Ted SeeksQuality

Estrategia Referentes
32

Ayer publicó en SA su cartera.

Surveying My Portfolio: Domestic Equities 2018

Summary

A survey of what we hold and in what size.

A brief summary and explanation of trading activity over the year.

A review of those eliminated from the portfolio.

It has been over a year since I last laid out our portfolio in a series of blog posts. How has it evolved since then? Our domestic equities (excluding utilities and REITs) were listed here.

8%+ positions: JNJ, AAPL, DIS

JNJ continues to be our largest and oldest holding, and one that I have neither bought nor sold since 2015. It once again takes the lead spot, again with a 10%+ weighting. If I had available cash, I would consider increasing that further.

While we have traded AAPL more frequently, with four purchases matching four sales, it remains solidly in the #2 position. We have added 200 shares in the last two months, and believe it to be a terrific bargain at the current price. I have a high conviction in the future of the company that reaches well beyond the current quarter's device sales.

Disney has been a key piece of our portfolio since 2014, and with a purchase in June has now cemented itself in the #3 spot. I am willing to trim this one a little, if it reaches full value, but thus far have been content to write call options on the last 100 shares, for a net gain this year of a little over $500 -- a nice "dividend" for owning a stock while waiting for it to reach my trim price.

5% positions: PG, KMB, MMM, CVS

As with J&J, I am slow to trade PG. We have held this position since 2009, and neither bought nor sold in the last year. It is not an exciting company, but one that I am comfortable holding in size under any market conditions. I have been tempted to trim a little, to be sure, but where else can I find a company this reliable to stabilize my portfolio?

KMB is a similar company, in some ways, but new to my portfolio as of last December. Since our initial purchase (in two chunks a month apart) we have simply held and collected dividends, again not tempted to trade this steady giant. In theory, anything is for sale at the right price. In practice, it is unlikely that anybody would offer me enough to part with this one. (I would need to see a price north of $140.)

While CVS remains one of our largest positions, the path has not been smooth. We trimmed the position by 50% in January, at $79/share, due to concerns over credit quality and merger uncertainty. Those fears have eased over the past year, as the company has continued to turn in solid revenue and earnings, and as the merger has proceeded more or less according to plan, while the shares have retreated more than 20% from my sell point. This remains a speculative position, but one where I believe management has a clear plan to lead the company forward. Thus we restored 2/3 of the trimmed shares, at an average price of $63/share, and I would at least consider adding back that final third if I had cash available (and if no other shiny bauble catches my eye).

4% positions: MSFT, GIS, INTC, UNP, HON

As I discussed last year, I continued to build out our position in MSFT with two additional purchases followed by a small trim. Microsoft is a great company, in the middle of a strong growth spurt, but the stock is pretty expensive. I hesitate to trade these shares, due to what I see as a bright future for the company, but the current position is as large as I am willing to hold for a company with these characteristics. If it were to appreciate substantially from here, I would need to trim it back even further (and in fact this is what happened to last year's growth darling, NKE).

A year ago, I wrote that I'm not sold on GIS as a "core" holding (and thus held it as a 2.5% position). To address the growth concerns that I identified at the time, they acquired Blue Buffalo in a hugely expensive deal that devastated their credit rating. I sold on the announcement at $52.67, locking in a $1500 loss, but have since repurchased an even larger position at an average cost of $42. As with CVS the price makes a difference, and a 20% discount can be the difference between a sell and a buy. As with CVS, the added information from a few quarterly reports and a detailed operational outlook has given me confidence in the direction of the company that was lacking at the time of the sale. To me, these companies are worth MORE today than when I sold them, yet the price is much lower. Go figure!

We previously owned INTC for a little over a year in 2013-2014, selling on valuation concerns after the price ran up. I consider it a high quality company, though admittedly in a volatile industry, and thus the recent dip in valuation was too much for me to pass up. Like MSFT the position size will be capped, forcing trims if it appreciates by 25% or more from here, but it is a company I am comfortable to hold long-term at this size.

Little to say about UNP and HON. They are both held in our taxable account, and thus not subject to trading at this point. (Though we did gift some of the UNP shares and then repurchase them.)

3% positions: SBUX, AMGN, HRL, NKE, ITW

SBUX was built according to the plan described, and is now at a full/permanent position. AMGN has not been traded over the past year. Not much to say about either one...

HRL has been traded actively. We closed out the position a year ago, with two sales at an average price of $36.50, then reopened the position over the next two months with two purchases at an average price of $34. We have since trimmed it back with two sales at an average price of $40. I never owned HRL before 2017, so I do not have strong feelings or an especially high degree of comfort with the company. Thus I am open to buying on dips and selling on spikes, as the trading activity suggests. What remains here is likely a permanent position -- but I say that with less conviction than some of the companies I have held longer.

NKE has been a substantial holding of ours since 2016, and was briefly one of our largest, however I am uncomfortable keeping max positions of a company with a P/E over 25, and trimmed in three sales at an average price of $70. No matter how successful they are or how strong their brand, it is a poor fit for my portfolio parameters and skews the overall averages. That said, I am comfortable holding a 3% position while ignoring the valuation, and I will happily add more if the price retreats to a level where I am comfortable again.

ITW is new to our portfolio, a company that I have long admired but which never previously made the cut. I find the dividend attractive after the recent bump, and am happy holding it at this level while I learn more about their operations.

2% positions: PEP, VFC, UTX, SYY, T, GPC, XOM, CSCO1% positions: BRK.B

Not much to say here... PEP and BRK.B are new additions, ones I will likely build over the next year. CSCO is another that I would like to build a little further. VFC, UTX, and SYY were all trimmed due to valuation at prices well above their current levels, though I have no concerns about their operations. T is now considered in this category, while previously I had it classified as a "utility".

Eliminations

Notable in their absence are the five stocks you saw last year that are no longer listed: BDX, MKC, LOW, IBM, and GE.

I sold BDX on credit quality concerns. It may be a great company, but it was selling at a premium valuation that entirely discounted the credit risk from the massive debt load it took on. I will consider it again once the debt moderates, but the combination of very low credit quality and high valuation made it a clear sell for me.

I sold MKC strictly on valuation. I saw no way to possibly justify $155/share, and in fact trimmed it twice even before that level. It is a strong company, one of the key Consumer Staples, but there is a price for everything -- and I won't even look at that one again until the forward P/E falls below 24.

LOW is a fine company, one that I've owned for three short (profitable) stints, but it is not a core holding for me and not likely to become one. I would continue to treat it as a trading position if the opportunity arose.

