Wednesday, May 8, 2013

Investment Report: Net Payout Yields Model - May 2013


This model was up 3.4% in April versus a 1.8% gain for the benchmark S&P 500. The model out performed the market in April to build onto a solid start from the first quarter of 2013. As of the end of April, the model was up nearly 15.1% for the year compared to 12.0% for the S&P 500.  

In general, the model remains very uneventful with only one trade for the month.

Bottom Performers
Since the model had a strong month, only a couple of stocks had a negative return for April. The weakest stock was Motorola Solutions (MSI) with a loss of over 10%. Only a few other stocks even posted a loss and none of those are worth mentioning.

Motorola Solutions reported a weak quarterly report that sent the stock down significantly. The theory of the model doesn’t care about the fundamentals of the company so the key will be whether the management team continues to buyback stock and pay dividends. With a dividend yield of only 1.8%, the key with this stock will be future stock buybacks. Considering the company bought $357 million worth of stock during Q1 2013, Motorola Solutions remains on a solid inclusion in the model.

Top Performers
The majority of stocks had good months considering the strong market returns in April. The biggest gains came from WellPoint (WLP), Hartford Financial (HIG), Northrop Grumman (NOC), and Vodafone (VOD). All of the stocks had gains of nearly 8% or more.

WellPoint jumped in April after a convincing earnings beat sent the stock soaring 10%. The company only pays a 2% dividend so whether it continues to repurchase shares, as the stock races higher will be telling.

Hartford gained 9% as the company starts buying back shares at a considerable reduction to Net Asset Value. The company pays a 1.4% dividend so further buybacks will be key.

As with WellPoint, Northrop gained 8% as it reported earnings for Q1 that easily surpassed analyst estimates. Considering the company still pays a 3% dividend, stock buybacks won’t be as important to keeping the stock in the model.

Vodafone gained nearly 8% as the rumors continue to swirl that Verizon (VZ) is in the process of working out a deal to buy out the 45% of Verizon Wireless owned by Vodafone for up to $130B. Such a windfall could allow the company to return more capital to shareholders and invest in beaten down European and Emerging Market assets on the cheap.

Trades

The only trade for the month was the purchase of CenturyLink (CTL) for around $35 after the stock cratered following a decision to cut the dividend and buyback stock with the savings. Even with the dividend slashed, the yield approaches 6% with the stock up to $37 now. This quick move is rare for this model, as typically the stock would need to initiate the buyback to a significant scale in order to elicit a purchase. In this case, the stock offered too compelling of a value after the large selloff.

Conclusion
With all of the fears regarding Europe and domestic debt waning, the market continues to hit all-time highs. Naturally the search for yield has sent the high net payout yield stocks to higher and higher levels. With fixed income yields so low, investors are likely to continue this trend all year and as with any trend it will continue until it doesn’t. Investors that disagree with the prices should slowly rotate out of the stocks that have huge gains, but fighting the trend is not suggested.

Even as the market continues increasing, the model rotates out of the winners and into stocks such as CenturyLink that underperformed. This non-emotional basis of investing provides for superior returns as typical investors keep winning stocks too long allowing gains to eventually slip away.



Disclosure: Long all the positions mentioned. Please review the disclaimer page for more details. 

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