This model gained a solid 0.8% in April versus a 0.7% loss for the benchmark S&P 500. The model remained strong all month even as the SP500 fluctuated all month.
No trades were made in the month of April as existing positions continued to work well with high yields.
Considering the market was slightly down and the model was only slightly up, not many positions had outside moves. The biggest gainers were Gap (GPS), Travelers (TRV), and Chubb (CB).
All three companies had very strong earnings partially helped out by the large buyback programs over the last year.
Just as with the top performers, not many stocks had outside negative moves in the month. The biggest losers were Conoco Phillips (COP), Goldman Sachs (GS) and Wellpoint (WLP) with all three companies losing more than 5%.
Conoco Phillips had disappointing earnings that naturally pushed down the stock. The other two had surprisingly good earnings even though the stocks sold off.
Mergers and Spin-offs
A couple of corporate transactions took place by the first of May that impacted stocks in the model.
Conoco Phillips decided to spin off the downstream business into a new entity called Phillips 66 (PSX). Since the spinoff split the full position into two smaller positions, the two stocks will be reviewed as to whether to add to or eliminate the positions. It all depends on whether the new independent companies will continue supporting high yields. The initial suggestion is that Conoco Phillips will keep the current 4.9% dividend yield while Phillips 66 will only start with a 2.5% yield. The level of buybacks will be crucial as to whether each stock remains in the model.
During April, Medco Health (MHS) was bought by Express Scripts (ESRX). The deal involved partial stock so the model is now invested in roughly a half position in Express Scripts. At this point it is unclear whether the combined companies will continue supporting large buybacks to justify remaining in this model.
The market in general remains in an uptrend that likely will lead to multi year highs though it has come under pressure as May began. This model will remain fully invested to capture as much upside as possible while protecting against any major downside from owning solid large cap stocks with outsized yields.
The biggest concern to this model remains that end of year tax hikes to dividends will hurt those stocks as 2012 ends. The issue and impact to the markets is now being debated on a regular basis, but the outcome remains very much in question.
As May proceeds, the model should be expected to rebalance some of the positions from the corporate transactions mentioned above as the details become clearer. The model prefers to limit transactions to reduce costs as the companies invested in are solid with or without high net payout yields. Though if it becomes apparent that going forward yields will not support inclusion in this model, the stocks will be sold for higher paying alternatives.
Disclosure: Long all positions mentioned. Please review the disclaimer page fore more details.