Nick's Portfolio Tournament Second Round Results

Round two results in the books; up next, the Sweet Sixteen!

I’m going to be honest with you, ever since U.Va lost their first round game to a sixteen seed, I haven’t watched a single NCAA tournament game. That loss was devastating for me and I’m not quite ready to watch college basketball yet. I have checked the scores online to see how well my brackets were doing in various leagues and pools that I joined and I know how crazy this year’s March Madness has been. There have been upsets left and right, resulting in Loyola, a little known eleven seed from Chicago making it to the Final Four. March has been a wild month in the markets as well, with talks of trade wars potentially disrupting the strong business sentiment surrounding tax reform. It’s this volatility in recent weeks that has put me behind when it comes to publishing my round by round portfolio analysis; I’ve had to spend a lot of time doing due diligence work recently as I attempt to protect the big gains my holdings have produced over the last several years. Will round two in my bracket’s portfolio be as crazy and volatile as the markets? Let’s find out!

Oh, and I’ll give the same disclaimer regarding typos here that I did for the first round games; as unprofessional as it might be, I’ve been staring at the screen far too long to proof read this. 5,500 words is a lot. I’m sure they’re in there but typing this 77-word note is infinitely more enjoyable than re-reading this manuscript of an article. I hope you can enjoy the piece either way! Up next, the Sweet Sixteen!

Also, for those of you who've missed the selection committee and first round results, here are links to those pieces.

1 AAPL vs. 8 JPM

This match up comes with a lot of clout. We’re talking about the world’s richest company against what many people believe to be the world’s best bank. In the short-term, JPM wins this battle from a dividend growth standpoint; JPM yields ~2% as opposed to AAPL’s ~1.5% yield and in the short-term, I wouldn’t be surprised to see JPM’s dividend growth outpace Apple’s due to increase cash flows from rising rates and tax reform combined with regulation coming off of the board. Many of the big banks in America gave shareholders hefty rewards in 2017 and I expect to see similar results in 2018 (JPM raised its dividend by 12% last year and I wouldn’t be surprised to see a 15-20% increase this year). However, AAPL’s overall shareholder returns will surely be greater than J.P. Morgan’s (measured in cash or with relative percentages of the company’s market cap, revenues, etc). I expect to see Tim Cook and Co. announce another blockbuster buyback program in April, alongside a double digit dividend increase. Apple is the world’s leading hardware company and I expect to see it outperforming many of its big tech brethren in the U.S. as this focus on hardware becomes a relative boon compared to info-tech as the public/governmental blowback to the current Facebook issues evolves over time. Both of these companies carry P/E multiples below the broader market’s. Both have strong balance sheets and long-term tailwinds. I imagine that both Apple and J.P. Morgan are included in many value investor portfolios these days, but in a tournament setting, only one can advance. Apple is the number one overall seed in my portfolio for a reason; its cash flows (and cash hoard) is unmatched. JPM is a respectable foe, but ultimately, APPL pulls away in this one, advancing to the Sweet Sixteen.

4 JNJ vs. 5 AVGO

Four versus five seed match ups are often toss ups. Typically, these are both very strong competitors with wonderful coaches (leaders), conferences (industries), and championship pedigrees (illustrious histories). However, that isn’t necessarily the case with this match up. Broadcom is seen as a controversial DGI company by many because of its CEO, Hock Tan’s propensity to run a lean and mean operation, which oftentimes results in job cuts and R&D budgets slashed. Many investors look down upon roll up strategies, and rightfully so. I own AVGO because of its strong yield and dividend growth prospects, but I also acknowledge that Mr. Tan’s strategy isn’t necessarily the best for long-term investors and will have to evolve over time as assets are amassed, or else, he runs the risk of creating a hollowed out, dare I say it, house of cards. Johnson and Johnson, on the other hand, is the paramount long-term oriented company, with regular, predictable, EPS and dividend growth that has rewarded shareholders for decades and decades. AVGO has posted much higher dividend growth than JNJ in recent years, but its history is minuscule compared to the mighty Johnson and Johnson. JNJ has increased its dividend for 55 consecutive years and boasts a dividend growth CAGR of nearly 11% over the last 20 years. This is how wealth is build, slowly and steadily, over the long-term. AVGO is an interesting growth play for income/value oriented investors due to its strong cash flow growth via acquisitions, though as a long-term investor, this game wasn’t very close. Johnson and Johnson advances to face Apple in the next round.

