The Street Is Back On Board With Aptiv’s Above-Average Growth Potential (NYSE:APTV)


Such was the fear and panic earlier this year that investors bailed out of even the strongest long-term electrification stories, including Aptiv (APTV). In relatively short order, though, investors have flipped from, “Hey, why don’t you let me out here?” to a Blues Brothers-style “Hit it!,” with the Street once again firmly on board with the well above-average growth potential offered by Aptiv’s portfolios in vehicle electrification, safety, connectivity, and infotainment.

I liked Aptiv back in May, and the shares have done well since then – though not quite as well as BorgWarner (NYSE:BWA) or Valeo (OTCPK:VLEEY). At this point, unlike with BorgWarner or Valeo, it’s tough to argue that the Street is still overlooking some upside. I like the M&A optionality created by the capital raise in the summer, and I do like the company’s leverage to some of the most attractive growth areas in autos (and industrials), but even with my own expectations already above the sell-side, it’s tough to make the numbers work now.

Time To Go Shopping?

Aptiv management took advantage of the strong rally from March lows, deciding to raise over $2.2 billion in equity capital in June through a common and preferred stock offering (split 50/50). The company didn’t really need to do this, as the prior debt load was still manageable and I expected the company to remain free cash flow positive through the trough (on a full-year basis), but I can’t really fault opportunism.

With a cleaner balance sheet, it looks like management intends to go shopping, with management talking about the window of opportunity opening back up again in the second half of the year.

What Aptiv might buy is an interesting point of speculation. In terms of the auto portfolio, I could see the company looking to acquire more sensor assets. Looking at what the company wants to do in terms of autonomous driving and cabin infotainment, sensing is the one area that stands out as potentially benefiting from supplementary M&A. I could also see the company potentially looking for more connectivity assets, given the importance of those capabilities in both autonomous driving and infotainment.

I’d frankly be surprised if Aptiv went more in the direction of power electronics (for EV powertrains). I mean, that’s what Delphi (NYSE:DLPH) already had before the companies split, and there’s no shortage of competition in the EV powertrain space now, so I wonder what Aptiv could really do there.

One wildcard I see in play is that Aptiv could look to expand its capabilities outside of autos. Commercial vehicles represent a little less than 10% of the revenue mix and industrial sales are smaller still, but both could be areas of investment. Electrification and automation is relevant to commercial vehicles, both for on-highway commercial vehicles, as well as off-highway, where I’m thinking mostly of electrified and semi-autonomous to autonomous mining trucks produced by companies like Caterpillar (NYSE:CAT) and Komatsu (OTCPK:KMTUY). With companies like Deere (NYSE:DE) continuing to invest heavily in precision agriculture, maybe advanced electrification and automation for ag machinery is a possibility.

I also see potential in the industrial space. Aptiv has strong technology in areas like electrical distribution (with low-voltage and high-voltage capabilities), connectivity, and human-machine interfaces (or HMI) for applications like infotainment. With factory automation demanding more electrification, new forms of connectivity, and new HMIs, is it such a stretch to think that Aptiv could be looking at opportunities here?

Continuing To Outperform, Rain Or Shine

Looking back at Aptiv’s June quarter, the company certainly took a hit from the sharp decline in auto production, as revenue declined more than 44% overall in organic terms, but management pegged its outperformance versus underlying builds at 11 pts – a slowdown from the 14-point outperformance in the first quarter, but still quite good. What’s more, interest in high-voltage electrification remains strong, with that business up 3% within a Signal and Power Solutions business that was down 43%.

Management has also spent a little more effort highlighting the margin potential of the high-voltage opportunity. Aptiv can leverage its large existing low-voltage business (where the company has content on roughly one in every 3.5 vehicles) and believes it can break even at $350M in high-voltage revenue and produce equivalent margins at just $400M in revenue, helped by the fact that high-voltage products include meaningfully more connectors than low-voltage (50/50 with cabling versus 30/70) and those connectors produce significantly better margins. With high-voltage revenue already at around $350M in 2019 and Aptiv having guided to $1 billion or more in 2022, it’s not too hard to see some margin accretion potential here.

There are also longer-term attractive opportunities in areas like connectivity and infotainment. I actually think the name “infotainment” does the technology a disservice, as I expect that the cabin of autos is going to see a merging of instrumentation, navigation, climate control, and other functions into a more unified control platform. Whatever you call it, this business could leverage high single-digit to low double-digit underlying market growth, not to mention opportunities in advanced driver safety (up to and including autonomous driving).

The Outlook

I believe Aptiv will generate high single-digit to low double-digit annualized revenue growth off of the low starting point of 2020, driven by vehicle electrification, enhanced driver safety technologies, connectivity, and “infotainment.” Competition will be fierce, particularly in areas like safety, connectivity, and infotainment, but Aptiv has an impressive array of existing platform technologies. I also would not sleep on the possibility of non-auto sources of growth, including commercial vehicles and industrial applications of Aptiv’s core technologies.

The issue is what that’s worth. I’m actually more bullish than most of the Street on revenue growth, and I’m likewise more bullish on margin potential – the Street expects EBITDA margins to hit the 16%’s in 2022 and then flatten for a while, but I believe growth in high-voltage and more advanced safety, connectivity, and infotainment offerings could drive more margin upside.

The Bottom Line

Even with robust revenue growth and FCF margin expectations, I can’t get to a compelling fair value relative to today’s price. And then you have to consider issues like the risk of competition and the risk that the higher cost of these more advanced autos could delay adoption relative to current expectations. I do still see mid-to-high single-digit annualized return potential here, which isn’t bad, but I think it’s fair to say that Aptiv has regained its “darling” status with the Street, and it may be more challenging for the company to surpass the level of expectations that seems baked into today’s price.

