Compounders And Dividends: November 2022 Watch List Update

Summary

• Since my original watch list article in September 2022, I have purchased three companies, two of which were on my September 2022 watch list.
• I removed one company from my watch list and added 13 companies.
• I discuss the companies I'm very interested in buying for the remained of 2022.

marekuliasz

I decided it was time to write another “Watch List” article since things have changed over the last two months. As noted in my original watch list post, the list of companies I keep constantly changes. While some companies on my watchlist may have been removed due to purchases in my portfolio (i.e., Union Pacific (UNP) and Blackrock (BLK)) others leave because I’m no longer interested in purchasing the company (i.e. Liberty Broadband (LBRDA)). In general, removing companies is quite rare. I try to keep my watchlist tight and focused on really high quality companies. When starting from a strong set of companies, there typically isn’t any fundamental reason to remove a company, all blue chips are worth owning at the right price.

To start, here are the companies that moved from my watchlist to my active portfolio:

Union Pacific

As noted here and here, shares of UNP were purchased in October and November 2022. Future purchases are almost guaranteed. I’ve waxed poetic about my love of railroads and I was thrilled to initiate and begin to build a position in UNP. I finally feel I own the best three public rails in UNP, Canadian National (CNI) and Canadian Pacific (CP). Even with the rally I’ll likely continue to add shares as I’m trying to focus on 2%+ dividend yielders through the end of the year.

Blackrock

As noted here, I finally picked up shares of BLK when they were yielding close to 3.3%. While I would have liked to purchase shares when they were closer to a 3.5% yield, the rally since has left me content with my purchase. I wasn’t expecting to be sitting on such large unrealized gains within a month of my purchase, so this has been a nice test of my resolve to own long-term compounders. I don’t foresee myself adding with my monthly savings/sales anytime soon, but I imagine I may allocate some dividend reinvestments if the yield ever creeps up again. As tempting as it may be to quickly lock in some gains and allocate to higher yielders, I don’t want to interrupt the compounding process. Your portfolio tends to appreciate when you sit on your hands.

Verizon Communications (VZ)

VZ was not on my published watchlist in September 2022, but it did make it in October 2022 when it was yielding 7%+. I’ve done enough research on AT&T (T) to know two things: 1) I will never own T as long as the current management team is in place and 2) I’d rather own VZ. When VZ started to approach a decade low, I quickly got up to speed (with some help from one of my favorite writers here, Leo Nelissen) and used VZ to replace a large portion of the income I lost from my ETF sale. I don’t anticipate adding to VZ again unless the price re-approaches depressed levels. There is a good chance I may use the dividends from my high yielders to start another high yield position at some point. I get nervous when the high yielders in my portfolio start contributing a large portion of my income. It opens me up to concentration risk in my dividends. I think I’ll try to eventually own a basket of 5-10 high yielders which will give me plenty of diversification of yield.

Over the past two months, I’ve removed one company from my watchlist:

Liberty Broadband

I actually discussed an interest in LBRDA in my September 2022 Portfolio Update and noted how the recent bottoming of both LBRDA and CHTR made the companies very interesting to me. I noted the following:

• It's getting to the point where I may have to add Charter (CHTR) or Liberty Broadband (which gives you something close to a 20% discount on CHTR) to the portfolio.

CHTR and LBRDA were around $328 and $80 per share at the time of that writing. While both have rallied (along with everything else in the market) I decided to remove LBRDA from my watchlist and add CHTR. I still believe in the underlying company, CHTR, but I have begun to lose faith in the Liberty management structure. Andrew Walker from Yet Another Value Blog had a great post with his disappointment in LBRDA and the other Liberty entities given their questionable capital allocation decisions over the past few years. I’d rather outright own CHTR than arbitrage the discount through LBRDA. While others may feel very comfortable with the structure, I’m fine looking at exposure through the underlying asset. That’s relatively consistent with how I look at other securities. I’d rather own physical gold or bitcoin than a gold or bitcoin ETF (that’s not an endorsement of either asset). I’d rather own a hand selected portfolio of dividend growth stocks than SCHD or VIG. The only place I diverge is owning oil and gas stock over physical oil and gas (for hopefully obvious reasons).

Watchlist Additions

Thanks to the wonderful commenters and writers on Seeking Alpha, along with some of my own individual research, I’ve added a number of companies to my watchlist from their recommendations. Here are the notable additions:

• Advance Auto Parts (AAP)

• Aflac Incorporated (AFL)

• Factset Research Systems (FDS)

• Medtronic PLC (MDT)

• MSCI Inc. (MSCI)

• Dominion Energy (D)

• Digital Realty Trust (DLR)

• Pinnacle West (PNW)

• Simon Property Group (SPG)

• Whirlpool Corporation (WHG)

• Charter Communications

• Novartis (NVS)

• Westinghouse Air Brake (WAB)

As discussed in my October 2022 Portfolio Update, I’m prioritizing companies yielding 2.3-2.5%+ for the rest of the year to help increase my portfolio’s yield. Because of that, there are a few companies that are “higher” on the watchlist than others. I’ve long been interested in the MLPs (MMP and EPD) and will likely open a starter position before the end of the year in one or both.