3 FB vs. 11 BIP

In light of Facebook’s recent privacy related issues, this match-up becomes very interesting. Honestly, a week and a half ago when I finished up my first round winners and losers, looking ahead, I didn’t think this “game” would even be close. Facebook has been one of the best growth stories in the market in recent years. What’s more, it trades with a relatively cheap forward P/E ratio (compared to its peers in the high growth tech space and even the broader market). However, it’s impossible for me to ignore the Cambridge Analytica situation because I think this could potentially boil over into an issue that affects Facebook’s core business model as regulation becomes an ever greater threat. Another reason that this second round match up is so interesting is the fact that these two businesses are essentially polar opposites. Facebook operates in software, data, and marketing dollars, while BIP owns real estate and infrastructure assets; in other words, on the intangible/tangible spectrum, there two companies operate on the opposite ends. I really like Brookfield Infrastructure Partners. Global infrastructure is going to need massive investments over the coming decades and I suspect BIP will be a beneficiary. What’s more, while FB doesn’t offer much in the form of shareholder returns, BIP is generous with its cash, offering a yield above 10% with strong distribution growth prospects. I’ve recently added to my BIP position and sold my FB position, which made this decision fairly black and white. I still waffled a bit because of Facebook’s massive growth potential; however, sticking to the rules I applied to the win/loss calculator for this tournament (which company would I buy, if forced to choose between the two with new money, today), I had to go with BIP. This is a major upset, but simply put, there are too many uncertainties surrounding FB at this point in time for me to be interested in buying shares. I’d love to own this high growth name again, but even after falling into the $150’s, I think it’s a safe bet to wait until the dust settles and for the market to figure out the effect that any regulatory outcome will have on the company’s forward revenue/earnings trajectory.

2 AMGN vs 10 JD

To many DGI investors I’m sure that this match up seems like a David versus Goliath competition. Amgen is an absolutely wonderful dividend growth company since initiating its dividend in 2011. The company hasn’t missed an annual increase since then and has offered investors, strong (in many cases in the ~30% range) annual income growth. This stock is at an interesting crossroads of growth, value, and income. AMGN has a long history of above average sales and EPS growth, which has not only fueled its stellar dividend growth over the years, but incredible total return figures. Looking back as far as Google Finance will go (November 29th, 1996), we see that AMGN has produced capital gains of 1013.21%. The S&P 500 returned 241.90% over this same period of time, meaning that AMGN has more than quadrupled the broader market’s long-term gains. When you factor in dividend re-investment over the last 8 years or so, AMGN’s relative out performance gap grows even wider. All of this growth and you’d imagine that AMGN traded with a premium right? Well, not quite. This company is trading for only ~12.5x 2018 EPS estimates, leaving value investors interested in healthcare exposure licking their lips. This is all very impressive stuff, but the ten seed isn’t shaking in its boots. I wouldn’t be surprised to hear that JD posted similar outperformance over the next 20 years or so; this company is becoming an eCommerce powerhouse in China (as well as in other foreign growth markets) and has a much smaller market cap than bigger eCommerce giants like Amazon (AMZN) or Alibaba (BABA). JD’s top-line growth during the last 5 years came in as such: 95.8%, 67.6%, 65.9%, 57.6%, 43.5% (and, 28.2% during the ttm). These sales are slowing, but their pace is still well above average. JD was my favorite growth pick heading into 2018 and even after all of those nice things that I said about Amgen (which are true and I’m remaining overweight in my portfolio), I’m picking JD to advance. AMGN is a wonderful company to own, but JD’s long-term potential due to the massive size/growth I expect to see in the Chinese economy in the coming decades is just too great to ignore. JD will be headed to the Sweet Sixteen with an upset win and face off against against the ten seed BIP.