IBM was a bad mistake. I bought a year ago at $153, then sold following the debt-funded acquisition of Red Hat at $118. I am willing to patiently own a company that is working through challenges, but not willing to ride that pony once the managers start stacking on debt. As with GIS, I might be willing to re-enter at the right price, if it were possible for me to develop any confidence in management's ability to operate the company. At this point that would likely require a new CEO.

GE was also a bad mistake, though happily a little less expensive (because I bought less in the first place). I grossly underestimated the severity of their problems, buying at $18.90 and selling at $15.40. I guess I could consider buying back in today at $7.50, but I would rather own companies that are successful rather than speculate that this piece of junk might be worth a little more than nothing.

Conclusion

As you can see, I am a sucker for value traps... Happily I seem to do well enough with QUALITY companies to make up for those bad mistakes, and I've learned to be quick enough on the trigger that I no longer ride my mistakes all the way down the slide. Overall, our "domestic equities" listed above have delivered a 2.20% return YTD and a 5.57% IRR since the last blog of this category, published 11/25/17. The S&P500 has delivered a -5.99% return YTD and -3.96% return 11/25/17, so it seems that my holdings have "beat the market" over that period? That is likely due to the emphasis in the portfolio on quality and defense, that should generally hold up well in weak markets.

I am comfortable with my portfolio as it stands. There are several positions I would like to build further, either to bring them up to size (PEP, BRK.B, CSCO) or due to value at this time (JNJ, AAPL, CVS), but our ready cash has already been spent and thus further purchases will be gradual. I could in theory look for something to sell, but for now am inclined to watch how things develop. The quarterly earnings season, and revised outlooks, will inform that process.

Disclosure: I am/we are long MMM, AMGN, AAPL, T, BRK.B, CSCO, CVS, DIS, XOM, GIS, GPC, HON, HRL, ITW, INTC, JNJ, KMB, MSFT, NKE, PEP, PG, SBUX, SYY, UNP, UTX, VFC..

1 me gusta
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Y esta era su cartera internacional a finales del 2017. Lo de MDT y ETN es un poco extraño ya que pese a tener residencia fiscal en Irlanda (retención del 20%), cotizan en el NYSE sin ser ADRs

20% positions: MDT, DEO
16% positions: UL, NVS
12% positions: NSRGY
8% positions: ETN, RHHBY

34

"I don’t want to dissuade young folk from learning and practicing DGI. Our personal investments have always followed a similar style, even if I originally learned it as “Growth and Income” investing. The idea of buying quality companies that pay stable dividends is not new!

On the other hand, both Growth and Income matter to the young investor. The Income becomes very important when you start needing it in retirement, but up until that point there is more than one way to grow the income stream. You can contribute new money, reinvest dividends, or benefit from growing dividends. Best if you do all three!

You’ve seen the various calculations comparing higher initial yield and higher growth. You know that it will take 20 years for Microsoft (yielding 1.83% and growing at 10% per year) to pass IBM (yielding 5.55% and growing at 4% per year) in yield-on-cost. After which people reasonably conclude, “How likely is it that Microsoft will sustain a rate of dividend growth that high for that long?” And thus determine that they prefer the “bird in hand” to the one that might be in the bush 20 years from now.

But I believe this is only half the equation. As a total return investor, who is not yet drawing dividends, my growth factor is equal to the sum of the dividend yield and the growth rate. That is certainly the growth rate of the dividend income when reinvesting, but if the yield is constant then it also becomes the growth rate of the underlying investment. In the above scenario, using those numbers, Microsoft might be expected to grow at a rate that is 2% greater than IBM. And that difference adds up over time!

Yet that brings us back to the fundamental question. Do we want to maximize the dividend payment in 20 years? Or maximize the portfolio value in 20 years? Again using the assumed numbers, an investment of $10k today in MSFT might generate $1700 in annual dividends after 20 years. An investment in IBM might generate $3400 in dividends. But (again assuming a constant yield), that MSFT position would grow to a value of $94k while the IBM position would only grow to a value of $62k.

Now I definitely want those dividends! My intention is to fund our retirement from the dividends, without needing to sell shares. Yet this is also exactly why I am a total return investor! Because the best way to enjoy fat dividends is not to invest in something that pays a fat dividend today – it is to invest in something that grows over time, then trade it for something that pays a fat dividend in 20 years! Chowder does this all the time with the older folk he helps, trimming some of the lower-yield positions, buying higher-yield positions, and thus generating the requisite income.

I have been doing that as well, almost without realizing it, shifting slowly from growth to income over the last five years. I noticed that our dividend income bumped up over 20% last year. The dividend income from our brokerage retirement accounts (for cleanest comparability) increased by 27% last year! A one-time exception? I thought so at first, yet the five-year average DGR for those accounts is a ridiculous 20%!!! And I could continue this for a few more years if I really wanted – we still have a third of our money in stocks yielding less than 2.5%.

So I’m definitely not arguing that you should ignore dividends. They are a key part of long-term investment success for almost any strategy, the element that makes stock investing more than just a casino. Nor am I arguing that Utilities and Consumer Staples are only for the old. Individual investors should begin with defense, the rocks on which the rest of their portfolio depends. But don’t neglect growth, and (especially in a tax-advantaged account) acknowledge the potential to shift towards greater income production in your 40s and 50s. Even in a taxable account this shift can be achieved through a combination of judicious trimming and reinvestment of dividends into different securities.

Chowder may disagree with much of the above, arguing that it is too complicated to learn one style of investing and then shift to another, however for me it has neither been a dramatic shift nor a rapid one. It has been more of a gradual change in emphasis than anything else, an evolution rather than a revolution.But the one point he and I absolutely agree on – don’t let anything get in the way of owning great companies. Don’t be swayed by P/E or yield or market volatility. Buy quality, buy strength, and build those winners over time!"

35

A raíz del último comentario, conversación Chowder-Ted:

CHOWDER:

"The problem here is that most people engaging in the dividend growth investing strategy have not been through a recession yet. I’ve been through 3 of them, and each time lost almost half of my portfolio value, that growth that people so often chase. I got tired of fighting for the same ground twice.

After I went through the second recession, I was ready for the third. In my greed to chase portfolio value growth, what I finally realized was that when the market corrects your share price, it doesn’t correct your share count.

The amount of dividend cash flow a $100K portfolio generates, is the same amount of dividend cash flow when the market corrects the portfolio value to $60KThe market does not correct share count and it’s the number of shares that you own that determines how much cash you can generate to reinvest.

