit by two issues this year. The first was a voluntary recall of nearly 500,000 engines that were discovered to produce excess engine emissions. This was the largest recall for heavy duty truck in history and resulted in Cummins having to take a $187 million charge in the first quarter and a $181 million charge in the second quarter in order to address the problem. Charges could total almost $500 billion for the year.

The second issue plaguing the company is a trade war with China. As China is one of Cummins’ key markets, a trade war could prove very costly. Cummins said on the Q3 conference call that tariffs were expected to cost the company $80 million this year, though that was down from $100 million previously. With the U.S. and China calling a truce on tariffs, these costs could be reduced. We own shares of Cummins through shareowneronline.com. This is not meant to promote this service, just a full disclosure for the reader.

Philip Morris is our fourth worst performing holding of the year, though the stock has recovered more than 8% since our August update. The international producer and marketer of the Marlboro Brand reported third quarter financial results on October 18th. The company earned $1.44, beating expectations by $0.16 and climbing 13%. Revenues were up just about a half percent, but that was due to a stronger dollar. In constant currency, revenues were up more than 3%.

Philip Morris saw just a 1.7% drop in cigarette shipment volumes, beating the industry average. Heated product market share improved 0.5%. The company did have to lower guidance by a few pennies due to currency exchange rates.

AT&T, a stock we have bought twice since last December, is next up on our underperforming leader board. The stock, which has dropped nearly 20% since the start of 2018, released results for the third quarter on October 24th. The company earned $0.90 per share, $0.04 below the market’s expectation, but did grow 21.6% year-over-year.

Thanks to the company’s Time Warner acquisition, AT&T’s revenues were up 15% to $45.7 billion. Time Warner added a nickel to EPS. While the Entertainment Group and Latin America were headwinds for the company, AT&T did see free cash flow improve 16% to $6.5 billion. AT&T shares declined after the release, but I like the company’s cash flow improvement as well as the contribution that Time Warner made to both earnings and revenues. I consider AT&T to be a core position and am willing to purchase this 6%+ yielding stock anytime I think it is on sale. AT&T is our sixth largest holding and trails only the next name on our list in terms of generated income for our portfolio.

Whereas shares of Philip Morris have recovered somewhat in the three months, Altria has seen a 5% decline in price since our last update. Altria released financial results for the third quarter on October 25th. The company earned $1.08 per share, $0.02 above estimates and 20% growth from Q3 2017. Revenue grew 3.3% to $5.3 billion, topping estimates by $80 million.

Cigarette shipment volumes dropped 5% for Altria, above the average industry decline of 4.5%. The company recently announced that it will take a stake in electronic cigarette maker Juul Labs in an effort to adjust its business as smoking rates in the U.S decline.

Investors have been rewarded with two dividend increases this year from Altria. Shareholders were given a 6% increase for the payment made this past January. Altria then kept to its usual schedule when the company increased its dividend by 14.3% for the October payment. Altria is our fourth largest position. The position is also our largest source of dividend income. I consider the position to be a core holding and add when I think it represents a good value. We added to the name back in October (see the section below for more information).

General Mills retakes the top (low?) spot on our underperformers list, with a decline of almost 29% this year. The packaged foods company released results for the first quarter of fiscal 2019 on September 18th. The company earned $0.71 per share, $0.07 above estimates and a gain of X% from the prior year. Revenues were higher by 8.5% to $4.1 billion.

General Mills $8 billion purchase of Blue Buffalo contributed mightily to results. This plus a lower tax rate (22.6% vs 30.4%) were the reasons for the beat on the top and bottom lines. Investors were not impressed and sent the stock lower by 8%. General Mills has increased its dividend for nearly 120 consecutive years. The dividend has been raised through wars, depressions and many different economic cycles. This factor makes the company attractive to us. We own General Mills through shareowneronline.com.

Recent Purchases

At the beginning of the year, I had an article published here on Seeking Alpha detailing five stocks that I wanted to purchase at some point in 2018. We’ve managed to acquire more of most of these stocks at various points during the year. On October 18 th, we crossed another stock off of our watch list when we added more shares of Realty Income (O) at the price of $57.99.

Value Line gives the company a 2 for safety and an A for financial strength. I am looking for at least a 2 for safety and at least a B++ for financial strength as this is evidence that the company is on sound financial footing.

Based off of expected funds from operation of $3.19 for the year, Realty Income traded with a P/FFO multiple of 18.2 when we added shares. This was 2.9% below the five-year average multiple of 18.7. Morningstar, Value Engine and CFRA all had a one-year price target of $60 for Realty Income, giving shares 3.5% upside potential from our purchase price. Value Engine’s fair value was $51.92 while CFRA’s fair value was $53.49, a 10.5% and 7.8% premium to their respective fair values at the time of our purchase.

Take the average of these numbers and I found shares of Reality income to be 0.70% overvalued when we added to our position. With twenty-five years of dividend growth, I am content to add shares of this Dividend Aristocrat even when it is trading above what I see as fair value.