1 T vs. 8 BLK

Blackrock is one of my favorite companies in the financial sector. We’re well entrenched in the era of passive investing and Blackrock is a leader. BLK has ~$6T of assets under management. The massive scale of their operation allows them to compete well with lower expense ratios and higher CAPEX, which helps them grow and retain their customer base. BLK’s top and bottom line growth is cyclical, which is why its an eight seed in my portfolio. Six of out the last ten years, BLK has produced double digit EPS growth though. BLK’s growth may not come in a classic stair step pattern, but it is surely trending in the right direction. Since initiating its dividend in 2003, BLK has provided investors with a dividend CAGR of 25.8%. The company’s yield is typically rather low because the share price appreciates alongside the dividend, you see just how powerful compounding at this type of annual rate is when you realize that investors buying BLK shares in 2003 when the dividend was initiated would have a yield on cost today of more than 58% (that figure rises to 78.4% if dividends were re-invested over that period of time). However, as attractive as I find BLK’s income prospects, it just doesn’t get much better than AT&T yielding 5.75%. AT&T is essentially a pure income play. The company has massive cash flows which it returns to its shareholders at a generous rate. T’s dividend is high, yet remains covered by EPS and cash flow/share. That said, the company also has massive debt loads and a long history of fairly stagnant growth outside of M&A activity. A focus on non-organic growth is why debt has ballooned in recent years, though no one is arguing that the strong wireless cash flows are going to disappear so at the end of the day, it comes down to responsible management of the balance sheet and thus far, I don’t think that AT&T has gotten out in front of its skis. I’m especially bullish on the Time Warner (TWX) and I’m waiting news regarding T’s current court case closely. I like T’s M&A strategy better than rival Verizon’s (VZ), which is why my weighting is so high. BLK offers much better growth prospects, but T’s cash flows and high dividend yield are too reliably to deny. T advances to the Sweet Sixteen in a hard fought game with this dialed in eight seed.

4 MA vs. 12 UTX

MasterCard is a market darling for sure. This company has posted ~60% capital appreciation over the least year or so. The company has posted double digit EPS growth every year since becoming public and remains one of the best dividend growth companies out there, having grown its annual dividend from $0.02/share to $1.00/share since 2006 which equates to a dividend CAGR of ~40%. You’d think with dividend growth like this the yield would be exceedingly high, right? Well, not quite. MA’s share price appreciation has kept up pace with dividend growth over time. This is a great thing for long-term shareholders, but not such a great thing for dividend growth investors thinking about buying the stock today. While UTX doesn’t have the same history of above average growth or future growth prospects as MasterCard, it does have one thing going for it as the underdog: a much cheaper valuation. MA is trading for ~36x ttm earnings and 29.5x forward estimates. UTX is trading for ~19x ttm earnings and ~16.5x forward estimates. MA’s forward growth expectations are much higher than UTX’s; however, I think the premium valuation current applied to MA shares will lead to relative underperformance moving forward, until the PEG ratio gap is closed between these two companies (UTX’s much higher dividend yield also plays a role in my relatively performance expectations). Both companies operate in industries with strong secular tailwinds; cashless/mobile/digital payments for MA and aerospace, both in terms of consumer, industrial, and defensive markets, for UTX. This match up comes down to valuation. UTX had a big upset of Nike (NKE) in the first round and the good times keep rolling into the Sweet Sixteen with the second round upset of MA.