AAP’s recent earnings sell off has added it to my watchlist. I’ve been a long admirer of AZO and ORLY. They’re incredible counter cyclical names that do well when times are tough and have been aggressive purchasers of shares. AZO and ORLY are clearly the superior companies (as I’m typing this, I’m convincing myself to remove AAP from my watchlist) but AAP has decided to return capital to shareholders via dividends as opposed to the share repurchasing method of its peers. While AAP is not as strong as the others in the industry, the 3%+ dividend is quite interesting with two strong dividend raises showcasing management’s commitment to returning capital to shareholders. I’m not sure I’ll buy shares, but it’s worth more research.

The last companies I’ll touch on are some healthcare companies I’ve long admired, MDT, Bristol-Myers Squib (BMY), and Merck & Co. (MRK)

I almost pulled the trigger on BMY and MRK a month ago when both were yielding over 3% and I’ll wait for another opportunity. While I’d love to buy both now, I’ll try and wait until the market gives me a little more margin of safety. MDT is the company I’m most likely to buy in this group over the next month or so. The 3% yield is the highest it’s been in a number of years. It deserves more research and I’m excited to learn more about the company.

Below is my watchlist of stocks, grouped by my five buckets:

Company	Ticker
Core Dividend Growth
Abbott Laboratories	ABT
Advance Auto Parts	AAP
Aflac Incorporated	AFL
Aon plc	AON
Bristol-Myers Squibb	BMY
Carrier Global	CARR
CME Group	CME
Factset Research Systems	FDS
The Hershey Company	HSY
Marsh & McLennan Companies	MMC
Medtronic PLC	MDT
Merck & Co.	MRK
MSCI Inc.	MSCI
Micron Technology	MU
Otis Worldwide	OTIS
PepsiCo	PEP
Prologis	PLD
Raytheon Technologies	RTX
United Parcel Service	UPS
Waste Management	WM
High Dividend Growth
Accenture	ACN
Applied Materials	AMAT
Cintas Corporation	CTAS
Cigna Corporation	CI
Deere & Company	DE
Dollar General	DG
Intercontinental Exchange	ICE
Intuit	INTU
KLA Corporation	KLAC
Lam Research Corporation	LRCX
Lockheed Martin Corporation	LMT
McKesson Corporation	MCK
Nike	NKE
Northrop Grumman	NOC
Sherwin-Williams	SHW
Stryker Corporation	SYK
Thermo Fisher Scientific	TMO
UnitedHealth Group	UNH
Zoetis	ZTS
High Yield
Dominion Energy	D
Digital Realty Trust	DLR
Enterprise Products Partners	EPD
Magellan Midstream Partners	MMP
Pinnacle West Corporation	PNW
Phillips 66	PSX
Simon Property Group	SPG
Whirlpool Corporation	WHG
W. P. Carey	WPC
Non-Dividend Payer
Amazon	AMZN
Advanced Micro Devices	AMD
AutoZone	AZO
Berkshire Hathaway	BRK.B
Charter Communications	CHTR
Copart	CPRT
Salesforce	CRM
Markel Corporation	MKL
O'Reilly Automotive	ORLY
Regeneron	REGN
ServiceNow	NOW
TransDigm	TDG
Ulta Beauty	ULTA
Other Bets
Activision Blizzard	ATVI
LVMH	OTCPK:LVMUY
Nvidia Corporation	NVDA
Novo Nordisk A/S	NVO
Pershing Square Holdings	OTCPK:PSHZF
Westinghouse Air Brake	WAB

Click to enlarge

Conclusion

I will likely keep writing a bi-monthly watch list article as it helps me synthesize my thoughts and provide transparency about what companies I’m looking at. It also provides feedback from the community around which stocks I should spend more time researching.

I hope everyone continues to provide feedback or points me in the direction of more research about some of these companies. Seeking Alpha has always been a great source for me in finding great companies. Thanks to all the commenters and authors who have sparked an interest in me about some great companies!

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in CHTR, AAP, AFL, FDS, MDT, MSCI, D, DLR, PNW, SPG, WHG, NVO, WAB, AZO, ORLY, MMP, EPD, BMY, MRK, ABT, AON, CARR CME, HSY, MMC, MU, OTIS, PEP, PLD, RTX, UPS, WM, ACN, AMAT, CTAS, CI, DE, DG, ICE, INTU, KLAC, LRCX, LMT, MCK, NKE, NOC, SHW, SYK, TMO, UNH, ZTS, PSX, WPC, AMZN, AMD, BRK.B, CPRT, CRM, MKL, REGN, NOW, TDG, ULTA, ATVI, LVMUY, NVDA, PSHZF over the next 72 hours. 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.