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





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B&M European Value Retail: Index Inclusion Is A Further Spur To Share Price Growth (OTCMKTS:BMRPF)


U.K. discount retailer B&M European Value Retail (BMRPF) has had a good year. At 460p, the shares are about 17% ahead of what they were when I recommended them in my June piece on Seeking Alpha, “Well-Poised Retailer For A Reopened U.K.: B&M European Value Retail.” They have recently tested higher levels, getting to 498p at one point. 500p may be a resistance point for now.

However, there is an upcoming stream of good news, which I think will help propel the shares higher.

FTSE Membership Will Help the Shares

It was announced that B&M will enter the FTSE-100 index of leading U.K. companies. The change will take effect from September 21.

First, it is worth noting that this in itself is a sign of a company in the ascendancy. The index is basically the hundred highest-capitalized listed companies on the London board. So, as with other such indices, getting added into it is indicative of a company whose capitalization is increasing, while falling out of it reflects a reversal of fortunes on that score. B&M will be replacing broadcaster ITV (ITVPF, ITVPY), which has been having a hard time of it in recent years.

As part of the index, there ought to be more buying by index tracker funds who buy the index components.

Academic research found that stocks exhibit positive abnormal long-run performance following their inclusion in the FTSE-100 index. The researchers also found that shares benefitted from short-term cumulative abnormal returns around the time of the promotion to the index. They speculated that that may be due to the aforementioned purchasing by index tracker funds, but the evidence for that was inconclusive. In any case, both short term and long term, inclusion in the index was positive for the share price.

Shares Will Have Additional Momentum Aside from the Index News

As I outlined in my piece “B&M: Strong Earnings Guidance Is A Clear Buy Signal,” the company has already guided the market to expect a near-doubling of adjusted EBITDA for the current six-month period, which ends on September 26.

I think some of that has been reflected in the run-up in shares of late. They have had a good year so far and despite some recent falls, the trend over the past several months has been clearly upwards.

Source: Google Finance

That is indicative of the fact that the company’s barnstorming performance during the COVID-19 pandemic is not only impressive in itself, it is also impressive when set against the general trend for retailers such as supermarkets, who have struggled to translate the pandemic sales surge into a profits surge.

Although there has been upwards price movement, I still don’t think the current share price fully factors in the strength of B&M’s performance this year. Additionally, with the economy in recession, the medium-term investment case for discount retailers such as B&M has strengthened, in my opinion.

I expect a pop in the share price in September or October, as the shares benefit from the dual impact of increased demand due to the FTSE inclusion and the market’s full appreciation of the B&M growth story when the first-half results are revealed.

Conclusion: B&M Has Further Upside

With a current P/E around 23 and a recent run-up in its price, I don’t think B&M is cheap. However, the stream of good news continues for now, and I expect that to have a positive impact on the shares. While I understand taking profits now, I think there is further upside for the retailer in the short term based on the positive news stream and index buying. I expect to see it test 550p in the coming six months versus 460p today.

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





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Gladstone Land: Continuing The Growth Story (NASDAQ:LAND)


Gladstone Land (LAND), one of only two farmland-focused real estate investment trusts in the United States, has a well-earned reputation for growth. This is especially true in the second half of the year, which typically sees the company make more acquisitions than it does in the first half of the year. This may make sense on the surface since crops are frequently planted in the spring and harvested in early autumn while farmers work on improving their farms in the winter months, but many of Gladstone Land’s properties grow perennial crops that do not need to be planted every year so this dynamic may not apply. The company continued this pattern earlier this week by acquiring farmland in Maryland and Delaware.

About The Acquisition

On Sept. 1, 2020, Gladstone Land acquired farmland in Maryland’s Eastern Shore and Delaware for $7.4 million. This was an interesting purchase as it’s outside of the area where the company usually invests. As I have mentioned in past articles on the company, Gladstone Land focuses on investing in farms growing specialty crops such as fruits, vegetables, and nuts. Many of these farms require fairly mild weather to thrive. As such, most of Gladstone Land’s farms are located in California and the southern states:

Source: Gladstone Land

This acquisition represents the company’s first entry into Maryland and Delaware, a fact which CEO David Gladstone noted in the press release:

With this acquisition, Gladstone Land now owns farms in 12 different states and 25 different growing regions across the U.S. We are seeing increasing opportunities in this region for high-value farmland growing potatoes, peppers, sod, and other high-value crops. We hope to be able to take advantage of certain of these opportunities to increase the overall diversification within the list of farms owned by the company.

The farmland that the company obtained in this acquisition grows vegetables and sod so certainly fits in with the opportunities that Mr. Gladstone sees. Vegetables can grow reasonably well in colder climates because they are an annual crop that need to be replanted every spring while sod is a fairly hardy perennial that can survive both cold weather and snowfall, so there’s no reason why these types of farms need to be in warm climates. Thus, Maryland and Delaware are reasonable locations for farms of this sort.

This farmland also provides Gladstone Land with certain diversification benefits. We have seen over the past few years why this can be important. In the spring of 2019, much of the Midwest along the Missouri and to a lesser extent the Mississippi Rivers suffered from widespread flooding that caused $2.9 billion in property damage and rendered at least one million acres of grain-producing farmland unusable for the year. We see a similar thing in California right now, where wildfires have destroyed at least 1.66 million acres, although it’s admittedly not all farmland. By spreading its operations across a wide variety of states and regions, Gladstone Land can limit the percentage of its acreage that’s exposed to these natural disasters. If, for example, all of its farmland was located in California, then these wildfires could threaten the company’s existence. Thus, the increasing diversification is a true benefit for the trust.