3 MSFT vs. 6 INTC

This is a heavy weight match up of tech titans if there ever was one. And, like so many of the games in this round, the ultimate outcome came down to valuations. Microsoft is one of my favorite technology holdings. It’s a unique combination of strong legacy cash flows and high growth, cutting edge cloud segments. The company pays a strong dividend and offers reliable dividend growth prospects in the high single digit/low double digit range. I view MSFT as a core holding within my portfolio, meaning that I’m willing to give the company the benefit of the doubt when it comes to holding it throughout overvalued periods of time. However, that doesn’t mean that I’m willing to break my value principles with regard to buying shares. MSFT is trading for more than 26x ttm earnings (and ~25.5x forward estimates), which is well above its historical long-term normal P/E of 26x. This long-term P/E takes the tech bubble into consideration; when you look at a 10-year normal P/E chart, you see that the company’s average premium is only 15x (meaning that the current 26x multiple is nearly double its more recent average multiple). MSFT is a steady grower, but it’s not a strong, double digit grower. The cloud space is going gangbusters for this company, but even so, it’s difficult to really move the needle for a company with a market cap in the $700b range with annual revenues of ~$95b. MSFT’s average 5-year revenue growth has been in the mid single digits and while I think the company’s reliable deserves a premium, it’s difficult for me to justify paying ~26x for a company with mid-high single digit top-line growth expectations. Intel, on the other hand, is only priced at 15.1x ttm ESP and 14.8x forward, which are essentially in-line with its long-term normal pricing multiples. A very large percentage of INTC’s sales are tied to the slow growth PC market; however, they’re making strides in high growth spaces like cloud computing, data center, and autonomy. INTC is expected to post slightly slower growth moving forward than MSFT, but I don’t think this gap justifies the large gap in market premiums. What’s more, INTC’s dividend is higher (~2.3%) is higher than MSFT’s (~1.8%). MSFT has better dividend growth prospects, but once again, the valuation wins the day here and the six seed Intel advances past the three seed Microsoft in a slight second round upset.

2 SBUX vs. 7 BABA

Starbucks has been at the core of my dividend growth portfolio for years now. I recently trimmed my stake, re-allocating those funds to Honeywell (HON) as a diversification measure; however, I’m still very bulling on SBUX’s long-term prospects and the company remains a top-10 position for me. SBUX offers a unique blend of double digit growth prospects, combined with a ~2% yield that has offered investors a 28.7% dividend CAGR since the dividend was initiated in 2010. SBUX’s operators are mature in the U.S. market, but the company continues to grow post impressive growth internationally, especially in the Chinese market. But, as impressive as Starbuck’s Chinese growth is, it cannot compete with Alibaba’s. BABA is one of the world’s predominate eCommerce and technology companies. BABA’s revenue growth over the past 5 years has come in at 72.4%, 52.1%, 45.1%, 32.7%, and 56.5%, respectively. BABA’s ttm revenue growth is still on this torrid pace, at 43.4%. Not only is BABA posting impressive revenue growth, but the company is growing profits as well. The company is priced at ~30x forward growth estimates, meaning that the valuation is still somewhat speculative, but it’s worth noting that SBUX also comes with a growth premium, albeit one much lower than BABA’s at ~23x forward EPS. BABA doesn’t reward shareholders with dividends or buybacks like SBUX, but its hard for me to pick against a company with a ~$500b market cap posting 30-40% annual growth. SBUX’s days of 20%+ annual growth are well behind it, in my opinion, and in this second round match up, I’ll be siding with the outsized growth potential of BABA in a seven versus two upset.

1 DIS vs 8 TCEHY

Here we have another battle between an established domestic brand/dividend growth name and a large Chinese technology company. Disney is my second largest individual position (which is why it’s a one seed), but this company has been a relatively dog for a couple of years now. I’m a big believer in this company’s content IP. I love the diversified business model, with historical IP and new studio content (that has been booming as of late, I mean, my gosh, Black Panther is breaking records left and right) trickling down to the resorts, cruise ships, and merchandising segments. Obviously the cord cutting trend has weighed on this company’s shares and that will continue to the be case until Iger and crew come up with a viable OTT plan (which is apparently in the works). DIS typically trades at a premium to the broader market and its media/entertainment peers, but this isn’t the case ATM. You’d think that the value investor in me would see these lower premiums (DIS is trading for less than 16x ttm EPS when the stock’s long-term normal P/E is ~21x); however, I’ve watched this stock slump for long enough to believe that the market will require revolutionary change to the media segment before it puts a significant bid under the stock. Tencent, on the other hand, is riding massive momentum, having nearly doubled over the last year or so. The stock has recently sold off more than 10% on slightly disappointing earnings, though I don’t think the long-term growth trajectory has changed. Tencent grew its bottom line 69% in 2017 and analysts expect to see 30%+ growth in 2018. Obviously growth numbers like this can’t continue in perpetuity, but Tencent continues to make investments in attractive areas of the market and has essentially turned itself into one of the leading tech VC funds (Tencent owns large stakes in NVIDIA (NVDA) and Tesla (TSLA), for instance, bankrolled by its highly profitable social and mobile media, gaming, and payment platforms). Tencent has deep roots in the very appealing Chinese market and will likely continue to benefit from the rules that benefit domestic businesses in that area of the world. I’m going to go with my gut on this one and side with the high growth and emerging markets exposure that Tencent offers. I’m still holding onto all of my Disney share, but if I was forced to buy one company or the other today, it would be Tencent. Disney is the first number one seed to fall in this tournament. It’s a sad day in the Mouse House.