Share count! … Build it! … We can’t control portfolio value, we can only hope. We can control share count and with that it means we can control how much cash we can raise for reinvestment. Work with what you can control."

TED:

"there is a reason I emphasize quality, strength, and defense! I’m also not talking about the usual crowd of high-fliers. I’m talking about established companies with outstanding histories — yet people are passing them by because they don’t yield over 3%?!? No MCD. Toss JNJ on the trash pile. Eliminate “low yielding” MMM from your portfolio. Sure, you can find companies with a 5% yield today, but if you pass over quality in the chase of current yield, are you really doing yourself a favor? Even in a recession?

And yes, I am also talking about including a few companies like NKE, MSFT, and AAPL in the mix. Quality companies with strong brands, if a bit more volatile than some. I haven’t noticed anybody correcting my share count in those either…I know you do not make this mistake in the portfolios you manage. Even if you are focused on income, you understand the value of a lower-yielding company that is growing the income successfully over decades. You have mentioned some of those for your son. Yet I see others confusing the emphasis on income with an emphasis on CURRENT income, ending up with lower-quality portfolios (with weak growth prospects) in the process. That will not serve them well, or grow their income stream through a recession.

Remember that “growth” does not necessarily refer to portfolio value. It can refer to DIVIDEND growth or EARNINGS growth as well, two things that the market does not take away in a correction. Dividends are a piece of cash flow, but there are strong companies with strong cash flow that choose to spend much of it in other ways rather than paying a high yield. A younger investor can benefit from some of those.

I absolutely agree with the focus on the fundamentals. A young investor is buying, not selling. Build share count and grow your ownership in world-class companies and you will be rewarded. A market correction is an opportunity, not an obstacle."

CHOWDER:

"I agree with your statement that I highlighted in this comment and have shown that the younger folks should not focus on yield, but to be sure any company they purchase at least pays a dividend and is considered a high quality company. It was one of my 4 criteria for purchasing a company, and moments ago I added that I was going to purchase more shares of NKE either today or tomorrow and its yield is just 1.2%. Next purchase after that will be HD with a yield of 2.4%.

I try to create balance when working with young folks. I try to take advantage of both higher yielding companies, those above 3%, with some of the lower yielding companies that seem to have higher dividend growth for now. I don’t know how long it will last which is why I sprinkle in some higher yielding companies."

36

Muy bueno el debate entre estos dos grandes.

Me ha recordado al hilo que creo hace tiempo Lluis sobre “Bajos dividendos muy crecientes VS altos dividendos poco crecientes”.

Sigo pensando lo mismo que ya pensaba hace un tiempo. Prefiero acciones con un rendimiento medio/alto (>4%), moderados incrementos (<10%) con un gran negocio pero maduro a empresas con un rendimiento bajo (<4%), incrementos elevados (>10%) y un negocio todavía por crecer.

Esto no quita que deseche las acciones de bajos rendimientos, de hecho, en esta bajada solo he comprado ese tipo de empresas porque tiene niveles muy difíciles de ver. Amén de que prefiero hacer un mix de ambos tipos de empresas puesto que me da más seguridad.

Cuando se empieza en el mundo de la inversión, y más concretamente en la inversión en dividendos, puede llegar a frustrar mucho ver lo despacio que va todo, más todavía si se compran acciones con RPDs <3%, ya que tras pasar por hacienda, el resultante es bastante ridículo. Tampoco creo que lo más inteligente sea comprar negocios que dan rendimientos superiores al 7%, 8,%, 9%, solo porque sí, sin ver que tipo de negocio o coyuntura tiene la empresa actual, ya que puede darnos más de un disgusto.

De manera totalmente personal, estoy más cómodo cuando hago un mix entre empresas que dan altos rendimientos y bajos aumentos de los mismos (y también de su principal), a empresas con bajos rendimientos, altas subidas de dividendos (y altos aumentos del principal), porque, como bien han dicho, el factor común de ambos tipos de empresas tienen que ser un gran negocio y además, en las crisis el principal se deteriora mucho (que no el negocio en si), mientras que la cartera de dividendos sufre menos (sé que esto también tiene replica, pero bueno…).

37

El hilo de Lluís y el que comentas de “Bajos dividendos muy crecientes VS altos dividendos poco crecientes“ son de obligada lectura cada cierto tiempo.

Te doy toda la razón. En la cartera hay sitio para ambos tipos de empresas, primando la calidad.

38

"After a busy December, I’ve been sitting back a bit the last few weeks. Our last portfolio purchases were AAPL on December 21 and CVS on December 24.

I find that I am reluctant to add to our larger positions at this time, as they are already substantial. Thus I will be taking a closer look at our smaller positions, possibly eliminating some while adding to the rest.

We have 11 positions that are less than 2.0% of the portfolio at this time. From smallest to largest: BRK.B, RHHBY, CSCO, XOM, GPC, SYY, T, PEP, VFC, NSRGY, UTX.

BRK.B – presently 1% of the portfolio, will look to add to this gradually over time until it is in the 3% range.

RHHBY – I have limited knowledge and spare analysis on this one. I like the company okay, and it has turned in a small profit over the last year and a half, but I don’t understand the business dynamics enough to build this one further – and thus will consider eliminating it entirely.

CSCO – this falls into the, “how the heck haven’t I built it yet?” bucket. I need to push some money this way soon.

XOM – Own it because I feel I’m supposed to own at least one energy/resources stock. Solid company, the industry leader. Not interested in building it, but if I sold it then I would likely feel compelled to buy it again.

GPC – Solid company but not really something I want to build. It can remain for now, but I’m willing to sell if I get a good price. I might sell before then to raise money to add elsewhere. 30 minutos más tarde pone "Sold out of GPC. I was actually thinking of doing so in November, and wrote options to that effect, but then the market correction got in the way. A nice 12% IRR over a 13-14 month holding period, so I’m obviously pleased with the results. It is a good company. But I don’t love retail/distributors in general and have other Industrials that I would preferentially own if I could find space in my allocation for them. "

SYY – One of my favorite companies. If T is a utility because its revenue is stable, then SYY is an uber-utility. Steady growth and a 2.5% dividend, promising a ~9% forward total return that you can bank on. May add to this when we make our Roth contribution.

T – A cheap stock, but not one I have a heck of a lot of conviction in. They seem to be doing the right things. I own enough of this one.