The acquisition of this property will support the company’s growth as will be discussed in more detail later. The reason for this should be fairly obvious. Gladstone Land already has secured a 10-year lease with a large sod and vegetable farmer in the region so it would be providing revenue and cash flow to the trust going forward. This stimulates growth for the trust.

Farmland Investment Thesis

As already mentioned, Gladstone Land is one of only two farmland-focused real estate investment trusts in the market today. Thus, an investment in Gladstone Land can be thought of as an investment in farmland. There are reasons to like farmland as an investment class, one of which is protection against inflation.

As I pointed out in past articles, such as this one, the response of the federal government and global central banks to the COVID-19 outbreak has greatly expanded the money supply. This is clearly visible here:

Source: Federal Reserve Bank of St. Louis

We also can see this by looking at the balance sheet of the Federal Reserve. Prior to the 2008 recession, the Federal Reserve generally had a balance sheet of around $800 billion. Since that time, it has climbed to around $7 trillion. About half of that increase was this year:

Source: Federal Reserve Bank of St. Louis

While the definition of inflation is a broad-based increase in prices, it’s caused by the money supply increasing more rapidly than the production of goods or services in the economy. This is because there’s now more currency available to purchase each unit of production. The law of supply and demand would imply that price levels must necessarily rise. In 2008, the United States had a GDP of $14.56 trillion, which has grown to $19.49 trillion today. This is a 33.86% increase. The supply of money has obviously increased much more than that. Clearly then, conditions are ripe for inflation.

Farmland acts much like precious metals in that they serve as a hedge against inflation. This makes sense since the supply of farmland is limited so a rising amount of money available to purchase it should push up the price of it. That has indeed happened. Over the 2000 to 2019 period, California farmland has been one of the best performing of any asset class:

Source: USDA, California ASFMRA, Gladstone Land

In fact though, unlike precious metals that do have their supply slowly increase, the supply of farmland steadily decreases globally. This is mostly due to the rising world population. As the population grows, the number of people demanding jobs, homes, and government services increases. This results in farmland being converted into these purposes:

Source: United Nations, Gladstone Land

Thus, not only should farmland prices increase with inflation but should actually beat it. This does in fact happen. In fact, farmland has beaten both the MSCI REIT index and the S&P 500 since 2005:

Source: National Council of Real Estate Investment Fiduciaries, Gladstone Land

These returns are enhanced by the fact that farmland is necessary for human life. After all, we all have to eat in order to survive. Thus, in many cases people will pay whatever they need to in order to acquire food. This allows farmland to be somewhat resistant to inflation and outperform many other things, especially when we consider that demand is falling.

Gladstone Land Growth Opportunity

As is the case with all real estate trusts, there are two ways by which Gladstone Land derives growth. The first way is by purchasing or constructing it. As farmland cannot really be constructed, purchasing it as the trust did a few days ago is the only real option. The other method is by raising rent. The company uses this method as well. It typically manages to secure at least one rent increase every quarter. This leads to steady growth in rental income from each of its properties. The trust has on average grown its rental income by 3.46% annually on a per property basis since 2013:

Source: Gladstone Land

Gladstone Land also has a history of steadily growing its earnings as well as its adjusted funds flow per share. It does this through both of the aforementioned methods:

Source: Gladstone Land

Most investors purchasing shares of real estate investment trusts do so because of the dividends that these companies pay out. Gladstone Land is no exception to this. In fact, Gladstone Land is one of the only real estate trusts that pays out its dividend on a monthly basis. This is nice for compounding purposes since monthly compounding periods result in more money over time that quarterly compounding periods. The company’s strong history of earnings growth has allowed it to steadily grow dividends over time. We can see this clearly here:

Source: Gladstone Land

This will likely appeal to those who need a regular source of monthly income that grows over time such as retirees and those seeking a high level of monthly compounding. Gladstone Land pays a 3.51% yield at the current level, which is certainly reasonable in today’s low interest rate world.

Conclusion

In conclusion, Gladstone Land has a long history of steady growth. The company’s latest acquisition of farmland should only help the company continue this. The overall investment thesis for farmland is very strong right now due to declining supply and the potential for inflation. Gladstone Land usually uses its steady growth to steadily grow the dividend, and when we combine that with its monthly payouts, this looks like a very solid purchase for any investor.

At Energy Profits in Dividends, we seek to generate a 7%+ income yield by investing in a portfolio of energy stocks while minimizing our risk of principal loss. By subscribing, you will get access to our best ideas earlier than they are released to the general public (and many of them are not released at all) as well as far more in-depth research than we make available to everybody. We are currently offering a two-week free trial for the service, so check us out!

Disclosure: I am/we are long LAND. 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.





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My Dividend Growth Portfolio August Review: 38 Holdings, No Trades


Welcome to my dividend growth portfolio review for August 2020. The S&P continued its winning streak of 5 straight months with gains and the best August in 34 years. The divergence between tech darlings and the rest of the market continued as Apple (AAPL) and Tesla (TSLA) dominated headlines capped by their respective stock splits on the last day of August. I wonder often whether this is a trap or there are real valid reasons for the continual rise in the indices. In any event, I don’t have a plan to sell my winners, but I am certainly not adding at these levels. I felt that we were just getting to some real value in many of the high-flier names in March, but those prices quickly evaporated.

I actually didn’t make any trades in August at all. In fact, my last trades (which were very minor in nature) were over two months ago at this point. I’ve benefited greatly from the market rebound and staying the course and holding through March, as painful as it was. I don’t wish those feelings on anyone, and it was truly hard to sleep at night when everything was tanking. That patience has paid off, as my overall portfolio value is up about 50% from the lowest of the low days. There have been some bumps and bruises along the way, of course. I sold my Tanger (SKT) stake a few months ago, and that was a massive loss.