Altria was our second purchase of the month. We added to our position on October 23 rd at $62.06. Value Line gives the company a 2 for safety and a B+ for financial strength. Their financial strength rating is one notch below what I would like to see in a company, but this is not a deal breaker if the stock is trading below fair value.

Based off of expected earnings for 2018, Altria’s stock had a P/E of 15.5 at the time of purchase, a 24.4% discount to the stock’s five-year average P/E of 19.3. CFRA had a one-year price target of $65, which, if reached, would result in a 4.8% gain from our purchase price. CFRA’s fair value is $68.60, meaning shares were 10.5% undervalued at the time of purchase. Morningstar estimated fair value to be $64 per share. This means our purchase price was a 3.1% discount to their fair value. Value Engine has a one-year price target of $57.50, meaning our purchase price was 7.4% above their price target. Their fair value was $70.10, 13% higher from where we purchased our shares of Altria.

Average these numbers out and I found Altria to be 8.07% undervalued at the time of purchase. With forty-nine years of dividend growth, I was willing to pay 5% over fair value to acquire Altria, but I was happy to add to our position at the price we did.

Current Positions

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

3M (MMM), Abbott Laboratories, AbbVie (ABBV), Aflac (AFL), Altria, Apple, AT&T, Boeing, Chevron (CVX), Cisco, 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 (JNJ), JPMorgan Chase (JPM), Lockheed Martin (LMT), MasterCard, McCormick & Company, Microsoft, Nike, PepsiCo (PEP), Philip Morris, Procter & Gamble (PG), Qualcomm (QCOM), Realty Income, Southern Company (SO), Starbucks (SBUX), Stryker (SYK), Target, Ventas (VTR), Verizon (VZ), V. F. Corp (VFC) and Visa (V).

Dividends Received

As stated previously, our goal is to have the dividends that our portfolio produces pay for our expenses in retirement. Therefore, we need our dividend income to grow over time. The following tables illustrate just how our income has grown since 2014.

Month / Year

Month Over Month Increase

Year to Date

Year Over Year Increase

October 2014

142.94%

2014

237.74%

October 2015

87.29%

2015

126.45%

October 2016

67.79%

2016

81.55%

October 2017

55.16%

2017

32.94%

This month saw solid increases in income compared to the four previous months. We’ve more than doubled our October 2014 income and are closing in on doing the same for October 2015.

Even so, theses totals are actually among the lowest month-over-month numbers that we have seen this year. That is because several of the companies that pay us dividends this month offer lower yields. I am not worried about lower yields, because I want to own quality companies. When it comes to quality, I don’t mind a low yield of a Stryker or McCormick, as I want to own the best of breed in each sector. The important thing is that each new month has seen an increase in dividend income from the prior year. We are able to do this due to our commitment to hold the shares we buy for the long term as well as invest in companies that increase their payments each year.

Year-to-date through the end of October, our portfolio continued to outperform my wildest expectations. Income produced has increased nearly 240% since 2014.

Companies that paid us dividends in October include: Coca-Cola, Nike, Altria, Philip Morris, Realty Income, McCormick & Company, Cisco, JPMorgan, Cisco, Ventas and Stryker.

Month / Year

Month Over Month Increase

Year to Date

Year Over Year Increase

Nov 2014

243.93%

2014

238.26%

Nov 2015

88.04%

2015

122.53%

Nov 2016

96.88%

2016

82.78%

Nov 2017

42.01%

2017

33.68%

As with October, November’s income continues to impress. Month-over-month increases are slightly better than October’s, with the gain from 2014 really standing out. That is because many of the companies that make payments in November, such as Verizon, were not in our portfolio in 2014.

You’ll notice from the month-over-month percentage changes were higher for November 2016 than they were for November 2015. We saw a slight decrease in dividends received in November 2016 compared to the previous year solely to Starbucks changing their dividend payment schedule from November to December in 2016.

As with October, year-over-year gains have been strong, with a nearly 240% uptick in dividends from 2014. We’ve turned a modest income into a cash producing machine in a few short years. All of this was accomplished by investing in what I find to be excellent companies with long track records of growing their dividends. I look forward to what this growth looks like when we are ready to retire in two decades or so.

Companies that paid us dividends during November include: AT&T, General Mills, Verizon, CVS Health, MasterCard, AbbVie, Proctor & Gamble, Apple, Realty Income and Abbott Laboratories.

Conclusion

The March to Freedom Fund has performed quite well in a volatile year, outperforming the S&P 500 in total return. Our dividend yield is also above that of the index as we have spent a lot of time and capital over the last year or so purchasing higher yielding companies. Our dividend growth on both a month-over-month and year-over-year basis have been remarkable to behold. This shows that investing for income can be successful if investors purchase quality companies at what they consider to be good value.

How has your portfolio perform this year? What do you think of our purchases of Realty Income and Altria? 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.