PEP, VFC, NSRGY, and UTX are all intentionally held at/around the 2.0% level. I would be willing to build PEP further, but do not feel any urgency to do so. VFC is not a great fit for my style and so is limited to this level. NSRGY is a fine company, but like RHHBY I have limited data on it. UTX is on freeze until the spinoff (and likely for at least half a year after).

Thus I intend to add to BRK.B, CSCO, and SYY as funds permit. I will consider selling RHHBY and GPC, though neither is urgent. The rest can stay as they are."

Respuesta de Chowder acerca de GPC

"In a young folk portfolio, I consider GPC a “must have” for the long term. I plan on increasing this position in not only my son’s account, but I do have it in some older folk portfolios as well.

I love having access to the consumer dollar and that means I have to have exposure to retail. It’s those NAPA auto parts stores that are recession resistant, and I love owning recession resistant businesses, especially since I have been through 3 recessions.

Since you Ted are a more active investor, I have to set portfolios up for those who will be more passive once I’m not able to manage their portfolios for them, so I have to think about companies that do better than others during poor economic times.

New car sales go way down during recessions, people fix up their cars and hold them longer as a result. thus GPC is one of my favorite consumer discretionary companies, right there along side of VFC"

Contesta Ted

"I may be a more active investor, but that does not enter into this one. I am not selling GPC as a trade and do not believe it is overvalued at this time. I have no quality concerns. It simply isn’t a conviction position for me.

Like you, I want “access to the consumer dollar”. I emphasize both Consumer Staples and Consumer Discretionary, believing that you can find some superior brands with staying power in that latter category. My Consumer Discretionary stocks include a large position in DIS and ~2% positions in SBUX, NKE, and VFC – all of which I believe have top-notch brand strength. AAPL also has some characteristics of a Consumer Discretionary company.

We also own SYY, which (regardless of categorization) shares many of the same characteristics of GPC. Our first purchase of SYY was 6.5 years ago. Our first purchase of GPC was just over 1 year ago. Partly for that reason, and partly because I believe SYY is somewhat more defensive in nature, I am more comfortable with SYY and intend to build it – while I do not see GPC as one of my top five ideas in the sector.Nothing against GPC. If I were to own ten stocks in the sector, it would likely be one of them.

I suppose I should note that I have different expectations for different sectors. When looking at Consumer Discretionary stocks, my foremost concern is the long term strength of the brand. I accept that the share price might get hammered in a recession (the sector tends to be somewhat volatile) but that doesn’t bother me.

My overall portfolio weighting is sufficiently defensive that it will tend to hold up better than average in a recession. That is good enough for me, so I don’t need to push that trait further.

I’m not looking for growth in Consumer Staples. I’m not looking for recession resistance in Consumer Discretionary. I’m not looking for dividend yield in Healthcare. Though I do try to consistently look for quality. :slight_smile: "

39

Cambio en el nombre del hilo.

La razón es la siguiente: Quienes leéis el blog de Chowder habréis notado que Ted ha cambiado su nombre a “SeeksQuality” además de borrar algún blog suyo como los recientes donde comentaba su cartera y orientación.

Ha comentado que lo ha hecho para tener más anonimato.

Para evitar problemas, le contacté por privado explicando que en este foro había un hilo dedicado a él y le pedí permiso para seguir recogiendo sus comentarios.

No ha puesto problema pero pide se elimine su apellido.

Así pues, a partir de ahora le citaré por su nuevo apodo. Ello también servirá para aquellos nuevos que decidan buscarlo en el foro americano (Seeking Alpha).

Muchas gracias CZD por la corrección ??.

40

A propósito de una conversación donde la mayoría recomienda no incluir en cartera empresas con calidad crediticia S&P por debajo de BBB (+).

“Debt ratios aren’t just about the risk of dividend cuts and bankruptcy, they are also a demand on the cash flow. A company working to get its debt ratio down will be squeezing its cash flow for a while to get there — which tends to inhibit growth for a few years. Thus high debt ratios can be a sell signal for a trader, even when there is little long term risk of the company failing,”

41

Parece que también asesora a gente.

"In a portfolio I advise for an older individual, desiring quality and stability but with no particular need for income…

Adding to JNJ, SYY, DIS, HON, LOW. Not recommending additions to HRL or MKC at this time based on valuation. (Might catch them next round regardless.)

Positions sorted by size after the adds: JNJ, PG, ABT, AXP, SYY, AAPL, CSCO, DIS, HON, MMM, CVS, LOW, UPS, HRL, MKC. It is a concentrated portfolio, but just a fraction of this individual’s assets, so the position sizes do not present undue risk"

42

"Yes, I believe that CEF leverage is buying on margin. It can be a low-cost way of securing loans. UTG is listed by Morningstar as having a -30% cash position, which I believe means that they have borrowed $30 for every $100 of investor principal – i.e. $100 of investor principal controls $130 of investments (and $30 of debt).

Margin leverage is on top of the leverage employed by the underlying companies. Moreover, it happens closer to the investor. If you invest on margin, you can get wiped out by a marginal call. Wiped Out. The broker sells off your assets and (maybe) gives you a little back after the loan is paid off. Unless you are very young, you cannot ever recover from that kind of a loss.

If a company borrows too much, that position might get wiped out. But the impact on the investor is presumably much less.

Margin leverage is commonly used by overconfident professionals to boost the returns on investment schemes that are guaranteed not to lose money. Then along comes a “black swan” that their models didn’t anticipate, and they are wiped out. Wiped Out. LTCM was run by Nobel prize winners. Hard to find anybody more experienced, knowledgeable, and professional than that. Wiped Out.

Speaking for myself, if I want a risky investment, I would rather invest in something a bit more speculative and/or volatile. I don’t need to take a safe investment and turn it into a risky investment through the use of leverage.

By the way, I know two family members who have been wiped out by margin calls. (Happily young enough that they can recover from that.) I have absolutely no interest in traveling down that road. I'm an idiot, and thus I like to keep my investing REALLY simple. I will let those who think they have a "sure thing" get wiped out."
43

"REITs are sensitive to the economy. It isn’t so much interest rates (though that is a factor), but their ability to maintain earnings and dividends through a recession. Most REITs reduced their dividend in the last recession, and there is no guarantee that the survivors of the last will also survive the next.

We will eventually have 20% of our retirement assets invested in what I consider “income equities”. I intend 10% in utilities, 5% in REITs, and 5% in the TIAA Real Estate Account, which is effectively a private (and conservatively managed) REIT."

44

Conversación acerca de tener un porcentaje de 15% o mayor de REIT en cartera.