I look around my portfolio today and I have quite the mix of both healthy high-fliers and then the laggards that have done nothing during this entire rebound. Apple is obviously my best high-flier right now and has now swelled to over 9% of my portfolio. I don’t think it offers much value today, but as a generational pick, I also have no intention of selling it. On the flip side, I’m looking at Simon Property Group (SPG), which is a newer pick that has been a complete dud. It’s hard to see right now where that one is heading, I’m not sure how much I like the company buying failed retailers, but I do like the idea of partnering with Amazon for some extra fulfillment centres.

Then, I have some names that are in the murky middle, like AT&T (T) or Johnson & Johnson (JNJ). With regard to AT&T, it’s been an income play, of course, but it’s also missed out on the rebound. The company is looking to sell DirectTV, which was a terrible acquisition at the exact wrong time as the industry was pivoting towards streaming. Selling part of my stake at $38 at the end of last year proved to be quite prudent, with the stock languishing under $30 today.

Johnson & Johnson has been interesting too, as it’s done well but has slightly lagged the Schwab U.S. Dividend Equity ETF (SCHD), which has been my favorite dividend growth ETF. With the company trading near its all-time high, is it time to just roll it into SCHD? The problem is that for each holding, there is always a limit to what I’d own. I don’t believe that limit would necessarily exist with an ETF; conceptually, I’d be OK with being 100% in it.

I’ve also been really disappointed with Cisco (CSCO) lately. The company had a poor earnings release, and in this age of Zoom (ZM) becoming a household verb, how did Cisco whiff so badly with its WebEx?

Being in the last month of a quarter, this is when my portfolio really pays dividends. The March, June, September, December months are my best months – as I think they tend to be for most investors. I received over $1,800 just in March this year. I’m never sure if I’ll eclipse the high-water marks with my biggest ETFs having a variable payout.

My portfolio grew to all-time highs (ignore the wrong value in the picture) to finish August around the 375k mark.

About Me

For reference, this article series covers my investing journey as a father of two towards my eventual retirement. Any specific stocks or amounts are particular to my self-directed 401(k) plan.

The goal of my portfolio is to generate a perpetually growing income stream for my wife and me during our golden years. The aim is to live off dividends without touching the principal. Dividend growth stocks and ETFs are the chosen vehicles to meet that goal. Currently 35, I have approximately 24 years before I can touch any of this money (without taxes and penalties).

Another primary goal of writing is to assist other investors. I hope there are facets of my strategy that you find appealing and can implement yourselves.

For anyone interested, I have a trimmed version of a portfolio tracking spreadsheet you can freely take for yourself, found here.

I’ve received some questions in the past, so you can save off a copy by selecting “File” -> “Make A Copy.”

2020 Goals

I originally had an optimistic goal of about $17,000 in projected dividend income when setting goals for 2020. I’ve since dropped any particular income goal for the year after having my life completely upended. I’m currently hovering around the $14,000 mark and making sure that I safely maintain that level. That will suffice for now until some additional clarity comes about.

Dividend cuts and suspensions did their fair share of damage part of my portfolio as well. The high yield Global X funds have cut their distribution rates, though they are slowly coming back. Simon Property Group suspended and reintroduced a lower dividend. Disney (DIS) halted its dividend for now. The one thing I have control over is owning companies that are able to actually grow their dividends through good times and bad. My goal for dividend growth holdings is to average a growth rate of at least 7%. Currently, 8.4%.

Portfolio Strategy

Buying Criteria

These are the general guidelines I will review to see if something is worthy of adding to my dividend portfolio or whether I will add to an existing position.

Investing Framework

This is the first round of questions to review during an initial filtering process of investments.

  • What is the opportunity here?
  • Am I excited about the business? (No trades)
  • What’s the expected growth?
  • What are the risks and downsides?
  • How does this fit into my portfolio?
  • Is the opportunity here better than an ETF?
  • Are we near an all-time high? Coronavirus showed how quick we can plummet. One fallout from this experience may be avoiding adding new money when we are near new highs. This seems extremely pertinent right now also.

Company-Specific Factors

  • What do the earnings and revenue growth look like?
  • How long is its dividend growth streak?
  • Is the dividend safe? 60+ on Simply Safe Dividends

  • What about the dividend growth rate historically and potentially going forward? Is this a fast grower or slow grower?
  • Chowder Rule (current yield + 5-year growth rate) > 10%.
  • I like to see shareholder-friendly management. This manifests in a healthy and rising dividend and a willingness to buy back shares. Often, buybacks aren’t done at opportune times. Additionally, they are frequently established to just buy back stock options for employees. A good metric to investigate is the “total shareholder yield”. This aggregates net dividends, buybacks, and debt reduction.
  • Perhaps, most importantly, the valuation needs to be right per F.A.S.T. Graphs. The stock should be trading at fair value or better for an appropriate timeline (14+ years, if possible). With a longer time frame, I can see how shares fared during the Great Recession, and this also removes some of the recency bias that can come from only analyzing valuation during this extended bull market.

Selling Criteria

Here are my guidelines when I may consider a stock sale. I really don’t want to sell shares, but I will when circumstances change.

  • Company degradation – This could be things like deteriorating balance sheets, loss of competitive advantage, and loss of credit ratings. These factors may come to light before a dividend cut manifests. The pandemic exposed a lot of names in this category.
  • Dividend cut or unexpectedly paltry increases. The dividend increase is the more visible outward sign of a company’s success.
  • Thesis not panning out.
  • Based on known information, capital is better passively invested or focused into better ideas.

Timing

One tactic I’ve used is buying shares prior to the ex-dividend date after the company has announced its yearly increase. The increase provides a quick glance into how management thinks the company is operating. A large increase can be confirmation from management that the business is running well. Sometimes, the reverse can be true too – being snubbed with a “bad raise” can be a red flag that things are not as they seem, and it’s time to research what’s up.

