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We see as much as 20%+ upside in Kinder Morgan’s shares, and separately, we think its dividend is poised for growth in the coming years. We’re swapping out a huge winner in Hasbro to make room. How exciting!
Changes to Dividend Growth Newsletter portfolio
Remove Hasbro (HAS) -2.5%-3.5% weighting
Add Kinder Morgan (KMI) +2.5%-3.5% weighting
Be on the lookout for a very important survey in the coming months. We need your responses.
By Brian Nelson, CFA
This will be a short note. First, General Electric’s (GE) shares continue to face pressure. You can read about our experience in calling the collapse in GE’s shares in Value Trap: Theory of Universal Valuation, and most of the weakness during the past couple trading sessions is stemming from the company’s comments regarding expectations for industrial free cash flow to be negative in 2019. For a company such as GE, this is a big deal.
At this point, if you are still looking and pondering historical data and not focusing on future expected free cash flows, the health of a company’s balance sheet (as it relates to a net cash or net debt position) and other hidden assets/liabilities (a stake in another company, an overfunded pension, etc), I have failed you. These three components are the three most important components of cash-based intrinsic value analysis. Not book-to-market, not the short-cut P/E ratio, not last year’s ROIC calculation. Nothing frustrates me more than talking about the past when the future is an absolute integral part of investing, if not the most important part!
Shares of GE may eventually recover from the present doldrums but if they do, it will come from a better-than-expected recovery in future industrial free cash flow generation or the sale of assets at a price that is higher than the implied value derived from their future expected free cash flow generation, as expected by the market. Investing becomes very easy to understand if you focus on the right valuation drivers, and that’s why you’re here. I appreciate that very much. [We shed GE at nearly $30 per share a couple years due precisely to its free cash flow weakness, which has only deteriorated since then.] Here’s what we wrote May 2017.
On to the change in the Dividend Growth Newsletter portfolio today. Hasbro (HAS) has been a huge winner in the newsletter portfolio thanks in part to the launch of Disney’s (DIS) Frozen line-up, which has trounced Mattel’s (MAT) Barbie sales. Hasbro’s transformation to more of an entertainment and licensing company has been great, too, but our contrarian call has already worked out these past many years.
Though we still believe the physical toy market is not in a death spiral and that the Toys R’ Us liquidation isn’t too disruptive, we see only modest upside in Hasbro’s shares from here, and too many downside scenarios that seem to only be growing in probability. Hasbro was an inaugural constituent of the Dividend Growth Newsletter portfolio in January 2012 at $31.89, and shares are now almost $90 each. That’s a “holding period” of more than 7 years, and we’re not looking back. We went against the crowd on this idea, and it has paid off in spades.
That said, we want to stay “fully invested” in the Dividend Growth Newsletter portfolio, and we’re going to be going back to Kinder Morgan (KMI). How about our December 26 call to move to “fully invested?” You can read about our 2015 call on Kinder Morgan in the Preface of Value Trap, but we think the pipeline operator is now back on track. We currently value shares at $24 each, and we think its dividend is finally on solid ground, with the common being paid from traditional free cash flow, unlike how it was in year’s past before the cut. We’re adding Kinder to the Dividend Growth Newsletter portfolio in place of Hasbro in the 2.5%-3.5% weighting threshold.
How things go full circle, but that’s part of investing. Investing is not picking your favorite company and looking at historical numbers, as one might do at the thoroughbred race track, but investing is converting why your favorite company is your favorite company into a forward-looking intrinsic value estimate and comparing that to its price to see if there’s an opportunity. You should be able to be bullish and bearish on the same company at different points in time, and at different price-to-fair value estimate considerations.
The Dividend Growth Newsletter portfolio has been on a “hot streak” lately. We made a fantastic call on Xilinx (XLNX) most recently–the company was added to the Dividend Growth Newsletter portfolio in the upper $80s in November 2018, and it was removed at nearly $120 per share in mid-February 2019. We expect our dividend growth ideas to be a part of the portfolio for years, if not decades, but if an idea hands a ~35% gain in a matter of months, or about 10 years’ worth of income over the holiday break, taking profits sometimes makes sense. We’re celebrating, not being disappointed that it didn’t take 10 years for this one to work out!
As we gear up for the mid-stretch of 2019, I need to ask you two favors. First, we’re going to be having a survey in the coming weeks and months, and I need you to fill it out. It will help Valuentum shape its future and serve you as best we can. Traditional surveys have very meager response rates, but I’m hoping you’ll be able to make the response rate for this one a very good one. I would appreciate it very much. Second, don’t forget to read my book Value Trap. In case you missed some of the praise for the book, you can read about what others are saying here.
Thank you – that’s all for updates with respect to the Dividend Growth Newsletter portfolio. More to come!
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Brian Nelson does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.