" While sector classification is clearly an oversimplification (and somewhat arbitrary), there are real correlations between similar companies. Owning PG, UL, CL, CLX, and KMB is not true diversification, because their product lines overlap heavily. They are all subject to similar market forces.

Quality is important, but quality is largely the ability to survive troubles. It is not a guarantee that you are unaffected by those troubles. If you own several quality companies that are all exposed to a single risk, they can all be hit at the same time – and you are leaning VERY heavily on the quality. Even quality companies can cut dividends, they just have a wider margin of safety before that happens.

So nothing against owning 15%+ in REITs, if you wish, but consider if they all share some risk factor? What happens if 15% of your portfolio hits the skids all at the same time?

On the other hand, it is a broad category. Perhaps their risk factors are substantially different? That is for you to decide – don’t lean too heavily on arbitrary sector classifications."

Responde Chowder:

"You speak about diversity against market forces, so old fashion in my view. When I’m looking for diversity, I’m looking against company specific forces. I want to have sector exposure but want to be protected against any of the companies I own going bankrupt.

I don’t care about market forces hitting a sector, that’s temporary. Tough times don’t last, tough companies do. Let the sector get hit, as long as I own the best of the best, I firmly believe I’m okay over the long run. I can deal with temporary drawdowns, I simply want to avoid the permanent ones."

Ahora Ted:

"I am a firm believer in owning the best of the best, but there are some people who also invest in companies with BBB- credit ratings. Those are NOT the best of the best, and in fact are in danger of a dividend cut if faced with sufficient adversity. There are only ~25 companies with a 50+ year dividend streak. All other companies have cut or frozen their dividends in my lifetime.

And in fact we were talking about REITs, not a defensive sector, where credit ratings tend to be lower and dividend cuts are much more common than in Consumer Staples. Most REITs cut their dividend in the last recession, and while owning quality biases the odds in your favor, I definitely don’t see it as a guarantee.

If somebody wants to have over 15% of their portfolio in triple-net REITs, who am I to object? But economic pressures affect sectors as groups, and dividend cuts tend to come as bunches. There were not many energy companies cutting their dividends in 2008-2009. There were not many banks cutting their dividends in 2015. Sector classification is imperfect, but the concept of shared risk factors is meaningful.

I prefer not to have more than 15% in any of the sensitive sectors, and aim for diversity of risk even WITHIN the sensitive sectors. Quality, yes, but also diversity. And I know you practice this in your own investing, especially in the sensitive sectors. You do not concentrate all of your Industrial positions in Aerospace, for example.

All I am saying is know your risk. Avoid anything that could do real damage to your portfolio goals."

[…]

"In my own sector diversification, I begin by deciding what kinds of business I want to own in what balance, and then aim for the “best of class” representatives of each. Thus my approach to diversification never keeps me away from quality! I suspect the greater danger is to those who go heavily after a sector because they feel it is a “bargain”. If they are right, then they do very nicely. If they misjudge the sector dynamics, they can end up holding a whole lot of cheap junk that was NOT selected on the basis of quality.

All investments have risks. The concept of diversification isn’t to eliminate these risks, but to limit the exposure of the portfolio to any SPECIFIC risk, whether company-specific or sector-wide."

45

Este comentario es para enmarcar:

"When people read the comments and actions of others, they tend to filter those comments through their own perspective and situation. As a result, they often reach very strange conclusions. I talk about my moves, putting them out there for consideration and criticism, however I operate quite differently from others – and thus the motivations ascribed can be very much off-target.

I talk a lot about “risk”. To me, “risk” is most fundamentally the chance that our portfolio fails to meet our needs. I tend to take a much broader view of risk than others, including the risk that my needs exceed what I am planning for. Thus it isn’t quite as simple as aiming for an income target and then standing put. While achieving my planned needs is essential, any margin of safety above and beyond that is also potentially risk-reducing. Perhaps the most serious risk of this type is the possibility that one or both of us will need expensive long-term care, perhaps for many years. It is unrealistic to plan an income stream that will accommodate that level of expenditure, thus it could be necessary to spend down the portfolio in this scenario. Total return matters for this purpose.

There is also the risk, one that @Bob Wells talks about, that my death or mental deterioration will prevent me from continuing to manage the portfolio. Educating my wife and children in the plan and process are perhaps the best answer to this form of risk.

Risk assessment need not imply a high likelihood of an adverse event. On my optimistic days, I expect that there is a 99.9% chance that we will have enough to be comfortable. (I don’t honestly see how that isn’t going to happen.) On my pessimistic days, I figure that there is a 5% chance that I’m overlooking something huge. On my cynical days, I figure there is a 25% chance that I am grossly overconfident. :wink: Still, I expect we will be fine. I actually lean optimistic in this kind of stuff.

Risk assessment need not be emotional. For me it is more an intellectual question, “What could go wrong, and how can I minimize that chance?” People talk an awful lot about “fear”, which in this context is foreign to me. When it storms, I am anxious that the roof might leak. When I drive in the winter, I am anxious that the cars around me might do something crazy. I’ve been dealing with anxiety since a nasty auto accident a few years ago, a low-level continuing stressor. But finances? Not something I get anxious about. I’ve done my best to bullet-proof our financial plan, and have no fear of it going wrong. Whatever happens will happen, and I will trust in providence.

Moreover, while I work in terms of “total return”, planning and projecting future position and portfolio values, I am not sensitive to market prices. My valuation spreadsheet estimates a future value four or five years out. This works from projected earnings, projected growth, dividend yield, and quality metrics. The calculation does not include the current share price, except in the final step where it estimates the five-year total return. Thus when the market goes down, that final column turns very green. (When it goes up, it fades towards red, moderated by any earnings upgrades.) Half the time I don’t even know the current share price of one of my holdings. Until people teased me with the comments that O was rising, I would have guessed that it was in the high 50s. I watch only a handful of stocks closely, those that I might be trading based on valuation. The rest just do whatever they are going to do, without my attention.

Recognize also that a five-year Total Return projection is not highly sensitive to share price. Or to almost anything else, for that matter. Right now, working from $200, I project a 6.5% annualized return for MMM. This is not going to change substantially if the earnings estimates move by a percent or two. For example, bumping the 2019 earnings estimate from $10.78 to $11.00 only changes the forward return by 0.3%. Increasing the projected growth from 7.3% to 9.0% increases the forward return by just 1.2% Dropping the share price by $10 increases it by 1.1%. So these numbers move slowly, mostly wiggling back and forth within a broad range of inaction. I am not going to dump MMM just because it has a forward return of 6%, and I am not going to “back up the truck” just because it rises to 8%. The valuation-based moves in the portfolio happen outside the 4% to 10% range. (In the past I may have tried too hard to optimize. At this point I am more content to watch and wait.)