Most importantly, this was not done to chase dividends but to strategically add to a position that was worthy of being added to. Trees don’t grow to the sky, and neither do dividend yields. A quality company that has a nice dividend increase should see its stock price rise by a similar amount over the course of the year, readjusting to the new and higher dividend amount. By jumping the gun, you can speed up the compounding process. This is also a much more compelling idea when valuations aren’t at nosebleed levels like they are today.

If this sounds interesting to you, you should check out my weekly article, where I give the full list of these companies.

Dividend Reinvestment

I have commission-free trades, so it doesn’t really matter whether I leave reinvestment on or not. I’ll try to leave it on for my core holdings or where I can lower my cost basis. This is also when I have ample cash (5%+ in my portfolio).

In any event, I did some simple conditional formatting on my spreadsheet. Cells will be green if I have an opportunity to lower my cost basis.

I can quickly cross-reference this with my upcoming dividend calendar for my dividend alerts. Additionally, I added an extra column on my spreadsheet for whether it’s on or off.

I have reinvestment on at the moment for everything I own except for PEI.PD and T.

Contributions

I continue to plug away and I’m on pace for maxing again for the year. I received a “true-up” contribution in March for having fully funded my plan before the end of the prior year. My understanding is not everyone has this, so check your circumstances if you fully fund a retirement account with an employer match prior to the end of the calendar year.

The Portfolio

Here’s my actual portfolio with a few of my data points highlighted. Apple continued to swell in August and has ballooned to over 9% of my portfolio.

Name Ticker % of Portfolio CCC Status Income
Apple AAPL 9.10% Challenger $214
AbbVie ABBV 1.58% Challenger $299
Abbott Laboratories ABT 1.46% Challenger $73
Brookfield Asset Management BAM 0.21% Challenger $11
BlackRock BLK 1.65% Contender $149
Cisco Systems CSCO 1.16% Contender $148
Global X Super Dividend U.S. ETF DIV 1.08% None $429
Cohen&Steers Opportunity CEF FOF 2.70% None $886
Corning GLW 2.87% Contender $283
Home Depot HD 3.01% Contender $237
Deutsche x-Trackers USD High Yield Corporate Bond ETF HYLB 2.86% None $640
iShares International Select Dividend ETF IDV 3.34% None $885
Johnson & Johnson JNJ 2.49% King $247
JPMorgan Chase JPM 2.26% Challenger $302
Mastercard MA 3.39% Challenger $57
Medtronic MDT 1.99% Champion $160
Global X MLP ETF MLPA 1.23% None $137
Altria MO 3.05% King $881
Microsoft MSFT 0.62% Contender $21
Nike NKE 0.96% Contender $31
Realty Income O 0.72% Champion $120
Pennsylvania REIT D Series 6.875% PEI.PD 0.14% None $172
Global X U.S. Preferred ETF PFFD 1.53% None $318
Prudential Financial PRU 2.09% Contender $501
iShares Mortgage Real Estate Capped ETF REM 1.68% None $900
Starbucks SBUX 2.39% Contender $167
Schwab U.S. Dividend Equity ETF SCHD 6.03% None $602
Global X MSCI SuperDividend Emerging SDEM 2.04% None $643
Global X SuperDividend ETF SDIV 2.24% None $1,213
Simon Property Group SPG 1.23% None $520
SPDR S&P High Dividend SPYD 5.78% None $1,274
Global X SuperDividend REIT ETF SRET 0.93% None $512
Stanley Black & Decker SWK 2.58% King $164
AT&T T 1.61% Champion $424
T. Rowe Price TROW 1.65% Champion $158
Travelers Companies TRV 1.61% Contender $176
Visa V 3.20% Contender $67

Here are the values behind the “CCC Status” category:

  • Champion/Aristocrat: 25+ years
  • Contender: 10-24 years
  • Challenger: 5+ years
  • King: 50+ years

Dividend Safety

Here’s a table that I keep tabs on the dividend safety score from Simply Safe Dividends and how that meshes with the S&P credit rating. The table is then sorted descending by the safety score (this is only for individual companies). Many of these scores have taken a hit lately.

Name S&P Credit Rating SSD Safety Score
Johnson & Johnson AAA 99
BlackRock AA- 98
Prudential Financial A 75
Home Depot A 87
T. Rowe Price 94
AbbVie BBB+ 50
Cisco Systems AA- 91
Medtronic A 99
Stanley Black & Decker A 90
Visa AA- 99
Apple AA+ 99
Mastercard A+ 99
Travelers Companies A 78
Corning BBB+ 77
Microsoft AAA 99
Nike AA- 99
Altria BBB 55
Starbucks BBB+ 67
Abbott Laboratories A- 71
JPMorgan Chase A- 60
Realty Income A- 70
AT&T BBB 65
Simon Property Group A 25
Brookfield Asset Management A- 55

With this new chart, I’ve had a few insights:

  • I try to bundle my riskier companies into ETFs than individual exposure.
  • I mostly own safe (60+ score) companies.
  • Out of dividend safety, dividend growth, and current yield, you can pick any two.
  • Disney has no safety score because of dividend suspension. Simon Property Group is hanging on with a 25 score.

Performance

Here’s my updated list of performance of my holdings versus their benchmark since I’ve first owned shares. Results are sorted descending against the benchmark. Results may not perfectly line up with my own results due to subsequent purchases. At a high level, I can see if I’m better off rolling money into a benchmark ETF than holding shares.

