Battle Loyal3: Round2 Elimination

In the first part, I examined all of the dividend paying stocks in the Loyal3 brokerage service.  After eliminating based on PE, Yield and Dividend Streak, I was left with a third of the original list.  Today, I dive a little deeper and attempt to reduce the remaining positions to three or so.

The remaining companies are:

AAPL, BBY, BUD, DPS, K, INTC, KSS, MAT, MCD, MSFT, TGT, WMT

AAPL : Eliminated

I am dropping AAPL out of the running for the simple reason that their current yield is below 2.5 (it was close during the initial screening).  AAPL is a good company with a brightish future ahead of them.  The main concern I have is whether or not they will still keep innovating.  They basically refurb their main product, the IPhone, each year.  Android phones are catching up in quality and I don’t know if they will be able to maintain market share.  Their market share will not erode overnight, but will be long drawn out affair.

BBY : Eliminated

They are struggling against their online competitors.  This can be seen in the steady deterioration of the following:

  • Operating Margin: 5.6 (2007) to 2.7 (2013)
  • Net/Operating Income have been declining since 2008
  • Free cash flow has been erratic.
  • Long term debt has grown.

BBY doesn’t provide the steady growth that I like and I do not like their future prospects.  This feels a lot like Circuit City to me. Remember them?

BUD : Watch list addition

I am eliminating BUD due to their lack of a dividend buyback and being a net issuer of shares. I do not want my ownership diluted.  Additionally, BUD has a FCF payout ratio of ~63%.  This is higher than I would like to see (60%).  However, I will keep an eye on BUD.

DPS : Maybe

DPS meets all of my criteria for a buy, including FCF Payout ratio <60, Payout Ratio <60, Interest Coverage Ratio > 9.  I currently have a small position in DPS, the only thing that concerns me is the current valuation.  DPS has less market penetration than KO or PEP and I feel like they could have steady growth.  I may be biased because my favorite soda is  Dr. Pepper.

K : Eliminated

The Kellogg Company has a tendency to buyback just a little bit more than they issue.  In fact, total shares outstanding went up from 2012 to 2013.   With my addition of GIS, I do not feel that adding more K at this time would be the best use of the available funds.  From a valuation standpoint, K is trading at a premium to most of it’s metrics.

INTC : Eliminated

I currently have a reasonable amount of Intel.  However, that is not the reason I will be eliminating INTC from contention.  INTC has not raised their dividend since mid 2012.  I may sell INTC if they do not raise the dividend or show demonstrable progress in revenue stabilization/growth.  INTC is at best a hold.

KSS: Eliminated

I think Kohl’s has some promise.  The main concern I have is that they are largely a clothing retailer (some home goods).  I know nothing about fashion and only go to Kohl’s when I can’t find it at WMT or TGT.  Relying as much on clothing/household goods may be hard when the consumer is more constrained.  During 2008, KSS FCF dipped into a negative value and has been inconsistent since.  Even though I do not necessarily require a 5 year or longer dividend history, I would like to see what happens when they hit a rough patch since they began their dividend policy in 2012.

MAT : Eliminated

Who doesn’t love toys?  MAT overall looks pretty good.  However, their cash flow has been pretty erratic over the last few years.  The FCF payout ratio was over 100% at the end of the most recent year, which is higher than I would like it to be.

MCD : Elmininated

I like MCD and would love to own more, but I am trying to avoid adding to my larger positions (over 4%).  MCD is in my Roth (which I am dripping right now), so I do not want to add additional funds at this time.  If MCD was trading significantly below my cost basis, then I would have considered it anyway.

MSFT : Eliminated

Microsoft has promise.  I like the moves the new CEO made with regards to Office on the IPad and releasing some of the software for free.  If you haven’t tried OneNote, you may like it.  It is a very useful product.  On the fundamental side, MSFT has a strong balance sheet and strong cash flow.  I would like to add to MSFT, however after the current run up, MSFT is over 4% of my portfolio.

TGT : Maybe

TGT has been beaten down this year.  They have suffered from a credit card breach that doesn’t seem to end.  Target is the kind of retailer I like. They sell a variety of necessities and other higher margin products.

WMT : Eliminated

For reasons discussed in my analysis of WMT, I will not be adding to this position at this time.

Two remain

TGT and DPS remain.  As of today, I have about 53 dollars in the Loyal3 account.  I will split the investment between these two positions.  Once this has completed, I will provide a post update!

Conclusion

It takes time to deploy capital in the most cost efficient strategy.  I spent a fair amount of time analyzing all of the possible candidates for my next investment.  This was a lengthy and instructive process for me.  The watch list of Loyal3 is somewhat of a random list (which isn’t how my actual watch list came to be), but it was good to familiarize myself with all of the dividend payers that are available in Loyal3.

Disclaimer: Long DPS, GIS, INTC, K MAT MCD, MSFT, TGT, WMT

 

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2 Responses to Battle Loyal3: Round2 Elimination

  1. TGT and DPS are good buys here I think, and both are strongly under consideration for my April purchases in my Loyal3 portfolio as well. I am still considering KO, PEP, and MCD as I’m less worried about position size in my portfolio since I am still early on in the accumulation stage. Over the course of the next couple years, this will certainly transition into a bigger factor for my investing decisions.

    • ILG says:

      I haven’t really thought too much about weights until recently. With prices where they are, it is a way to encourage me to look outside of my favorites to find additional opportunities. Now, if a good opportunity arrives, like it did when PM dipped into the mid-70s at the beginning of the year, then I don’t mind temporarily over-weighting a position.

      I don’t think you can go wrong with KO, PEP or MCD!