So while I do find the occasional “back up the truck” conviction buy, it tends to be the result of longer-term moves rather than an ephemeral price correction. I was talking about NKE a few years back – and was talking about them for at least a year before the price moved. CVS still hasn’t gone anywhere. These days I am mentioning AAPL, DIS, and INTC. These trends are measured in years, not months. But once a stock shows as a strong buy on my spreadsheet, there are really only two ways it can exit. Either a severe downgrade in quality or forward expectations or a substantial rally. Looking at numbers won’t help you anticipate the former, you have to consider the business plan and your confidence in the business plan.

Thus I would encourage other investors to relax a little, especially if your investments are causing you stress. You don’t need to pounce on every 5% move, and in fact the best values are often found among those stocks that HAVEN’T moved much recently. (Think DIS or CVS.) And it is pointless to worry about what is going to happen. Try to consider the risks dispassionately, weighing and balancing them against your own situation, then set a portfolio plan that is designed to meet your needs with minimal risk. After that? Implement the plan.

I spend a lot more time commenting here than I do actually looking at my investments. I spend a lot more time managing the daily/weekly bookkeeping, entering grocery receipts, logging/recording income, paying bills… I do update the prices on my spreadsheet weekly, sometimes also mid-week if there has been a large market move, but that takes just 1-2 minutes and rarely leads to further action. I do update my projection spreadsheet quarterly, which takes perhaps five minutes per stock, but again it rarely leads to substantial changes. When the plan does call for trimming or adding, I have a handful of positions to consider, and it is usually a matter of 30 minutes to figure out how to implement the plan.

Do you have a clear plan that tells you what you should be doing in any situation? If not, consider writing one? Once that is established, the rest is easy and emotion-free. Good luck!"

46

"Wrote options against SBUX @ $67.50 and AAPL @ $170, as both positions have grown substantially since I last touched them. Will be happy to keep the shares if the price drops below that in the next few months. Will be happy to take the money if it doesn’t happen.

That opened room in the portfolio to add CSCO, which I’ve been talking about doing for months. (I admit that I do limit the amount in Technology, and have AAPL arbitrarily classified as a Technology company, and thus this limited my opportunities to fill out the CSCO position. Task accomplished.)

Also added a few shares of VTR. Didn’t look at the price, yield, or valuation, other than to calculate how many shares are needed to bring it up to size.

Spent most of the last hour and a half looking at the proposed MLB rule changes, as well as some of the locations mentioned by Jeff and Zaan for vacationing. The actual trade orders probably took fifteen minutes. :slight_smile: Enjoy!"

47

Sector thoughts…

Consumer Staples has been surging, perhaps on the expectation of continued easy money conditions? I’m not loving that – price appreciation without fundamental growth does nothing for me. Only three of the stocks on my list trade at less than 19x estimated 2019 earnings: GIS, KMB, and SYY. HSY and PEP are borderline at 19.5x. Everything else is looking overvalued at this time. At $102, my estimated forward return for PG drops below 4% (and simultaneously the price appreciation would push the position size up into the next category). That would be a clear trim for me, so I may choose to write a call option at that price to cover 1/4 of the position. Or I might not. PG largely gets left alone.

Healthcare has long been one of my favorite sectors, along with Consumer Staples. CVS has been trading sideways for a month or more, waiting for news to catch a direction. They release earnings (and presumably an updated outlook) next week. The shares could take off if it is positive, as they have been beaten down SO far. My major focus will be their cash flow, debt levels, and plans for the MinuteClinic (whatever they are calling it now) vision.ABT and SYK are priced through the roof. Good companies, growing well, but I have a hard time investing in anything at such a high P/E (and low yield). JNJ and MDT are also good companies, and are 2/3 the valuation. The pharma segment is not especially expensive, and pays good dividends, but they are also under political pressure in their pricing. That may hold growth down for a while?

The Industrial sector is the third that I overweight. UPS, UTX, and ETN are looking like good values here (if you believe in the business outlook). UNP has shown stellar operating performance, and despite steep price appreciation it may still be fairly valued. Analysts have a hard time keeping up with a company that is growing this fast! MMM is trading at the upper end of its fair value range, in my opinion. They need to show a stronger outlook to justify further appreciation – but conversely the shares are not likely to appreciate too substantially until the outlook improves. This is my largest Industrial position (followed by UNP), but I am content to wait.

Consumer Discretionary is showing strength similar to Consumer Staples. Hard to justify the pricing on NKE, VFC, MCD, and SBUX – but I’ve already trimmed them back to a “permanent” position and am willing to simply hold regardless of valuations. All four companies are performing well. LOW looks like a good value, if you believe in their outlook. T as well (whatever sector they are in). DIS continues to be undervalued, and in my opinion is making all the right moves. It is by far my largest CD position, some 40% of the sector holdings.

My fifth core sector is Technology. In my opinion, this is a sector where you need to take a long term view, investing for competitive edge and market dominance rather than based on near-term outlook or yield. My favorites are AAPL (which I also believe is a bargain), MSFT (which is emerging as a dominant cloud player), CSCO, and INTC. I have GOOGL flagged to add at some point, but am in no hurry due to the lack of a dividend and the high valuation. IBM will reward investors richly if they ever get anything right…

49

"Here is an exercise for you…

Go to your planning spreadsheet and hide everything but the ticker and the industry. Hide the yield. Hide the P/E. Especially hide your cost basis. You know the companies on your spreadsheet, I presume, or they wouldn’t be there. What are the highest quality companies in each sector?

My take? (* denotes a company I do not own at this time)

Consumer Staples: PG, *CL, NSRGY, PEP, *COST, KMB, HRL, SYY, *KO, *CHD, DEO, *WMT, UL

Plenty of quality to choose from in that sector! You don’t need to own them all, though I would question why you would want to go much beyond this list.

Consumer Discretionary: DIS, NKE, *HD, *GPC

You’ve probably noticed by now that I tend to pass on retail? :slight_smile: A personal foible.

Healthcare: JNJ, MDT, RHHBY, NVS

Credit ratings falling in this sector, with far too many companies aiming for BBB+ ratings. There are relatively few left with pristine books. I own all four.

Industrial: HON, ITW, *BA, MMM, UNP, UTX, *GWW

Ambivalent on whether that last should be included. It is strong, for sure, but I may have it slightly overrated?

