Monday, February 7, 2011

Investment Report - February 2011: Net Payout Yields

January was a solid month for this model as it beat the benchmark (2.6% versus 2.26% for the SP500). For a Risk Score 1 model the goal remains to outpace the benchmark by a slight amount each month with greatly reduced volatility from the higher risk scores.

The model intends to allow investors to sleep well at night knowing that stocks in the model gain from weakness in the markets via using their large sums of cash and profits to buyback stock and issue large dividends.

Trades
No trades were made in January which will be typical of any month especially so close to model creation in November. Its expected that stocks will remain in the model for at least 6-12 months where they will hopefully rotate out due to gains that have reduced the net payout yield below desired levels.

Top Performers
The best performing stocks for January will likely surprise most investors. Both Lockheed Martin (LMT) and Capital One Financial (COF) had gains exceeding 13%. With defense budgets in question, LMT spent the 2nd half of 2010 in the dumps. With a dividend yield above 4% when 2011 started, it should've been little surprise that investors would finally turn back to this stock. Add in a solid buyback program and this stock was set to outperform.

Likewise, COF was another stock that missed the rally that began in September. Unlike LMT, COF didn't have the yield support, but it does now have the earnings to support a return to higher dividends and possible buybacks.

Other top performers that garnered gains in excess of 7% were CSX Corp (CSX), Wellpoint (WLP), and Vodafone Group (VOD).

Bottom Performers
Two stocks had very weak months with losses in excess of 8%. Itau Unibanco Banco Holding (ITUB) and Lorillard (LO) were hit pretty hard for different reasons.

ITUB has been impacted by high inflation in Brazil that has led to higher interest rates. Being a strong bank in a country with bullish long term prospects, any drop appears short term.

LO was heavily impacted during the month from concerns regarding menthol bans. The company has a 6% dividend yield and spent roughy the same amount on share buybacks in 2010 leading to a 12% net payout yield. The concerns about the cigarette industry may be high, but the cash generation and decisions of management suggest remaining invested. In fact the annualized buyback yield from Q4 alone was roughly 10% after the company spent $285M on its own stock. This highlights how short term lower stock prices can actually benefit investors in these stocks.

Summary
After an initial weak month in November when the model began tracking results, it has remained consistently stable with the market. Any major outperformance by this model will be a struggle as the market zooms ahead favoring small and mid caps. The model generally provides great downside support when a correction eventually takes place. As the LO example shows, market or stock weakness can be relished in certain cases making it much easier to sleep at night.


Disclosure: The investment report relates directly to the activity of the Net Payout Yields model on Covestor.com. It is not intended as specific investment advice and should be used for informational purposes only. The author is long all the stocks mentioned in the report. 

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