4 CSCO vs. 5 CMCSA

Once again, we come to a very interesting (and extraordinarily tough to call) 4/5 match-up. These are a couple of strong dividend growth up and comers. Neither company has an exceptionally long annual dividend increase streak, but they’re both large positions in my portfolio because of the recent generosity that their management teams have shown to shareholders and their dividend growth prospects moving forward. CSCO’s dividend increase streak is 8 years and since initiating its dividend in 2011, CSCO has provided double digit annual increases to shareholders each and every year. Comcast has a slightly longer dividend growth history, with 11 consecutive annual dividend increases. Like CSCO, CMCSA has also provided shareholders with double digit dividend growth each year since its inception. CSCO has a dividend yield of 2.6%, while CMCSA has a dividend yield of 2.3%. While both dividends appear to be very attractive, the momentum of these two companies couldn’t be different. Cisco is in a strong uptrend, having finally returned to growth last quarter. Comcast, on the other hand, is trading at 52-week lows. CMCSA is down approximately 20% YTD on apparent concerns that the market has regarding its participation in a bidding war for SKY. When I see a dividend growth name like CMCSA down at 52-week lows, my ears perk up. CMCSA has posted positive EPS growth every year since 2009 and is expected to post high single to low double digit bottom line growth over the next couple of years. The company’s payout ratio is well below 50%, which seems to point towards continued double digit dividend growth as well. All of this, combined with the company’s 13.2x forward P/E ratio has moved the stock towards the top of my buy list. CSCO is a high quality name for sure, but CMCSA is the winner here.

3 AMZN vs. 11 GILD

Honestly, this match-up was one of the easiest for me to call. A lot of these second round games have been difficult decisions for me, but it is clear that AMZN’s growth potential is a much greater force than GILD’s value proposition. From 2013-2015, GILD increased its EPS from $2.04 to $12.61 on the back of its blockbuster HCV treatments. The stock obviously roared on this news, but since then EPS has fallen steady, because these treatments were curative and demand fell for the drugs as populations of infected individuals decreased. GILD made a name for itself with its HIV treatments and that portfolio remains strong. What’s more, the company recently used some of its massive cash flows from the HCV success to make the large acquisition of KITE Pharma in the oncology space. Many believe KITE’s revolutionary CAR-T therapies could become a strong growth catalyst for this biotech, but that growth appears to be a few years down the road. Amazon, on the other hand, is experiencing massive growth in the present. AMZN is a world leader in eCommerce, cloud infrastructure, and AI. The company is moving into a wide variety of ancillary markets, broaden its scope and moat as a business. Although I admit that AMZN’s valuation has been and will likely continue to be highly speculative for years as Jeff Bezos continues to focus on taking market share rather than posting profits, I simply can’t pick a value stock like GILD (although it pays a 3% yield, has given shareholder strong dividend growth and has a speculative growth future with CAR-T) because Amazon’s long-term growth potential is simply too high. Apple will likely win the race to the $1t market cap, but if I had to bet on which company will have the first $2t market cap, AMZN (along side several of the large, Chinese tech names) would be leading that race.