Technology: MSFT, AAPL, INTC, *GOOGL, CSCO

Others: BRK.B, XOMI don’t include Utilities or REITs on this list, so please don’t read anything into that omission. They are hard to compare fairly as they work from different metrics. For that matter I only include 50-60 companies total. If your favorite top-quality company isn’t listed, it may be that I haven’t added them to my watchlist yet. I don’t follow everything!"

50

15 de febrero:

“Initiated a position in WTR this morning. It doesn’t seem like an especially great value, and I’m uncertain as to what it will look like post-acquisition, but I am only buying a small position to begin from – I hope to build it over the next two years into a size comparable to my other utilities.”

“I will likely be layering into this one slowly over the next two years, whatever the valuation, but I would be willing to make a larger purchase if it were to offer an unusually good value.”

Ha analizado las utilities del sector agua y esta ha sido la escogida.

51

Nuevo artículo a propósito de KHC, hablando acerca de cómo se puede evitar entrar en empresas que luego den problemas:

Could We Have Seen It Coming?

The KHC dividend cut caught a lot of people by surprise.

Did the business take an unpredictable turn for the worse, or could we have seen this coming?

What might we look for to avoid owning mistakes like this in the future?

I have never considered Kraft (KHC) as “investable” by my standards, as the Baa3 credit rating falls well short of my nominal minimum. I am not a fan of serial acquisitions, as they make it very difficult to get a handle on the financials, and I like to see a solid ten-year history for a company before investing. But what if I had looked? What would I have seen? What were the shareholders of KHC looking at – and perhaps ignoring – when they looked at the financial statements? Let me pull up Morningstar (through my library’s subscription) and see what it shows…

Income Statement

My assessment of a company’s financial situation typically begins with the Income Statement, as that helps to put the rest into context. Revenue is critical. Is a company growing or shrinking? Have there been any major acquisitions? In the case of KHC, it shows just an eight-year history. The first six of these show essentially flat revenue. That jumps to a new level in 2016, which again continues flat through to the present. It is simple enough to deduce that there must have been a major acquisition closed in 2015 – and in fact that is when the Kraft/Heinz merger closed. (It isn’t clear to me why the reported 2015 numbers appear similar to the 2014 numbers. Perhaps the reporting was not merged until the following year, so 2015 shows only Kraft?)

A quick hop over to the Key Ratios page shows that operating margins jumped with the merger, from a prior level in the teens to the low 20s. I can see why that would be encouraging for investors, though a not-quite-three-year history is a bit short for my tastes. Given the magnitude of the transformation, anything prior to 2016 is likely not relevant to the new business.

Moreover, there is no evidence of top-line growth from 2016 to the TTM. Nor has Operating Income improved over that span, going from $6.1B to $6.8B to $6.0B. Net income was impacted by a tax-reform adjustment of $6.7B in the fourth quarter of 2017, which also gets included in the TTM column, but once you back that out there is no meaningful growth in Net Income either. Nor does EBITDA (which is not impacted by the corporate tax reform) show any improvement, going from $7.5B to $7.8B to $6.7B.

It is hard to reach any kind of sensible conclusion from just a three year history! When looking at a number is it a one-time blip in the trend? Or is a slight dip a harbinger of things to come? You can hash and rehash these same three columns forever and still not be able to forecast the future with any kind of confidence. In its present form, KHC is simply too young to have a proven track record. The lack of top-line growth is mildly concerning, but not unusual in this sector over this period of time.

It is tricky to estimate the payout ratio. Morningstar calculates one, but it appears to be in error (I cannot figure out how they reached the number they did). If I back out the impact on earnings for tax reform, I estimate perhaps $2.75 per share, which suggests a “stretched” payout ratio of over 90%, but not immediately concerning – if the earnings grow from there.

Conclusions from the Income Statement: Limited/no growth, possibly slow revenue declines, and earnings that are barely enough to cover the dividend. I would not see it as an attractive investment based on these qualities, but the numbers do not signal imminent disaster.

Balance Sheet

I prefer to look at the Quarterly Balance Sheet report, and mostly focus on debt trends. Looking at the ten-quarter history, I see that debt declined slightly from $30B in 06-2016 to $28B in 12-2017, but then increased to $31B last quarter. Always concerning to see the debt tick up for a heavily indebted company, but it wasn’t a huge bump or an extended trend. Sometimes liabilities shift from one line to another, and the Total Liabilities line has shown a steady decrease from $64B to $54B over ten quarters.

The debt ratio is potentially an issue. First, the LT debt of $31B is only 2/3 of the total liabilities. There is a huge “deferred taxes liability” as well. But forget that. I’m never sure what to make of deferred taxes anyways. The TTM EBITDA (which is not affected by the tax change) shows as $6.7B, for a debt ratio of just under 4.5x. Anything over 4 is scary-high, and I would need a high degree of confidence in the direction of the company to invest at these levels. It is concerning that the company seems willing to carry debt at this level without paying it down more aggressively.

Conclusions from the Balance Sheet: Heavily leveraged, but that merely confirms and reinforces the BBB- credit rating. It isn’t really anything that I needed to sleuth the financial statements to figure out.

Cash Flow Statement

For many businesses, my look at the cash flow statement is pretty perfunctory. I want to make sure that Operating Cash Flow is sufficient to meet all the basic demands on it – Capital Expenses, Dividends, and Share Buybacks. A single-year shortfall is not a problem, but it is concerning if the OCF regularly falls short.

Morningstar calculates $5.2B of operating cash flow in 2016, $0.5B in 2017, and $1.4B over the TTM. Since the last two overlap, it is also important to look at the quarterly breakdown – however the 4Q17 does not stand out.

It is not at all clear to me how a company that is reporting $6B/year in operating income can somehow show just ~$7B over THREE years in cash from operations. I guess there has been a large build in Accounts Receivable and Inventory, as well as other changes in “working capital”? I might have picked that off the Balance Sheet, if I looked closely, but did not notice it until I looked at the reported cash flow!

Capital Expenditures are the first demand on the cash flow. They can be managed by the company, to a degree, but declining investment can be a bad sign (unless there is a very good reason why a company requires less investment than in previous years). CapEx from 2016 onward has been trending lower, from $1.2B in 2016-2017 to $855M over the TTM. It is concerning that despite this decrease, CapEx over the last seven quarters has exceeded OCF, $1.8B to $1.4B. That would not seem to leave ANY cash for other purposes.

The Cash Flow Statement also shows the dividend payments, a current run rate of $762M/quarter or $3.0B/year. While the free cash flow in 2015 was barely sufficient to cover the 2015 dividend, the negative cash flow since was clearly inadequate to the need.

Conclusions from the Cash Flow Statement: There is something badly wrong with the business, as it has struggled for seven quarters to generate consistent cash flow. Cash generation is barely sufficient to cover capital expenditures. It is not clear that the business is generating enough cash at this time to support any dividend at all.

Conclusions

It is hard to formulate an investment thesis for a business with a track record (in its present form) that is just three years old. I like to see stability and consistency, as that gives me confidence in future earnings. The Income Statement from KHC is too volatile and too brief to support that degree of confidence. The quarterly results might offer a little greater insight, but the decline in Operating Income from ~$1.6B/quarter in 2016 to $1.3B in 2Q18 and $1.1B in 3Q18 should give pause – if anybody took a careful look at the quarterly trend.

The leveraged balance sheet is more obvious. In fact you could guess at that simply by looking at the credit rating. It is always debatable how much debt a business can support, but LT Debt/EBITDA over 4.0 is considered dangerous, and a business that skates along at that level is risky. That is what the BBB or Baa3 credit ratings tell us. I might be willing to invest in a business with a low credit rating, but I would need a very high degree of confidence in its outlook.

But it is the Cash Flow statement that raises the most red flags. I’m not enough of an accountant to reconcile the respectable reported Operating Income with the weak/non-existent cash flows. But recognizing that I lack this expertise, I want to see BOTH the Income Statement AND the Cash Flow Statement supporting my confidence in the business. In this case the cash flow is clearly insufficient.

Now yes, this is hindsight in that I’m looking at past numbers and pretending that I didn’t have an inkling of what was to come. I previously never took more than a superficial look at the credit rating (unacceptably low) and Debt/EBITDA (unacceptably high). It is not a business I already owned, and given the obvious weakness it was not one that I cared to research in any detail. I prefer to spend my time researching quality companies that I might want to own!

But when a company with zero top-line growth has fallen well short of being able to cover the dividend out of OCF (let alone FCF) over the past two years, and only barely covered it the year prior, then it is hardly a surprise when the dividend is cut! I would presume that shareholders periodically review the financials of the companies that they own? I admittedly don’t look carefully at all of my holdings every quarter, but I take a close look at any that are showing marginal credit or deteriorating earnings quality. I do not believe that KHC should have passed such an inspection.

Looking Ahead

For those considering holding on to KHC, or considering a speculative buy to take advantage of a rebound, I would raise three concerns.

First, the dividend was cut by 36%. If I take the former $3.0B annual dividend obligation and reduce it by 36%, I get a $1.9B dividend obligation. While the cash flow statement for the latest quarter has not yet been released, as far as I know, the average FCF over the last three years has been $1.28B. Unless they find a way to dramatically increase the FCF, I don’t think they can afford the current dividend rate either. Thus a second dividend cut (likely eliminating it entirely) could be in the cards. And that could be the best thing for the business.

Second, while the Intangibles/Goodwill writedown did not affect the actual operations of the company, it does weaken the asset book. S&P has already indicated that it will consider downgrading KHC from its current BBB rating. KHC cannot afford downgrades, and thus would be well advised to take steps to repair the credit rating. That can include elimination of the dividend (freeing up cash to work off the debt more quickly) or an equity raise (diluting current shareholders and likely also resulting in a dividend cut).

Third, the weakness in cash flow is shocking. Before investing in the company, I would need to understand why their reported cash flow over the last seven quarters is so much weaker than the reported income.

The immediate default for an investor should be “do nothing”. Under most circumstances, you are better off allowing a situation to develop before acting. You are less likely to miss a great opportunity than you are to miss making a bad mistake. But competing with this is the “show me” principle. If you cannot confidently project stable and growing revenues, earnings, and cash flow, then it is very hard to justify investing in a company. A retreat in a recession is expected. A collapse during a period of economic expansion is a surprise.

I will refrain from making specific recommendations, but would encourage any KHC shareholder or anybody considering an investment in KHC to find their own answers to the three questions raised. It is entirely possible that you will find solid answers that my limited research has not turned up. Read the transcript of the conference call (or better yet, listen to the recording). Review the SEC filings whenever they are released. Consider the direction that management lays out. Is that sufficient to answer these concerns?

52

Acerca de KO:

"KO suffers from the “moving parts” problem, as in the past decade they first took over their bottling operations and then refranchised them. Thus you see revenue trend from $31B in 2009 to $48B in 2012 and it is now back to $32B. They have not seen a third of their business evaporate! It is simply a question of whether those low-margin bottling operations are included in the books or operated as separate entities.

If you look at Operating Income, that has been much steadier. It did peak at $10.8B in 2012, falling back to $8.6B in 2016, but it has risen nicely each of the last two years. And again, the bottling operations may be low-margin, but they contributed something to the income. So it is hard to make an apples-to-apples comparison unless you reach back ten years.

I am not thrilled by the KO debt. They added debt when they took over the bottlers, and added more debt through acquisitions. Yet somehow they forgot to clear that debt when they refranchised the bottlers! In 2009, KO had $5B of LT debt. Now they have $25B, for a company that is essentially the same size. It is like running across that star athlete from high school who now weighs 250 lbs. He may be the same person, but you cannot reasonably expect the same performance. Nonetheless, he might still beat me in a race…

The payout ratio is a little concerning, but not TOO bad. I don’t see how Morningstar is calculating those numbers, and thus would ignore them (and calculate them myself). I see $28B in Operating Income and $23B+ of Operating Cash Flow over the last three years combined. CapEx is around $5B, while the dividend is around $19B. This more-or-less works. I would love to see them open up a little more breathing room, perhaps restraining dividend growth for a few years to allow earnings to pull ahead, but I don’t see it as actively dangerous.

Part of the reason is that they still enjoy strong A1 credit. Even if they stumble, they can afford to borrow a lot more before they are at any risk of losing Investment Grade status. A company that is already highly leveraged like KHC does not enjoy that margin of safety.

In conclusion, I consider KO “top quality” and carry it on my watch list. If somebody is looking for a high-yield Consumer Staples company, I would recommend they consider KO, KMB, UL, or PEP (also strongly recommend PG, but its dividend has dipped below 3.0%). Analysts are expecting $2.00++ of earnings this year, so the payout ratio should be okay. Forward earnings growth projections of 7% may be optimistic, but even 3% would be sufficient to their needs. They should be fine. Not promising you great growth or great returns, but I would be shocked if they were to run into financial trouble in the next five years."