Author: James Hofman
Covestor model: Dividend Growth
Disclosure: Long NOK, FTR, ENP,MRK, HCBK, LO
My dividend value model is a long-term focused portfolio that emphasizes both income and valuation. I look to take advantage of opportunities that arise from companies and sectors temporally falling out of favor. Once the valuations are cheap enough in a sector, I perform some basic industry and company analysis to make sure that it is an industry and company that I see having better days ahead of it. If I do not feel the company has the potential to grow earnings in the future then it will be removed from consideration. My screening and selection will mostly draw from mature industries and firms that are re-organizing.
An example of a turn-around story I own is Nokia (NOK). I believe Nokia’s recent decision to switch its devices over to Windows Mobile OS will help increase sales, as they will be more competitive. They will also benefit on the bottom line from R&D savings.
A long-term pick of mine, Frontier Communications (FTR), has strong cash flows that can support its high dividend yield.
Some of my value picks may not be based on earnings growth alone, but may also come in the form of firms where core assets are under-priced by the market. An example of this could be my recent pick Encore Energy Partners (ENP), where I believe the market has not accurately begun to price its proven oil and gas reserves at today’s prices.
Being a value investor is never easy; we are often buying what every one else is selling and hates. But I believe it works. Some of the portfolio’s recent worst performers are, I believe, some its best long-term prospects, but the market has been spooked out of these names because of some short-term events.
For example, Merck’s (MRK) management revised guidance lower to reflect more R&D spending. This dragged the stock down recently, but it remains a great long-term story.
Hudson City Bancorp (HCBK) missed earnings and the stock dived, even though it was one of the strongest banks through the crisis.
Lorillard (LO) sold off heavily in January for fear of a recommendation against menthol by an advisory panel. Now it appears the panel will find that there is no link between menthol and increased risk of disease. The stock is still low despite the draft report’s publication, and the company is the best operator in the tobacco industry in terms of growth and margins.
With the weaker stocks in the portfolio, I am not afraid to buy more on these dips. In the meantime, the portfolio holds a basket of stocks that produce relatively high dividend yield.
Source
“Menthol Not Shown to Raise Health Risks of Smoking, U.S. Draft Report Says” Molly Peterson. Bloomberg, 3/1/11. https://www.bloomberg.com/news/2011-02-28/menthol-cigarettes-not-proven-to-raise-health-risks-panel-says.html