2 NVDA vs. 7 NVO

NVIDIA had a wild day today. Around lunch time news broke that the company was suspending certain autonomous driving tests in response to the Uber crash that killed a pedestrian in Arizona last week. This sparked a sell-off that grew and grew as the afternoon wore on, eventually become a 10%+ move to the downside, potentially inspiring the bears to come in and whack the entire tech sector. This is the type of outsized volatility that I expect to see with a speculative growth stock like NVDA. Sure, it’s never fun to see one of my holdings fall more than 10% in a single trading session, but if I expand the time horizon, I see that NVDA is up about 100% since I bought share early last year. NVDA is priced richly, at ~40x forward earnings, but I think this premium is warranted because of its amazing growth prospects in the AI arena. NVDA produces great profits in the present with its gaming chips, but many analysts believe that it has a significant lead on its peers in the AI space, which could be one of, if not the greatest growth market of the coming decades. Novo Nordisk has growth prospects of its own, but they’re much smaller than NVDA’s. With that said, so its NVO’s valuation premium, which is something that value investors will surely appreciate. I’ve been invested in NVO for years because of its leading presence in the diabetes space. Unfortunately, the developed world has a habit of eating poorly and not exercising enough. This leads to chronic disease and NVO benefits from this. The health foods trend is real, but I don’t think it’s powerful enough to become a headwind for NVO. If anything, I’d be surprised if the prevalence of diabetes did anything but increase, making NVO a great long-term investor idea. Chronic disease is a powerful tailwind, but not compared to the rise of artificial intelligence. NVO is the better income oriented investment here, but NVDA is the winner, advancing to the Sweet Sixteen where it will face off with another powerful AI player, AMZN.

1 GOOGL vs. 8 WPC

Alphabet is limping into this second round match-up, sick with some of the Facebook digital ad contagion. What’s more, the negative news regarding automation on Tuesday seems to weaken the strength of Waymo, which is one of my favorite businesses under the Alphabet umbrella. I actually trimmed ~25% of my GOOGL position earlier this week at $1031 because of concerns regarding regulation and how this might effect the business models of companies like FB and GOOGL in the digital ad space; however, I’m going to cut to the chase here because I’m heading towards an article well above 5000 words and my hands are getting sore: GOOGL is the winner here, headline risk and all. I added to W.P. Carey recently and the stock is now my largest REIT holding. I really like the company’s property portfolio. I think WPC’s 6.6% yield is sustainable and will continue to post annual growth in the low single digits. I think WPC’s yield is high enough above my forward looking interest rate expectations to protect the stock. However, GOOGL’s long-term growth remains intact (even if regulation comes into play, I don’t think that GOOGL earnings are going to be crushed) and I think ~25x is a fair price to pay for a company with possesses the strong, double digit top and bottom line growth prospects that GOOGL has moving forward.

4 BRK.B vs. 12 PEP

United Technologies already advanced to the Sweet Sixteen as a twelve seed, will Pepsico? PEP has experienced a bit of weakness lately, trading down to 20x ttm earnings (which is below its long-term normal P/E ratio of 21.7x). PEP also gave investors a 15% dividend increase recently and currently yields 3.01%. This company has increased its annual dividend for 46 consecutive years, putting it in rare air as far as dividend growth goes. PEP is one of my favorite consumer staples names and appears to be a leading candidate for investors looking for defensive holdings with its 0.67 beta; however, it’s going up against a company that I consider to be the most defensive company in the market: Berkshire Hathaway. Unlike PEP, BRK.B doesn’t pay a dividend, which is why it is a four seed and not higher (if Berkshire paid a dividend it would definitely be a top five holding of mine, likely making it a one seed). It’s tough to find a single company that is more diversified that Berkshire due to the impressive collection of assets and equity that Warren Buffett has collected over the years. Kraft Heinz (KHC) is Berkshire’s largest consumer staples holding, though Buffett has also amassed a notable stake in PEP’s rival, Coca-Cola (KO) as well. However, what sets this competition apart isn’t either company’s assets in the present, but instead, the growth potential and flexibility that comes from Berkshire’s massive ~$100b cash pile. Buffett has been amassing cash for awhile now, waiting for great deal that will move the needle for BRK. His (and his management team’s) patience is what sets them apart and gives me confidence as this company, even without a dividend that contributes to my income stream, as a defensive company. Berkshire advances against this tough twelve seed.

