Towards the end of last month I added to my position in the Consumer Cyclical sector. This sector is underweight by dividend income in my portfolio and I decided to buy into a new company to round the sector out.
Around 8% of my total annual dividend income from stocks comes from the Consumer Cyclical sector at the moment; I want that value to be nearer 9% per my dividend portfolio sector allocation.
The Consumer Cyclical sector
The Consumer Cyclical sector, also known as Consumer Discretionary, is a general grouping of companies that sell ‘nice to have’ items; this includes automotive, housing, entertainment and retail industries. The performance of the sector is linked to the economy, since more luxury products are bought when times are good and fewer when times are bad. Its counterpart is the Consumer Defensive sector which is grouped around more mandatory items which in theory should be less impacted by the economy since everyone needs soap and other essentials.
Morningstar shows the Consumer Cyclical sector as having average performance over a rolling 1-year period, beaten by Healthcare, Technology, Financials and Real Estate.
My Consumer Cyclical stocks
I currently own positions in LB, HD, MCD, WPPGY and MAR in the Consumer Cyclical sector.
L Brands (LB)
L Brands (LB) is a $24B retail company selling clothing lines, personal care and beauty products. Its biggest brands are Victoria’s Secret and Bath & Body Works. I bought this stock originally in early 2013 solely because of its strong brand name and retail / media presence and I’ve not added to it since. The company joined the US Dividend Champion list this year as a 5-year Dividend Challenger.
The company pays a 2.4% dividend, having increased it for the last 5 years starting 2011. Its current payout ratio is 52%, higher than it’s typical 30-45% range. The annualized dividend growth over the last 5 years is the third highest in this round-up at 18%.
Its P/E of 21.4 is higher than the S&P 500 average of 19.2. LB’s P/E has always been higher than the S&P 500 and the current gap is smaller than normal so the stock might be considered better value this year on that basis. Projected EPS growth over the next 5 years is 10%.
The company is prone to paying out special dividends (2010-12, 2014 and a $2 payout this year in February) in addition to its ordinary dividends. Dividend increases usually occur in the February declaration; the increase this year was from $0.34 to $0.50 or a 47% increase. The company pays 2.1% of my annual dividend income.
Free Cash Flow has been positive for each of the last ten years with a low of $16M in FY2008 and a high of $1071M in FY2015. TTM Free Cash Flow is $1022M.
PFE has an average credit rating at Moody’s with a Ba1 grade after being upgraded in 2011.
Better than expected sales in July led to an increased 2nd quarter EPS guidance of $0.66 to $0.68.
Home Depot (HD)
Home Depot (HD) is the world’s largest home improvement retailer with a market cap of $151B. It operates over 2,200 stores in the United States, Canada and Mexico.
Home Depot is a 6-year Dividend Challenger with a current yield of 2%. The dividend has increased with a 5 year dividend growth rate of 16% – the fourth highest rate in this roundup. The payout ratio is typically within a 30 to 50% range.
HD has a P/E of 23.7 vs. the S&P of 19.2. The P/E has been higher than the S&P each year since 2008 with the biggest gap of 7 points seen in 2012. Estimated 5 year EPS growth is 13% which is the second highest among my stocks in this sector.
Dividend increases are usually declared in February. This year’s increase was from $0.47 to $0.59, a 25% increase. The company pays 1.3% of my annual projected dividend income.
Free Cash Flow has been positive for each of the last ten years with a low of $2.17B in FY2008 and a high of $6.24B in FY2015. TTM Free Cash Flow is $7.6B.
HD has a good credit rating at Moody’s with an A2 rating since 2013. Last year’s online security breach was a negative but ultimately did not affect the rating.
Home Depot purchased Interline Brands for $1.63B last month in an effort to increase sales and services aimed at professional contractors / installers. Interline sells maintenance and repair products to property managers. The purchase was considered to be positive for the company’s credit rating.
McDonalds (MCD) is the world’s leading global foodservice retailer. With a market cap of $95B, it operates 35,000 locations serving approximately 70 million customers in over 100 countries every day.
MCD is a 39-year Dividend Champion and its dividend yield is 3.4%. The current 79% payout ratio has been slowly increasing from a low of 43% in 2008. MCD’s dividend growth over the last 5 years has been about 10%.
The company has a P/E of 23 which is higher than the S&P’s 19.2. Its P/E has been tracking the S&P average closely since 2011, but the current value breaks that trend. Projected 5 year EPS growth is 7% – the lowest among the stocks I currently hold in this sector.
Dividend increases are usually declared in September. Last year’s increase was from $0.81 to $0.85; an increase of 5%. The company pays 3.8% of my annual dividend income.
Free Cash Flow has been positive for each of the last ten years with a low of $2.6B in FY2006 and a high of $4.4B in FY2011. TTM Free Cash Flow is $4.3B.
MCD has a good credit rating at Moody’s with an A3 rating, although they were downgraded from A2 in May this year due to concerns over MCD’s aggressive shareholder return targets through dividends and stock repurchases requiring higher levels of debt.
First quarter results posted in July were below expectations with a 13% drop in net profit for the quarter as sales in U.S. stores fell 2% in the three month period.