Ticker Owned Since Benchmark Versus Benchmark Versus S&P
AAPL 4/13/2015 SCHD 279.04% 262.39%
TROW 9/29/2016 SCHD 82.29% 59.80%
HD 5/3/2016 SCHD 69.53% 47.46%
MA 7/26/2018 SCHD 54.11% 44.57%
MSFT 11/14/2019 SCHD 52.74% 41.35%
GLW 10/14/2015 SCHD 45.78% 28.39%
MO 10/31/2013 SPYD 45.26% -67.95%
NKE 5/3/2016 SCHD 40.22% 18.15%
V 7/26/2018 SCHD 32.37% 22.83%
BLK 10/16/2019 SCHD 29.29% 17.64%
ABT 1/10/2020 SCHD 26.93% 18.85%
JPM 7/15/2016 SCHD 21.50% -2.46%
FOF 10/10/2019 SPYD 17.67% -24.33%
SWK 1/28/2016 SCHD 15.72% -8.54%
MDT 11/22/2016 SCHD 7.86% -13.69%
PRU 4/7/2016 SPYD 7.01% -72.52%
ABBV 1/28/2019 SCHD 6.18% -7.28%
JNJ 12/9/2015 SCHD -3.43% -20.25%
T 11/3/2015 SPYD -3.95% -71.17%
O 2/21/2020 VNQ -5.50% -28.89%
HYLB 1/10/2020 AGG -6.45% -10.73%
SBUX 12/3/2015 SCHD -12.32% -28.75%
CSCO 8/23/2019 SCHD -22.70% -33.56%
TRV 4/28/2014 SCHD -37.12% -65.04%
BAM 2/21/2020 SCHD -50.79% -56.80%
SPG 4/30/2019 VNQ -58.44% -82.59%

The data runs off the API I host over at Custom Stock Alerts (documentation here). This set comes from exposing the stock return calculator as an API call that can be used on the web, MS Excel, or Google Sheets.

The next column allows flexibility to define what my benchmark can be. For example, look at the REITs – I’ve set their benchmark to be VNQ for an apples-to-apples comparison. A utility could be compared to XLU, for example. I need to flesh out what high yield ETF I want to be the benchmark for my high yielding ETFs. I generally compare everything to either SCHD or SPYD, depending on the yield/growth profile.

Versus S&P: This is a measure of the alpha generated (or not) versus the S&P 500 as a benchmark. This is calculated using the stock return calculator here, and it uses the “Owned Since” column as the starting date. This may not reflect actual results, as multiple purchases would change the figure. I can also set the benchmark at the individual ticker level. This table is how shares have performed since I first purchased them. I can compare versus both the S&P and another benchmark for each holding. It’s supported by the stock return calculator (there is also API access available for use in spreadsheets) that I built.

Portfolio Yield

I’ve calculated a few aggregate statistics for my portfolio. The portfolio yield has now dropped under 4% as equity valuations have skyrocketed. It peaked over 6% in March. Projected income is still about the same as it has been the past four months.

Projected Income $14,014.76
Cash $16,144
Cash Ratio 4.46%
Total Value $377,748.18
YOC (Divi Companies) 5.90%
Yield (Divi Companies) 4.26%
Portfolio Yield 3.88%
Yield w/Cash Drag 3.71%

Projected Income – The sum of all known dividends for all holdings

Cash Ratio – Percentage of cash in the portfolio

Total Value – Self-explanatory

For these next batch, the numerator in each calculation is my “Projected Income”.

YOC (Divi Companies) = “Projected Income” / (“sum of invested capital” – (cash + cost of all non-dividend-paying companies)). This is my yield based on what I put in. This is separate from current market valuations.

Yield (Divi Companies) = “Projected Income” / (“Portfolio Value” – (cash + value of all non-dividend-paying companies)). Said another way, this is the yield from all my dividend-paying companies.

Portfolio Yield = “Projected Income” / (“Portfolio Value” – Cash). This is the yield based on all my invested money and their respective prices today. This would be the headline figure advertising the portfolio.

Yield w/Cash Drag = “Projected Income” / (“Portfolio Value”). All in, this is the yield, given my expected income divided by the full portfolio value.

Correlation Matrix

I use the correlation matrix from Portfolio Analyzer. It’s a huge table mapping out how one stock trades with another from a relation of -1 to 1. -1 means they move perfectly opposite of another. 1 means they move in perfect lockstep.

I’ve used this information in the past to remove holdings that essentially move in lockstep (correlation > 0.90). It’s also a factor when adding in a new position. It doesn’t necessarily make sense to add something if another holding closely mirrors it. I’ve learned that during panics, all of this goes out the window, as everything gets sold off indiscriminately. Bonds and preferred shares offered very little ballast.

Dividend Increases

Dividend Cuts

Trade Summary

My Sells

None

My Buys

None

Charts and Graphs

Dividends

This chart covers a rolling 3-month average of my dividend income. With a quarterly view, I can smooth out the variations from month to month. What’s been interesting is how well the data has fit the trend line over time.

There was a downward period in 2018 when I moved some money to growth stocks. Later, that trend reversed, which led to the current peak of over $1,200 in March. Then, the recent drop is all surrounding coronavirus and the impact it has had on dividend payments around the country. I’m still above the $1,000/month average, though just barely.

The aqua bars for 2020 were all trending higher before having several lacklustre months. August was a decline year over year and over last quarter (May). Let’s see why.

2020

May

2019

Notes

  • The noticeable change from May was Tanger no longer providing any dividend income. This was from both the explicit dividend suspension but also by cutting bait with my shares. Shares have continued to drop, since I sold if there’s a silver lining. Perhaps at some point there is some value here, but this was a bad investment from the get-go.
  • The lines struck through in 2019 were holdings that I sold during the year but that had received their dividend in July.

Dividends by Position Size

The bubble graph maps expected yearly dividends (y-axis) by the percentage in my portfolio (x-axis). The third data point, yield on cost, is represented by the size of the bubble.

