Tuesday, March 8, 2011

Investment Report - March 2011: Net Payout Yields

February was a disappointing month for this model on a relative basis as it underperformed the SP500 (1.88% versus 3.2%). Large caps in general continue to struggle as the market works its way upwards. Other then a few losing positions, the model mostly lacked the big gainers to keep up with the market.

Trades
For a second consecutive month, no trades were made in this model. This is very normal for this model as transactions are limited to reduce costs and realized capital gains. Though it is expected that some transactions will me made over the next few months to move out of positions where stock gains have reduced dividend yields and buybacks have declined significantly.

Top Performers
Walt Disney (DIS) was the top performers in February with a 12.5% gain. DIS is a prime example of a stock where the yield has continued to fall making them less attractive to this model.

Wellpoint (WLP) had the second largest gain of 7%. This move was not surprising as they've consistent bought back enormous amounts of stock leaving them with a net payout yield that has exceeded 17% at times.

Yum Brands (YUM), Hartford Financial Services (HIG), and CSX Corp (CSX) all had gains in excess of 5%. Yum Brands (YUM) also falls into the category of stocks likely to exit this model as the yield continues to drop as the stock has had significant gains.

Bottom Performers
Cisco Systems (CSCO) was by far the worst performer for the month losing over 12%. CSCO had a very disappointing earnings report for the 2nd consecutive quarter. This time the analysts derived that the company is losing share and hence their huge drop didn't derail market which lead to the massive relative underperformance. CSCO does have a decent buyback so the lower prices only help them buy more stock on the cheap. Also the company is likely to initiate a dividend this year to add to the yield support.

The other two significant bottom performers were Millicom International Cellular (MICC) and Microsoft (MSFT). MICC was taken down by the weakness in emerging markets while MSFT likely fell due to the CSCO weakness.

Summary
Whenever this market returns to normalcy of having down months, this model should show better relative performance. The yield support and buybacks are more successful in down markets, but for now the rapid rise is swamping the dividends and providing little opportunity for companies to buyback stock on weakness. As mentioned earlier, expect more transactions in the next few months as yields shift faster then normal due to unusually strong market gains.


Disclosure: Stone Fox Capital owns the stocks mention for clients that invest in the Net Payout Yields model. Mark Holder owns these stocks in his personal account. Please review the disclaimer page. 

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