Just A Couple Of Thoughts On Several DGI Stocks

Jul. 09, 2015 9:42 PM ETXOM, CVX, MCD, KMB, KO, PG, JNJ, PEP, SO, CL, GIS4 Comments
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Value, Growth At A Reasonable Price, Long-Term Horizon, Portfolio Strategy

Contributor Since 2012

Zugzwang (German for "compulsion to move") is a situation found in chess wherein one player is put at a disadvantage because they must make a move when they would prefer to pass and not to move. The fact that the player is compelled to move means that his position will become significantly weaker. A player is said to be "in zugzwang" when any possible move will worsen his position.

I was working on a few metrics on well known DGI stocks and decided to publish a couple of thoughts here in my blog. Basically, I picked several stocks that are all around articles in the income & dividend section. I picked 12 stocks that were chosen in several articles as the most favored by various contributors. These are... XOM, CVX, MCD, KMB, KO, PG, JNJ, PEP, SO, CL, GIS, O. I wrote about O in a previous instablog so I'm excluding it from this analysis. Also, this stock requires a different set of metrics because REITs are valued in terms of funds from operations and not earnings.

The first metric that I wanted to analyze is the payout ratio. I had an idea about the dividend coverage but I didn't imagine that some of these companies were paying almost 100% of earnings.

(Source: YCharts)

The next metric I chose was Price to Earnings Ratio. Anything above 18 is a bit frothy in my opinion. 5 of these stocks are trading above 25x earnings.

(Source: YCharts)

One of the qualities that DGI authors always point out is the potential these stocks have for reliable dividend growth. This is in fact true, as shown below.

(Source: YCharts)

Now for the tricky part. Earnings don't follow this trend, not even close actually.

(Source: YCharts)

I prepared a spreadsheet with the compound annual growth rate for both earnings and dividend growth. Here's what I found...

  2010-2015  
  a b  
  DIV CAGR EPS CAGR (b - a)
XOM 8,20% 1,15% -7,05%
CVX 7,33% -0,60% -7,93%
MCD 7,10% -0,45% -7,54%
KMB 5,08% -2,19% -7,28%
KO 6,26% -7,52% -13,77%
PG 5,46% -4,78% -10,23%
JNJ 5,25% 2,63% -2,61%
PEP 5,88% 1,55% -4,33%
SO 7,68% -0,06% -7,75%
CL 6,27% 2,73% -3,54%
GIS 8,83% -2,08% -10,92%

Dividends have increased at an astonishing pace, however, earnings per share are - in some cases - negative. The period is 2010-2015 (6 years), and I used the current trailing twelve months earnings as an estimate for year end 2015. This may prove to be a little too optimistic, with corporate earnings suffering due to dollar strength and other circumstances.

I didn't devote plenty of time to this analysis, it's more of a "share as I think" kind of thing. If there are any factual errors, I kindly urge the reader to point them out.

In my opinion this seems like a perfect storm. Chase for yield + high payouts + declining earnings + interest rate risk = Be careful.

Of the name above, I believe there's value in the energy stocks, XOM and CVX. I'm following a couple of ETF's (VDE) and (XLE) to go long the energy sector.

Regards,

CFB

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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