With Apple continuing its rapid price appreciation, I had to adjust the graph yet again to fit it. On the vertical axis, SPYD is projected to provide the most income of any holding. Most of my individual holdings are all lumped there in the middle.

Growth

The $768 in August was a decline of 7% from last year, with the biggest driver being the removal of Tanger Factory Outlet Centers. On a rolling year-to-date basis though, I am up 45% compared to last year (though that percentage keeps dropping each month). I’m on pace to capturing my 2019 dividend total sometime in October most likely.

This chart is my forward-looking income view where I sum up what I would earn in the next 12 months based on the shares I own and the currently declared dividend rates. It currently stands about $14,014, which is about 28% higher than what it was a year ago. You can see the trend over the course of the year – my original projections were about double last year and that has pretty steadily moved downwards. My projected income has been stuck for many months now through the combination of dividend pauses or cuts, along with not a lot of new capital driving income forward.

At some point, these forces will abate, and it will be off to the races once more. This helps me keep a cool head knowing this too will pass.

Target Portfolio

I have a target portfolio that captures my need for a lot of various dividend sources, while also having allocation to growth. This is how I would like to allocate money across different equity (not asset) classes. I’m an equity guy, though I’ve found value in fixed income as a place to park extra cash.

I first allocated 15% to growth stocks. This scratches my itch for having shares in Berkshire (BRK.A) and some of the FANGs. I’m also optimistic that at least some will be the dividend growers of the future (most likely to be Berkshire or Alphabet (GOOG, GOOGL) at this point).

Next is 20% (was 25%) allocated to high-yielding stocks. I use these as the income portion of my dividend machine. Dividends may be directly reinvested if current prices are right or they will be harvested and tactically allocated to the best investment idea at the time. It also helps me shore up my “balance sheet” by having more cash being generated alongside my regular contributions. I also added a 5% to fixed income – these are more income-generating ETFs under bonds or preferred shares.

The main portion of the portfolio at 55% is core dividend growth. This is where I am to pick names that I expect to surpass the high yielders decades down the road. I would consider names like Apple, Nike, or Home Depot to be generational winners. This can also be ETFs such as SCHD, which are built to hold dividend growth companies.

Lastly, the remaining 5% is allocated to cash. I think any active investor must always have cash on the sidelines for opportunities that present themselves. Frequently, these opportunities may only last a day, and with no cash available, either lead to a missed opportunity or a need to scramble to sell something else. This will help prevent FOMO (fear of missing out).

Another way to view the core portfolio would be through a Venn diagram across the three equity categories.

https://static.seekingalpha.com/uploads/2019/3/6/9020091-15518710183814197.png

For illustrative purposes, I specifically have the circles overlapping most of the area to highlight the focus on dividend growth stocks.

Actual Portfolio

I’m in the ballpark of where I’d like to be. High yield took a shellacking in March, which cut that slice down a lot. It continues to lag, and I’ve now been carving out a niche for fixed income. Dividend growth is still about 2/3rd of my portfolio, and I could use some more raw growth. I do plan on adding growth when valuations settle.

Here’s how I classify my holdings in order to create the above pie chart. I try to be logically consistent, but it can be a little subjective. One example of the subjective nature is Altria is pegged as a dividend growth stock, but AT&T is high yield. Their current yields are similar, but the dividend growth rates have been quite different.

Ticker Classification
AAPL Dividend Growth
ABBV Dividend Growth
ABT Dividend Growth
AMZN Growth
BAM Dividend Growth
BLK Dividend Growth
BRK.B Growth
CSCO Dividend Growth
DIS Dividend Growth
DIV High Yield
FOF High Yield
GLW Dividend Growth
GOOG Growth
HD Dividend Growth
HYLB Fixed Income
IDV High Yield
JNJ Dividend Growth
JPM Dividend Growth
MA Dividend Growth
MDT Dividend Growth
MLPA High Yield
MO Dividend Growth
MSFT Dividend Growth
NKE Dividend Growth
O Dividend Growth
PEI-D High Yield
PFFD High Yield
PRU Dividend Growth
REM High Yield
SBUX Dividend Growth
SCHD Dividend Growth
SDEM High Yield
SDIV High Yield
SPG Dividend Growth
SPYD Dividend Growth
SRET High Yield
SWK Dividend Growth
T High Yield
TROW Dividend Growth
TRV Dividend Growth
V Dividend Growth

Visualizations

Income by Sector

ETFs continue to provide the lion’s share of dividends, which moved up from about 50% last month to over 54% now. The rest is allocated over different sectors.

Sector Allocations

A little more than a third of my investment dollars are in an ETF. This should make sense, as I get more yield from some ETFs and many of the individual dividend growth stocks yield substantially less.

Champion, Contender, Challenger View

Lastly, when analyzing my individual picks, I categorize them based on their dividend growth history (Kings 50+, Champions 25+, Contenders 10+, Challengers 5+). While not completely predictive, focusing on quality has been beneficial to my portfolio. Disney suspending its dividend isn’t surprising with how leveraged it is to gatherings; whether it is in the movie theatre watching the latest releases or visiting theme parks. In the company’s case, it is also on the heels of a massive leveraged acquisition for the Fox film assets.

This is an automated pull from my API. I have a “King” status for those with streaks over 50 years. I want to note that the Abbotts per the CCC list are not Champions, though, by legacy S&P rules, they are both Dividend Aristocrats.

Correction Watch List

My watch list for new holdings would be for growth names. Some examples might include:

I have an opportunity to potentially add some BAM, PRU or CSCO, as they are my only dividend growth names where the current price is below my reinvested cost basis.

