Hacks for Your Portfolio
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
"Hacking" your portfolio is a good thing. A life hack is a new term for making life easier and as stressful as investing can be, some basic things to remember can keep you off the Xanax and tequila.
- Best of breed
- Get some yield
- Know the field.
If you can buy a stock that is the best of its industry, offers some yield, and is in a field you either know well or feel you can keep up with, that is a great hack stock (in the good sense of the word).
You must be this big to ride
A Dividend Aristocrat, one that has raised dividends for 25 years or more, is a good starting point. There are maybe 50 of these companies in any given year, as some drop off and others come on.
Buying a Dividend Aristocrat guarantees a few things-- the company has at least a $3 billion market cap. In other words, you must be this big to ride and a member of the S&P 500 club. Volume in the stock has to be at least $5 million in 6 months. Frankly, I wouldn't want a stock that hadn't traded that much in half a year. Some examples companies you are probably familiar with are Procter & Gamble (NYSE: PG), Monsanto, Chevron, and McDonald's.
What a Dividend Aristocrat doesn't guarantee is that it is a good buy at its current price. Many names on the list now have trailing P/Es in the mid- 20s or higher. It also doesn't promise a sizzling growth rate; most of these have single digit growth rates. One I like that isn't as well-known as these iconic names is consumer staple Clorox (NYSE: CLX)
Better hygiene and germophobia
Clorox, with a trailing P/E of 19.69, is one of the smallest of well-known consumer staples but it will mop up any portfolio mess with its 3.30% yield, raised for 37 consecutive years and just raised 11% recently. Its trailing P/E is lower than competitors Procter & Gamble, Colgate Palmolive (NYSE: CL), and Church & Dwight.
The company has benefited from trends toward better hygiene (huzzah!) and germophobia from annual flu outbreaks. It also has a varied product mix aside from cleaning products, including Hidden Valley dressings and sauces, Burt's Bees personal care, Kingsford Charcoal, Glad plastics, Brita water filters, and kitty litter.
The company has some innovative products in its pipeline with new Burt's Bees cosmetics, a Nickelodeon branded Brita water bottle in time for Back to School, and new laundry additive products.
The company reported Q4 results on August 1. Margins expanded 130 bp for the quarter and full year EPS growth was 5%. The big takeaway was that the competition sat up and took notice of Clorox's record shipments of disinfecting wipes during flu season and have ramped up their own promotional spending. However, regulatory and client expectations of cleanliness have boosted their Professional products division for cleaning.
CEO Don Knauss said, "We anticipate stronger top line performance in the second half as our plans to address the competitive environment take hold and we benefit from innovation." (source: Seeking Alpha transcript). Remember, flu season is imminent.
Clorox resembles what Procter & Gamble looked like a few years ago before it jettisoned its food products to concentrate on home and fabric care, personal grooming, and family and baby care. If only Clorox would buy a coffee company.
Procter & Gamble has a 21.05 trailing P/E now and a 2.90% yield. That yield has been consistently raised for 57 years straight. The two companies have similar PEGs with Clorox at 2.41 and Procter & Gamble at 2.35.
Both are similarly poised to expand emerging markets. P&G earns $33 billion in revenue from emerging markets. In an interview on CNBC after earnings CEO Knauss reported that developed markets' growth was slowing down and the company was bullish on Latin America, in particular.
It must be noted Warren Buffett's Berkshire Hathaway lightened up in Procter & Gamble as his latest 13-F filing showed. But Pershing Square's Bill Ackman cut his stake to 9 million shares, a 68% reduction, in the packaged goods giant even after his activist push for a new CEO succeeded, losing CEO Bob McDonald and bringing back former CEO Alan George Lafley. Ackman also agitated for a big push into emerging markets. The stock is currently trading around $80.00 as is Clorox but at the Ira Sohn Conference he stated implementing his suggested changes would take Procter & Gamble to the $120s in just a few short years.
Colgate Palmolive gives "best of breed" a new meaning as it operates in two divisions: Pet Nutrition and Oral, Personal, and Home Care. This company, founded in 1806, is trading at the richest trailing P/E of the three at 24.96 and the lowest yield at 2.20%. With 123 years of continuous dividend payouts and 51 years straight of raises there's little need to worry if they can cover the yield.
Despite the rich valuation here, Colgate Palmolive has the most exposure to emerging markets with a full 50% of revenue from these faster growing regions with another 30% coming from other international markets, exactly the opposite of Clorox (80% US originated revenue). The company sells to over 200 countries compared to Clorox's 100.
Its brands, like Procter & Gamble and Clorox, often hold #1 or 2 market share. Also its Pet Nutrition division is well positioned for growth as pet care is the second fastest growing sector of retail after electronics.
The Foolish takeaway
So, all three are best of breed and have yield. Clorox is the bargain of the bunch with the highest yield and at the smallest market cap of $11.1 billion is not as heavily covered as the other two. It is innovating, expanding internationally, and I like the way it looks like a small Procter & Gamble in its heyday. If you could buy Colgate Palmolive much, much lower at a point where its yield was closer to 3% that would be an especially good lifehack for your portfolio.
Now, it's your chance to know the field and do due diligence. With three Dividend Aristocrats to choose from "hacking" your portfolio, they've already done the heavy lifting for you.
AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!