Marriott International (MAR)
Marriott International (MAR) is a $20B company operating several hotel chains across different price levels: Residence Inn, Courtyard, Fairfield Inn, Marriott and Renaissance among others. I originally bought MAR back in 2013 when I was travelling more and staying in hotels; it wouldn’t qualify as a new purchase based on my current screener due to its low dividend yield. I am interested to see where its dividend goes in the future so I’m not considering to sell it at this time. Plus I’ve always wanted to own a hotel ever since playing Monopoly.
The company is a 6-year dividend Challenger and pays a 1.3% dividend which has been increasing over the last 5 years at a 56% annualized rate. This is highest rate of increase in this review although high percentage growth can be misleading when the dividend payment is a small value per share. The payout ratio is 37% and typically falls in a range between 20-35% on a financial year basis.
MAR is an expensive stock. It has a current P/E of 26.4, which is higher than the S&P Index average of 19.2. This follows a historical trend however; the P/E has been higher than the S&P for each year since 2004 although the current gap is much less than in 2014. Projected EPS growth for the next 5 years is 21%, the highest in this roundup.
Dividend increases are usually declared in May; this year’s increase was from $0.20 to $0.25; a 25% increase. The company pays 0.4% of my annual dividend income.
Free Cash Flow has been positive for each of the last ten years with a low of $57M in FY2010 and a high of $832M in FY2011. TTM Free Cash Flow is $784M.
MAR has an above-average credit rating at Moody’s with a Baa2 rating which it’s held since 2010.
Second quarter results beat expectations with net earnings of $0.87 per share vs. projections of $0.81. Its revenue of $3.68B was below expectations. Full-year earnings are expected to be $3.10 to $3.18.
WPP Group (WPPGY)
WPP plc (WPPGY) remains the world’s largest advertising company at $29B after Omnicon (OMG) and Publicis (PUB) agreed to disagree on their proposed merger last year. The company was originally founded in 1971 as a manufacturer of wire shopping baskets and I’ve written about it previously in an earlier UK Dividend List post where they’re a 22-year dividend Contender – the WPPGY symbol here refers to their US listed ADR. The UK symbol is WPP.
Here on the US exchanges, WPPGY has increased its dividend every year for the last 5 years making it a 5-year Dividend Challenger. Because of this, projected yield is hard to determine – this year’s DPS of $3 gives a current yield of 2.7%. The annualized dividend growth over the last 5 years is 20.7%.
Payout Ratio has been in the 30-50% range over the last 10 years and is currently around 65% based on an EPS of $6.52 and DPS of $2.99.
WPP’s P/E is lower than the S&P’s average of 19.2 at 17.9. Over the last ten years, the P/E typically tracks the S&P fairly closely with the exception of 2013, and the current P/E is similar to 2014 values. Its projected EPS growth over the next 5 years is 10.9%.
Dividend increases follow the typical UK pattern with a bi-annual dividend schedule where payments arrive in July and November each year. Increases can be on any payment and the amounts are also affected by the exchange rates. WPPGY currently pays 0.7% towards my annually projected dividends as I only started a small position in them February and March.
Free Cash Flow has been positive for each of the last 10 years, with a low of £412M in FY2011 and a high of £1.49B in FY2010. The TTM Free Cash Flow is currently £1.49B.
WPP has an above-average credit rating at Moody’s with a Baa2 rating.
WPP’s half-year results are due on 26-August. In their previous first quarter report in April, net Revenue was £2,783M, an increase of 5.2%. Net sales increase 2.5% to £2,419M.
What to buy?
Of the companies listed above, both HD and MAR fall outside my minimum yield threshold of 2.25%, so those stocks need to decrease in price further. MCD looks quite expensive given its lower growth expectations and high P/E. LB looks a little on the expensive side too and I score it a little lower because of poorer credit quality. Which leaves WPPGY meeting all my standard criteria and this looks like a reasonable next purchase.
However. Since two of my holdings are yield-locked and out of possible selection, I decided to diversify one final time in this sector to bring the total number of holdings to 6. And what caught my eye from my watchlist as a long-term investment was Walmart.
Walmart (WMT) is a $230B retailer, operating Walmart and Sam’s Club stores.
The company is a 42-year Dividend Champion and pays a 2.7% dividend which has been increasing over the last 5 years at a 12% annualized rate. The payout ratio is 40% and has typically held steady in a range between 20-40% over the last ten years.
WMT has a current P/E of 14.3, below the S&P Index average of 19.2. This level is a significant drop compared to 2014 which it held close to the S&P average value. Projected EPS growth for the next 5 years is 4%, the lowest of all companies here but not too surprising for such a large company.
Dividend increases are usually declared in February; this year’s increase was from $0.48 to $0.49; a 2% increase.
Free Cash Flow has been positive for each of the last ten years with a low of $3B in FY2006 and a high of $16.3B in FY2014. TTM Free Cash Flow is $14.8B.
WMT has a good credit rating at Moody’s with an Aa2 rating which it’s held since at least 1997.
Q2F16 results are due to be announced on 18 August 2015.
Q1FY16 results published in May showed a 0.1% drop in Revenue from $114.8B from $115B largely due to currency rates. Income also declined from $6.2B to $5.7B.
My stock purchase
I purchased 10 shares of WMT @ $73.35 ($740.45) on 7/20.
This purchase should increase my projected yearly dividend income by $19.50.
Quote of the day
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