Things Coming Up

I don’t have any expected dividend announcements for August, and here are the announcements I’m waiting for the rest of the year:

  • JPMorgan
  • Mastercard
  • Microsoft
  • Nike
  • Starbucks
  • AT&T
  • Visa

Conclusion

I earned $768 in dividends in August. That amount was 7% lower than a year ago, and it was lower than the prior quarter of May. The biggest factor was Tanger having suspended its dividend and me ultimately selling shares. Year to date, I’ve received $8,310 in dividends, which is up 45% than this time last year.

My forward-looking income is still hovering around $14,000, which is still approximately flat for the year. I didn’t make any stock trades this month, and I still have about 5% cash at this time.

Enjoy your long Labor Day weekend, and thanks for reading. I hope you’ve enjoyed reading it as much as I’ve enjoyed writing it. I encourage you to “Follow me” if you don’t already!

Disclosure: I am/we are long AAPL, ABBV, ABT, AMZN, BAM, BLK, BRK.B, CSCO, DIS, DIV, FOF, GLW, GOOG, HD, HYLB, IDV, JNJ, JPM, MA, MDT, MLPA, MO, MSFT, NKE, O, PEI-D, PFFD, PRU, REM, SBUX, SCHD, SDEM, SDIV, SPG, SPYD, SRET, SWK, T, TROW, TRV, V. 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.





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Wix: Don’t Get Too Excited With The Growth Rate (NASDAQ:WIX)


While Wix (WIX) will continue to aggressively expand and grow its top line in the next few months, we believe that purchasing its stock at the current price is a risky endeavor. With a market cap of over $16 billion, the company makes less than $1 billion in revenues in a year, while its stock trades at a forward P/E of over 500x, way above its peers. At the same time, Wix has never made an annual profit on a GAAP basis after becoming a public company and it spends the majority of its revenues on marketing expenses in order to sustain its current growth rate. For that reason, we believe that Wix’s shares have an unattractive risk/reward ratio and it’s better to stay away from its stock despite its impressive performance in the last few months.

Growth At All Costs

In the first half of the year, Wix greatly benefited from nationwide lockdowns around the globe, which forced more people to go online. As a provider of various web-based solutions for web developers and entrepreneurs, Wix has one of the most sophisticated ecosystems of products among its peers. The majority of the company’s clients are small businesses that want to expand their presence on the internet and use Wix as a one-stop-shop for their needs.

Source: Wix

Recently, Wix had the strongest quarter in its history. From April to June, its revenues increased by 27% Y/Y to $236 million and the business was able to add 9.3 million additional users, which is an increase of 64% Y/Y and an increase of 4% Q/Q. During the period, the company also added new dropshipping tools, improved its order and fulfillment features, and improved its website editor. However, the company’s GAAP EPS in Q2 was -$1.06, below the street estimates by $0.56, while the advertising expenses increased by 90% Y/Y. Despite constantly increasing its top line, Wix’s net loss has been widening in the last few quarters and in Q2 it was -$57.74 million.

The reality is that Wix doesn’t have a unique business model and it needs to rely solely on an aggressive marketing campaign to retain its growth levels and increase its customer base. As a provider of web-based solutions, Wix is competing with companies like Shopify (SHOP), Square (SQ), and Adobe (ADBE), all of which provide similar services to customers. In addition, with enough knowledge of web development, entrepreneurs have a choice to use open source engines like WordPress, BigCommerce, Magento, and others, which provide similar web-development solutions at a cheaper cost. By competing in such a competitive environment, Wix has no other option but to reinvest the bulk of its revenues on advertising in order to stay relevant.

In the last decade, Wix has never made an annual profit on a GAAP basis and it’s unlikely that it’ll reach the breakeven point anytime soon, as the street expects its EPS for the year to be -$0.45. At the same time, the company will likely continue to raise more debt in the upcoming months in order to stay afloat and drive growth. In early August, Wix already raised $500 million by issuing convertible notes with a maturity date in 2025 and its debt load has been sequentially increasing in the last eight quarters.

While aggressive advertising so far has been successful, there’s no guarantee that the company will be able to sustain the current growth rate in the long-term. Currently, small businesses are being affected the most by the pandemic, and thousands of enterprises already declared bankruptcy in the United States in the last few months. As we are in the midst of a recession, even more businesses will likely go under in the following months. For that reason, it’s hard to justify Wix’s market cap of over $16 billion, considering that the company makes less than $1 billion in revenues in a year.

However, Wix is not the only company from the sector that trades at such irrational exuberance levels. Its major competitors also trade at premium valuations and some of them even have negative margins. But the problem with Wix is that the company’s forward P/E of over 500x is way above the industry’s average forward P/E ratio of 180x, while at the same time its business has the worst margins when compared to others. Considering this, it’s safe to say that Wix is overvalued at the current price.

Source: Capital IQ

For that reason, we believe that purchasing Wix’s shares at this stage is too risky, as there’s not going to be enough margin of safety at the current levels. What’s also interesting is that recently the company received approval to increase its buyback program from an initial $100 million to $300 million. Considering the company’s premium valuation at this moment, we believe that it’s not going to be beneficial for the shareholders if the company allocates the available capital for buybacks at the current levels. If another selloff starts in the next few months, then Wix will be hit the hardest, due to its high price and the capital that is about to be used on stock repurchases will quickly evaporate. With that in mind, we believe that it’s safer to look for other companies with a more attractive risk/reward ratio than investing in Wix at the current price.

New Marketplace Service

On September 11, Bears of Wall Street will launch a new Marketplace service: Best Short Ideas.

The goal of the service is to provide you with actionable short ideas from which you can profit by betting against the companies that trade at irrational exuberance levels and have limited upside. While the Fed continues to pump the stock market, there is still an array of businesses that cannot justify their premium valuations and our goal is to find those businesses. If you have a high-risk tolerance and interested in shorting stocks, then this service is for you.

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





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