Author: Chris Santiago
Covestor model: Dividend Value
Disclosures: Long TNH, CALM, JEC, RY, CF
The two months in the dark leading up to Dividend Value’s launch were a rough time for anyone invested in equities. The two biggest gainers for the portfolio in this time period were Tetra Nitrogen Company LP (NYSE: TNH) and Cal Maine Foods (NASDAQ: CALM). The worst performers were Jacobs Engineering (NYSE: JEC) and Royal Bank of Canada (NYSE: RY). I’d like to take this opportunity to briefly discuss these four positions.
I originally got into Tetra Nitrogen because of CF Industries (NYSE: CF), both of which produce nitrogen fertilizers. These fertilizers are essential to produce a high crop yield, and must be reapplied annually to keep the soil fresh. CF had been a favorite holding, but I wanted a stock that had a higher yield. TNH was an easy fit as a subsidiary of Terra Industries, which is itself a subsidiary of CF Industries. TNH is required to pay out 100% of its available cash each quarter, which gives the stock a very attractive yield. However, it is worth noting that these payouts will fluctuate with Tetra Nitrogen’s earnings.
Cal Maine Foods (CALM) is the largest producer of fresh eggs in the United States, accounting for about 18% of the market. Cal Maine’s operating results are significantly affected by wholesale egg prices. In part due to that, the company has a variable dividend policy, as opposed to fixed. Though the stock has high short interest as of 7/1, which is likely because of charges of egg-price fixing and pending litigation, I will continue to hold the position for the foreseeable future. CALM currently has a high yield and strong 10-year average return on invested capital (ROIC). The ROIC is particularly attractive, as it signals that the managers are making good decisions with the capital shareholders have provided them.
Jacobs Engineering (JEC) provides a broad range of technical, professional and construction services to industrial and governmental clients. A key difference with Jacobs, in comparison to other E&C firms, is that the company focuses on building long term relationships with major clients, with more than 80% of its backlog derived from these relationship-based clients. While the company does not pay a dividend, this is a name that I’ve long seen value in. JEC has managed to maintain an impressive annual growth rate for the past 10 years. Jacob’s largest market segment is refining, so this investment is strongly correlated to long term oil prices. I think the bulk of Jacob’s price decline can be attributed to 1) its recent lowering of the top range of full year guidance, and 2) fears of global slowdown that hit most industrials during the month of June. Other factors to consider are the lower price of oil and cutback in governments’ spending, as these are two of JEC’s largest segments.
Royal Bank of Canada (RY), or RBC, adds a little financial exposure to the portfolio. It yields close to 4% as of 7/1/11 (Yahoo Finance). The goal with this investment was to gain exposure to the banking sector, away from the U.S. dollar, with exposure to a commodity economy – while staying in North America. RBC’s last quarter earnings weren’t so great, but longer term the company has been increasing net income significantly. Looking forward, it appears as if the company is set to focus on its core businesses, with the sale of U.S. retail bank operations to PNC.
Looking ahead, Philip Morris (NYSE: PM) is a name that would fit well into the portfolio, and one that I will be watching closely over the coming months. Additionally, I will be looking closely the portfolio’s Swiss Franc (NYSE: FXF) position. The Franc trade has worked well for the past 12-13 months, and the time for closing out of it may be nearing.
Respectfully submitted,
C. Santiago
Sources:
RY’s dividend yield from Yahoo Finance, 7/1. http://finance.yahoo.com
