Dividend Growth Portfolio Reality Check, Part 2

Includes: ABT, EXC, KO, PM, TOT
by: Matt Cilderman

Understanding Literature Pays Dividends

In my previous article, we talked about lessons that investors can learn from "Animal Farm" by George Orwell and we performed a "reality check" on five of the stocks in my portfolio.

I would like to continue with lessons that can be learned from great works of literature. In this article, we will use the poem, If by Rudyard Kipling. The speaker in the poem is a father who is giving advice to his son about how to become a man. In short, he encourages the son to find balance in his life, to be virtuous and wise.

If you can trust yourself when all men doubt you,

But make allowance for their doubting too;

In order to buy a stock, someone has to be selling and in order to buy at a good value, this often includes a fair amount of selling. As investors, we need to be confident but realistic about potential negative outcomes. So, without further ado, this is my "reality check" of five more stocks in my portfolio.

Phillip Morris International Inc. (NYSE:PM)

Bull: Phillip Morris is one of my high-conviction holdings; the company keeps growing earnings, raising the dividend, and the stock price keeps shooting higher. I recently read a rather good but long Instablog post on the history of the Chinese cigarette market. I believe this bodes well for PM's future in China.

  • P/E 17.5
  • 5 yr. P/E N/A*
  • P/FCF: 30.08
  • Yield: 3.64
  • 5yr. DGR: N/A*
  • Payout Ratio: 58.15

Bear: Currently, one of the most important challenges that the company faces is the plain packaging fight in Australia, and its future implications. Two other problems that the company has been handling relatively well are the counterfeiting of its products and regulations/declining profits in Europe. In regards to the future of the company: It is inevitable that as countries develop, they will follow in the footsteps of the more advanced nations and try to find ways to reduce smoking due to the cost of healthcare. The question remains whether the company can keep out in front of the changes and continue to find areas of growth.

Sentiment: I am comfortable with my current position and weighting in my portfolio; however, I believe in this company for the mid-term (five years) and might add on a significant pullback.

Exelon Corp. (NYSE:EXC)

Bull/Bear: In a recent article here on SA, Anthony Grossi did a great job of summing up the positives and negatives for the company. Also, while the company does pay a hefty dividend, it has not been increased in a few years.

  • P/E 10.4
  • 5 yr. P/E 13.6
  • P/FCF: -26.8
  • Yield: 5.4%
  • 5yr. DGR: 2.7%
  • Payout Ratio: 69.9%

Sentiment: Hold

Total S.A. (NYSE:TOT)

Bull: Total continues to be mispriced over the problems that are occurring in Europe; however, a large part of its resources and revenue come from outside Europe.

  • P/E 7.9
  • 5 yr. P/E 9.2
  • P/FCF: -23.6
  • Yield: 5.47%
  • 5yr. DGR: 9%
  • Payout Ratio: 41.7

Bear: If you compare its P/E to the five-year P/E, the company may not be as cheap as it seems. Also, while the company pays a nice dividend, it is still subject to a 22% withholding tax. The French government has also interfered in its business before and I believe that the upcoming elections will play a big part in the future of the company.

Sentiment: Hold

Abbott Labs (NYSE:ABT)

Bull/Bear: I have to admit that I have had a hard time listing information that was solely bullish or bearish. I think this reflects my ambivalence about the future split of the company. Initially, when I heard about the split, I was disappointed; Abbott has been a dependable, low beta company with a great record of increasing its dividend payments ( five-year DGR of over 10%). While I am bothered by how this will increase the risk of my overall portfolio, the market seems to like the news and has given me a nice gain. Please note that I did not include the usual metrics because of the aforementioned split.

After the split, diversified medical products company will retain the Abbott name and the other, as yet unnamed part, will be the pharmaceutical company. The diversified medical products company seems to be the more stable of the two and should benefit from the recent FDA approval of its FreeStyle InsuLinx Blood Glucose Monitoring System. While the pharmaceutical company benefits from Humira, unless it can continue to find more uses for it, the patent will expire soon and this is a major worry for that company.

Sentiment: I am going to wait and see how the split unfolds; however, if the market bids the stock up to $65 before then, I will consider taking my profit off the table and holding on with the rest.

The Coca-Cola Company (NYSE:KO)

Bull: Coca-Cola is a great, low beta, core holding that has raised dividends for 50 years. Its most recent increase was 8.5%. This stock also has the Warren Buffett seal of approval and is one of his highest conviction holdings.

  • P/E 18.85 yr. P/E 18.7
  • P/FCF: 69.79
  • Yield: 2.93%
  • 5yr. DGR: 8.7%
  • Payout Ratio: 49.97%

Bear: The growth is supposed to be coming from overseas; I think that the earnings may take a hit in the next few quarters due to a slowdown in China and outright recession in Europe. Also, as you can see, the five-year DGR is only 8.7% and I will be keeping an eye out to see if it trends downward.

Sentiment: Right now I am holding, and if my expected slowdown does occur, I will be ready to buy.


In closing, let me leave you with a few more lines from the poem:

If you can dream - and not make dreams your master;

If you can think - and not make thoughts your aim;

If you can meet with Triumph and Disaster

And treat those two impostors just the same;

In the long term, whether the market soars (triumph) or plummets (disaster), real life is found somewhere in the middle (reversion to the mean), and an intelligent investor keeps his/her head and buys during disaster. Additionally, as we have observed over the last two articles, a successful investor is not afraid to dream, but keeps firmly in touch with reality.

Sources: Data used from close of Market on 3/09/12, acquired from Finviz, Morningstar and Seeking Alpha.

*Note that PM has not existed five full years.

Disclosure: I am long KO, TOT, PM, ABT, EXC.

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