3 V vs. 7 FDX

This is a pretty interesting match up between a couple of companies with strong, long-term growth tailwinds. It’s difficult not to get excited about owning companies in the digital payments and/or the logistics spaces. What’s more, these are just companies, these are market leaders. Both companies have posted tremendous growth in the recent past and are expected to post EPS growth of more than 20% in 2018. Both companies are up and coming dividend growers, Visa has an eleven-year dividend growth streak and FedEx has a sixteen-year dividend growth streak. Visa has given investors double digit annual increases ever year since initiating its dividend and FedEx has rewarded investors with double digit dividend increases eleven out of the last sixteen years. Both companies offer very little in terms of yield, with V’s coming in at 0.7% and FDX’s coming in at 0.8%. Needless to say, I’m a big fan of both of these companies, so like so many other match-ups in the second round, this one is going to come down to relative valuation. Visa is trading for nearly 31x ttm earnings and 26.7x forward expectations. Visa has always traded with a high premium and in the past, these market prices have been justified by the company’s growth, but I still find forward multiples above 25x to be speculative, regardless of the quality of the company. FedEx is much cheaper, trading for just 16.5x ttm EPS and 15.5x forward expectations. Visa’s forward growth outlook is slightly better than FDX’s, but not enough to justify the broad valuation gap between the two. FedEx is the upset winner.

2 BA vs. 7 MO

And last, but certainly not least, we have a match up of two very well known dividend growers. Altria is one of the dividend growth old guard, having created wealth for its shareholders for decades with its traditionally high yield, above average dividend growth, and numerous spin-offs. Boeing doesn’t have nearly the dividend growth history that Altria offers, yet there are few companies in the market that have rewarded shareholders more in recent years that BA. I recently purchased MO at $59.82 as the stock finally hit my price target of 15x earnings, yet Boeing remains one of my top performers, up well over 100% from my $126 cost basis. I haven’t added to BA recently, but that’s because capital appreciation has pushed my current position to an overweight status. Boeing is admittedly much more expensive than MO, trading at nearly 30x ttm earnings (and 22.9x forward estimates). What’s more, BA’s massive price appreciation has driven the company’s dividend yield down to 2.1% even after 5 consecutive years of strong, double digit dividend increases. MO’s yield is much stronger, at ~4.7%. However, even with the higher valuation and lower yield, if I was forced to pick between buying one of these companies above the other, it would be Boeing. Aerospace is probably my favorite (and most reliable) long-term secular growth trend. Tobacco usage, on the other hand, is trending in the other direction. MO is a very shareholder friendly company, but over the long-term, I don’t think it will be able to compete with Boeing’s (albeit cyclical) growth.

Disclosure: I am long every company included in this bracket except FB, EZU, IEUR, and EXPE, which I have sold since this project began.

No. 1-2
Nicholas Ward
Nicholas Ward


Dstewart, sorry it took me so long to get back to you - I didn't see the comment before. I agree that the Chinese gov't is a concern, but I also view it as a potential boon as well. The way I see it, China wants to be recognized as a legitimate global power. I think Xi and Co. realize that this means they will have to eventually play by the rules (or, at least, more by the rules than they do today) to gain fuller access to developed global markets. To become a leader China will need internationally recognized companies and I think the gov't will try to help its crown jewels: Alibaba, Tencent, Baidu, JD, etc, become global powerhouses. However, if I'm wrong here, I still feel comfortable with exposure to Chinese names because of the demographics within their country alone. In a decade or two there will likely be more than 1.5b Chinese citizens and they have an emerging middle class which could surpass the total population of many developed nations as a whole. Either way, the growth runway of these companies remains long if they are shut off from global markets. I'm not going overweight any of these companies because I acknowledge the fact that the gov't could come in and shut them down tomorrow - I just don't see this as very likely (I'm much more concerned with China kicking out foreign companies like SBUX or DIS, which would really put a ceiling on their short-term growth prospects).


Nicholas, I find the match up results very interesting but I can't help but notice the wins for, Alibaba and Tencent. I know you are a bull on China's growth into a consumer oriented economy but I cannot bring myself to buy any Chinese equities. The two simple reasons are government risk and accounting risk. I do not believe for a second that the Chinese government will not interfere with any of these companies' business model if it crosses the communist party's agenda. As well, as a Canadian, I have seen many TSX traded companies stocks implode over accounting improprieties in China (Sino-forest etc.). As an investor I may be hurt by these beliefs but with a 30 year horizon, I doubt missing out on these 3 companies will affect my retirement in a noticeable manner. As I have said before capital preservation with growth is my primary concern and I do not feel safe investing in Chinese companies.

An interesting article link is below: