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Stock of the week
Old 08-10-2010, 08:43 PM   #1
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Stock of the week

Dividend Stock of the Week

For the near term as I have resubscribed to the Value Line Survey I will for fun be listing my pick of the week of the stocks listed in the weekly issue of Value Line. Over the next 13 weeks I will pick 13 stocks that will be by design all dividend payers, from diversified industry groups and conservative by nature. The desire would be to select stocks that should average to multiyear holdings. I will pick each stock as a 2% portion of a mythical 1MM portfolio or $20,000 each. The basic rules for inclusion as a pick are:
1) Must be rated in the top 25% of all Value Line stocks for Financial Strength and Safety – Goal is to have 8 of the 13 picks with a Safety Rating of 1
2) Must pay a dividend with a reliable record of dividend growth
3) Price Stability must be in the top 65% of all companies
4) Earnings Predictability must be in the top 65% of all companies
5) Timeliness of 3 or higher with a strong preference to stocks rated 1 or 2.

Selling will occur if :
1) Value Line reduces the Financial Strength at all or if Safety falls below 2. A cut in Safety ranking is a strong reason to sell a stock in and of itself but is not automatic.
2) Timeliness rating falls to 4 or lower.
3) Dividend is cut or expected increase unexpectedly does not occur.
There are other more subjective guidelines I follow that may be expanding on in the future. The reason for most of the rules is to obtain a dividend stock that no matter what the market is doing will be bringing a dividend home that will grow in excess of inflation. All of the criteria are by using only the Value Line Survey, for myself I always check further by reading the most recent Edgar filings and trying to listen to management on a earnings call to see if their plans sound reasonable.

For this week the Value Line industries are:
Apparel
Retail Automotive
Retail Shoe
Shoe
Retail (Special Lines)
Electric Utility (West)
The Issue #11 was a very strong issue with 22 stocks rated “1” in timeliness and many stocks meeting the criteria for selection. After a review of all stocks in the issue I decided on this week’s selection as V.F. Corp “VFC”.

VFC is the world’s largest publicly traded apparel maker with such brands as Lee, Nautica, Wrangler, the North Face and Jansport to name a few. It has increased the dividend every year for over 17 years and is currently yielding 3 percent. The dividend payout ratio is at the high end of it’s historical range so the growth is receding from a 10 year average of 11 percent however dividend growth should still be well above inflation rates. V.F. Corp is showing growth this year led by a strong performance in China. The large international presence, management’s commitment to the dividend, the ability to maintain margins in this very tough economic environment and ratings far above the minimums for investing led me to selecting this stock. So with my $20,000 and allowing for $50 commission and $48 in slippage of price from the close I would have 248 shares earning an annual dividend of $595.20 resulting in a dividend yield of 2.98%

My runners up were:
Ross Stores – Very tough choice. if I held other dividend stocks yielding excess of 4 % already this fast growing dividend stock would have been almost impossible to pass on but with a yield of just 1.3% I could not choose it over VFC. In the end I went with the more conservative choice.
Nike – Dividend yield of 1.5% along with 3 years in early 2000 of not raising the dividend left not quite not enough for this very solid company to be selected.
Target – not selected due to dividend yield under 2%, but there is nothing in this company otherwise to not like. A long history of continually rising dividend at very high exceess of inflation and still paying out less than 25% of earnings.
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Old 08-10-2010, 09:01 PM   #2
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What a great idea. I currently subscribe to M* dividend investment newsletter and will be fascinated to see the difference between the approaches.

Nike at time has hit the M* newletters radar screen, I wouldn't buy Ross because I am sure the company has no moat (and I hate the stories although I do sometimes shop there.

However, VF Corp is an obvious candidate. M* has 4 star rating on it a fair value of $95. A narrow moat and an 'A' credit rating. I like its history of raising dividends even last year!

At what point will you be using real $ for this portfolio?
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Old 08-10-2010, 09:01 PM   #3
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I'll subscribe, I like the price

But isn't 13 * $20,000 more like a quarter of a million instead of one million?
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Old 08-10-2010, 09:19 PM   #4
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Originally Posted by Ronnieboy View Post
I'll subscribe, I like the price

But isn't 13 * $20,000 more like a quarter of a million instead of one million?
At the present time I am of the belief of a holding the minimum of 25% of stocks in a portfolio so 13 *2 = 26% of total portfolio, I should have made that more clear.
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Week 2 selection -
Old 08-16-2010, 10:00 PM   #5
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Week 2 selection -

Stock of the Week #2
This week is issue 12 in the Value Line world and the selections are not nearly as strong as last week. Only 3 stocks in the issues are rated “1” for timeliness. The industries for the week are:

· Recreation
· Entertainment
· Hotel/Gaming
· Publishing
· Newspaper
· Advertising
· Petroleum producing
· Oilfield Services
· Chemical (Diversified)

This week’s selection is also featured as a free sample in the Dow30 stocks for value line so you can print and view the selection – MMM the 3M Company. A diverse manufacturing company with a very strong international presence (65 percent of volume) with a dividend that has risen at a 6 percent annual rate over the last 10 years. It is top rated for Safety and has held that rating for over 20 years and is one of the few Value Line companies with a A++ rating for Financial Strength. Value Line is only predicting a 2 percent annual growth for the next five year s which I believe that will turn out to be a bit low as the payout ratio is only 37% for 2010 and earnings are expected to grow at 7 percent. I would anticipate the dividend to grow at least at the 10 year average of 6 percent. I agree with their assessment that MMM is a bellwether for the global economy so there is a price risk here but I think the dividend is very safe and appears to be very important to MMM management.
At a closing price of 83.43 we will take 239 imaginary shares for the $20,0000 yielding an annual dividend of $492.34 or 2.46%, a bit lower than I would like but looking better every day in comparison to bond yields. Selection of this stock was made a bit easier as only one of the other stocks in the issue met the minimum criteria!

The runners up in order this week were:
Washington PostWPO The only other stock in the issue that met the minimum required selection criteria this stock is not nearly as strong as MMM with negative earnings growth over the last five years and several years in the past 10 of not increasing the dividend. At a 2.1% dividend the risk seemed to greatly outweigh the reward.

PALL CORP PLL A filtration specialist company did not meet the minimum criteria with a dividend cut in 2001 which indicates the lack of commitment to the dividend I would demand in buying a stock. However it’s return on total capital has been increasing smartly in recent years with strong potential in both international and US markets their dividend has a very good chance of advancing much faster than inflation.



http://www3.valueline.com/dow30/f5993.pdf
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Old 08-17-2010, 08:24 AM   #6
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Good thread RM, this should be interesting.
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Old 08-17-2010, 08:34 AM   #7
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Great thread . One of VFC's brands is 7 for all mankind which are the hot jeans for teenagers now .
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Old 08-23-2010, 09:54 PM   #8
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what ever it is, short or sell it...... LOL LOL
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Old 08-23-2010, 10:28 PM   #9
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This week is issue 13 for Value Line, the industries this week are:

· Banks (Bank of Hawaii, Citigroup, JPMorgan Chase)
· Financial Services (H&R Block, American Express , Visa, Mastercard)
· Computer Software and Services (SAP, Microsoft, Intuit)
· Internet industry – (AOL ,Google, Amazon ,Netflix, Baidu)
· Public Private Equity (boy have these stocks taken a beating!)

An interesting issue with many very well known stocks that did not meet the minimum criteria for investing for a conservative dividend investor as I outlined in the opening post. After a thoroughly enjoyable read of this issue the choice came between two banking stocks – Bank of Hawaii (BOH) and Cullen/Frost Bankers Inc (CFR).
Both stocks are trading in the neighborhood of $50 a share and pay a $0.45 quarterly dividend. Bank of Hawaii is about 10% cheaper and so has the higher dividend which made me originally lean to that stock as my overall dividends to this point are somewhat low.

But in the end I selected Cullen/Frost.


Cullen/Frost (CFR) is based in San Antonio and has over 100 financial centers in Texas. It is the 5th largest bank and financial holding company in Texas. Cullen Frost revenues come from interest on loan and fees for services. This bank will be heavily affected by the economy in Texas which has outperformed the rest of the United States.
In comparing to Bank of Hawaii the comparison first start with the outlook for Texas being slightly superior to the Hawaiian economic outlook based on a reading a few Fed paper summaries Texas economy expected to grow 2.6 percent vs 1.2 percent for Hawaii. But Cullen/Frost had other more important advantages for a dividend investor over Bank of Hawaii. The safety rating for Cullen/Frost is the highest Value Line provides while Bank of Hawaii just meets my minimum guidelines. Likewise Financial Strength, Stock Price Stability Price Growth Persistence and Earnings Predictability all were higher for Cullen/Frost when compared to BOH. Fundamentally the book value of Cullen/Frost is $34.50 while Bank of Hawaii has a book value of $21.35.

Finally Bank of Hawaii has gone 7 quarters now without increasing its dividend while Cullen/Frost just increased its dividend right on schedule. Stocks that defer dividends when history indicates they usually increase their dividend every year are exhibiting a warning sign I pay heed to like a flagman holding a red flag. Therefore I am going to pay the 10 percent premium over Bank of Hawaii’s dividend for Cullen/Frost’s.
$20,000 will purchase 385 shares of Cullen/Frost @ 51.81 for $693 in dividends annually with a 3.47% dividend yield.

My runner up obviously was Bank of Hawaii (BOH) as it met all the criteria necessary for purchase.
The third place selection this week was Brown & Brown (BRO) an insurance brokerage firm with a rapidly growing dividend for the past ten years with slowing dividend growth recently. With a dividend yield of just 1.6 percent Brown and Brown fell casualty due to a lack of income.
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Old 08-24-2010, 02:34 PM   #10
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3M I've owned for years now and have been supplementing its rather modest dividend by writing cover calls.

As a BoH customer, I am not a big fan of the bank, so I'd be reluctant to buy its stock unless it was screaming cheap. I'll check out CFR though looks promising, although I do have too many banks stocks.
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Old 08-26-2010, 03:18 PM   #11
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I have a limit order for 3M and hope tomorrow is a stinker of a market so that I can bag a couple 100.
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Old 08-30-2010, 10:47 PM   #12
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Back to the start of the Value Line selections with Issue 1 and the industries are:
· Auto and Truck
· Precision Instrument
· Electric Utility East
· Medical Supplies
Two stocks stood out in this issue above the other 148 NSTAR (NST), an East Coast holding company of NSTAR electric which delivers electricity in eastern Massachusetts and also distributes gas in central and eastern Massachusetts. NSTAR is one of 2 stocks that I actually presently own. In response to Clif’s earlier question I am not presently investing in most of the stocks I have listed however over the next 3 years I need to get my stock allocation up to 25% and this is going to be the primary selection tool. NSTAR t has recently sold off one of its operations and will use the proceeds to buy back shares, a practice I personally wish companies would halt and find productive uses for excess cash. However this is a company that understands its east coast niche, is very committed to its dividend and has expansion projects on the horizon that make the 5.5% dividend growth I anticipate reasonable. The valuation at present seems a bit poor based on other utilities but based on the pure dividend percentage and likelihood of further increases makes me suspect this is a good value if long term rates were to hold at 3-4 percent.

The other stock BECTON DICKINSON (BDX) a leading hospital supply company with 3 segments in the medical field – Diagnostics, Medical and Bio Sciences. 48% of its sales are in the US and 32% in Europe so the Euro weakness will hurt this company. A long solid growth history has been its hallmark and sales even have increased in the past 2 year slowdown. While I have liked a couple of stocks in each issue by the end I was satisfied with my previous selection as being the best for a dividend portfolio I would make for myself. This time I wish I could hold both even after pondering both companies. Becton Dickinson has the advantage of being as financially secure as 3M with a 2.1% dividend that is expected to grow at 11.5% which is a decline from the 14.5% average increase over the past 10 years. With dividend payout to income of 28 percent there is plenty of room for that to occur. NSTAR is similarly strong financially to BDX, though not quite at the same level, the current dividend rate for NSTAR of 4.25 with a 5.5% dividend growth rate means it will be 12 years if all played out according to expectations for BDX dividend to catch the payout for a similar investment in NSTAR.

In the end for me the need to have stocks in the portfolio with yields over 4 percent to have a suitable overall dividend yield makes me select the personal favorite – NSTAR. So therefore I will purchase 529 shares @ 37.61 of NST receiving an annual income of $846.40 or 4.23% on my $20,000 investment.
A side note as Johnson and Johnson is also in this issue and has been for years, a great dividend stock and a top rated Value line stock in financial strength and Safety. However, the long period from 2001 without any substantial increase in share price, driven primarily I believe by the overvaluation from the S&P500 bubble of 1999 has led to the price growth persistence to fall to the bottom half of stocks. While not listed as criteria in my selections, I use that as an elimination screen because I prefer stocks that over the long term are increasing better than average. Additionally the recent increase in dividend payouts to net profits to 45% from 35% from earlier in the decade makes me hesitant to jump into JNJ at this time as that is 2 red flags for a very nice company. However with a 3.77% dividend JNJ is still very interesting as a dividend company and certainly there is no reason to sell if one already owned the stock. I would rather though own one of the two listed above......... well I'd rather own both but I guess I said NST.
Also thanks Clifp on the comment on BOH, I will keep their poor service in the back of my mond for future reference if I get close to purchasing again. I will recap the 4 selection and how much money the stocks are down later in the week as the market is begining to look like its ready for a big dive.
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Old 08-31-2010, 01:52 AM   #13
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NStar has been in the M* Dividend Builder portfolio since last Oct. He likes the stock up to $34/share, it remains a possible candidate for me if I end up having some spare funds.

A BDX looks interesting but for me a stock with an average dividend is just an average stock and I am content to own it via VTI.
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Old 09-13-2010, 10:13 PM   #14
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I have been on vacation celebrating my 25th wedding anniversary so this week I’ll catch up with 2 weeks in one: Issue 2 and Issue 3.

Issue 2 has one of Warren Buffet’s favorite industries the railroads but alas none met the minimum inclusion for the portfolio. The industries in Issue 2 are:
· Air transport
· Trucking
· Maritime
· Railroad
· Restaurant
· Industrial services
· Environmental
· Investment Co Foreign Funds
· Information Services

In the end the choice was to me clearly between two stocks in the restaurant industry, McDonalds the well known fast food company and YUM ! Brands (YUM)the spinoff from Pepsi that I am sure they wish they had kept. YUM owns 3 major fast food concepts Kentucky Fried Chicken, Taco Bell and Pizza Hut. They also own Long John Silvers and A&W. YUM has the distinction of being the largest American retailer in China and profits are soaring with foreign operations contributing 63% of operating profit.

McDonalds (MCD) is a dividend machine of late growing the dividend by an average increase of 26 percent for ten years. Foreign sales are a bigger percentage of operations than YUM however the profits are a lower percentage at 53%. Mc Donald’s perhaps would have liked to hold on to the stake they sold off in Chipotle in 2006. In the end the higher dividend at 2.9% for McDonalds and higher Safety rating of “1” leads to its selection for issue 2. Mc Donald’s has shown the commitment needed to the dividend by not squandering its capital and instead returning it to shareholders at 50% of the profits. It has acted as the partner one would like to see in a stock and as a result it has seen continual growth in both dividends and stock price. So for the $20,000 I will take 267 shares resulting in $587.40 in annual dividends. As a memeber of the Dow Jones Industrial Average Value Line provides the ratings for free so in it you can find a stock with many very strong ratings for Timeliness (2) Safety (1) Financial Strength (A++) Price Stability (100) Price Growth persisitence (70) and Earnings Predictibility (100) with a projected dividend growth rate of 9.5% future help on this slightly low yield is in store.

http://www3.valueline.com/dow30/f5707.pdf
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Old 09-13-2010, 10:49 PM   #15
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Issue 3 is a dividend lovers dream, the kind of issue that if one was not careful could end up filling an entire dividend portfolio. This is where the investing rules of only one stock per issue is both a blessing and a curse. It keeps one from being too concentrated in related industries but makes choosing the one stock to take very difficult. The industries are:
· Petroleum (Integrated)
· Canadian energy
· Natural Gas
· Natural Gas Utility
· Chemical (Specialty)
· Wireless Networking
· Coal Industry
· Oil/Gas Distribution
· Pipeline MLPS

In the end when building a dividend portfolio I would select the stock that is going to cause me the most paperwork: Kinder Morgan Energy (KMP) Kinder Morgan is the largest pipeline master limited partnership which will cause the filing of taxes as a small headache should one decide to invest in this stock. Kinder Morgan owns 29,000 miles of pipeline and over 180 terminals. However, I believe it is that fact which keeps these stocks undervalued and providing dividends in excess of 6 percent with growth rate in the dividends over the very long term more than 3 times the inflation rate. (13% over 10 years for Kinder Morgan). This stock is only a “2” for safety and a B+ in financial strength the bare minimum for investing but the commitment and continual raise of the dividend over 15 years makes this stock well worth the risk in my opinion.
So with my $20,000 investment I will purchase 292 shares of stock at $68.30 yielding an annual dividend of $1,273.12.
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Done?
Old 10-05-2010, 12:25 PM   #16
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Done?

Have you quit picking?
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Old 10-05-2010, 02:55 PM   #17
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I thought that I had missed it too....looking forward to your next pick!
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Old 10-05-2010, 02:59 PM   #18
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I'll third that! I've been enjoying this thread and hope the OP continues with more pick of the week stocks.
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Old 10-11-2010, 08:23 AM   #19
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OK I have been busy at my job and I will resume posting and catching up with the past weeks. I actually just reupped the Value Line for 2 additonal years so I'll have the issues for a while now.
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Old 10-11-2010, 09:14 AM   #20
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Originally Posted by Running_Man View Post
OK I have been busy at my job and I will resume posting and catching up with the past weeks. I actually just reupped the Value Line for 2 additonal years so I'll have the issues for a while now.
Thanks Charlie!

Looking forward to your analysis, recommendations and comments!
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