DTA’s Income Build Portfolio: One Sell, Two Buys, And The Pandemic Is (Mostly) Why

As I put together and manage our Income Builder Portfolio, I am trying not to get too spooked by the COVID-19 coronavirus.

Nevertheless, it also seems foolish to completely ignore the virus and its significant effect on the economy — especially if executives at one of the companies we own (or are considering) issues a clear warning.

Such was the case with TJX Companies (TJX), which on March 19 released the following statement:

I used the yellow highlighting to emphasize a few points:

  • In addition to closing all stores, TJX shut down its retail websites, which has not been the norm in the industry since America started taking the coronavirus seriously.
  • As a Dividend Growth Investing practitioner, my eyebrows always get raised when company executives volunteer that they are “evaluating” their dividend program. In my experience, such evaluations usually lead to the payout being significantly reduced or eliminated.
  • Throwing away guidance that the company had made just a few weeks earlier also got my attention. I do expect this to be done by hundreds (perhaps thousands) of companies in the months to come.

After reading the company’s statement, it became clear to me that it wasn’t a matter of if I was going to dump the Income Builder Portfolio’s TJX position but when.

Just 3 hours after releasing the above COVID-19 Update, TJX followed with a “clarification” from CEO Ernie Herrman:

“TJX is a great company with a great retail model. I want to reiterate that TJX entered 2020 in a very strong financial position. We consider the actions that we announced today as just prudent steps we are taking to further strengthen our financial liquidity and flexibility during this uncertain environment. Additionally, while we are evaluating our dividend in the near term, I want to emphasize that we remain committed to paying our dividends whenever the environment normalizes for the long term, as we have been for decades.”

My response: “Cool. I am still going to sell, but maybe I’ll select TJX for the IBP again someday.”

And so on Monday, March 23, I sold our 44.3124 shares of TJX. I used the proceeds to build up two of our utility positions, American Electric Power (AEP) and Dominion Energy (D).

As you can see by the above graphic snipped from our brokerage website, each trade needed multiple transactions to complete. That happens occasionally with limit orders, as some shares become available at the designated price and others follow a fraction of a second later.

The TJX sale netted $1,595.22, and the combined purchases of AEP and D cost $1,595.23.

We had plenty of cash left from the money Daily Trade Alert allocates each month to cover the penny difference.

I am a patient investor and I call myself a “reluctant seller.”

Indeed, I had made only one previous sale in the 27 months I’ve managed the IBP.

Given that we had added to our TJX position just last week, I was not thrilled to turn right around and sell that; nor was I tickled to sell the shares we had bought in 2019.

But when big parts of my investment thesis — guidance issued during the Feb. 26 earnings call, and the likelihood of continued dividend raises — were blown up by the company itself, I simply felt I couldn’t sit back and enjoy the explosion.

Here Come The Utes

I had been wanting to beef up the IBP’s holdings in the utilities sector, and these transactions do just that — lifting the percentage of utes within the portfolio from 11% to 15%.


As I wrote back in 2018, I like that utilities have predictable revenue streams, and I love that they pass a large percentage of profits to shareholders.

Unfortunately, investors desperate for income had bid up most utes, and the sector had become extremely overvalued.

It took pandemic pandemonium to push prices back down, as Morningstar analyst Andrew Bischof noted last week:

U.S. utilities’ sell-off continues to provide opportunities for long-term, defensive investors seeking growth and yield. The sector is 16% undervalued based on Morningstar’s fair value estimates as of March 19, down from 21% overvalued at the peak in mid-February. We now think this is the time for investors to consider buying financially strong utilities with attractive growth potential and dividend yields.

Most regulated utilities offer a high degree of near-term cash flow certainty after working diligently to improve regulatory relationships and strengthen their balance sheets with historically low-cost financing, but we think the market became overly optimistic about utilities’ long-term growth potential as earnings multiples rose as high as 30 times. The sector sell-off shows that investors have recalibrated their assumptions about utilities’ long-term growth potential. The market is now more in line with our 4%-5% long-term growth rate assumptions.

Over the next five years, we expect U.S. utilities we cover to invest over $600 billion, supporting median 5.5% earnings growth and slightly lower dividend growth. We don’t expect the coronavirus to have a material impact.

Although I agree with most of that analysis, I do think the coronavirus is having some impact on utilities — perhaps explaining why a sector that is considered “defensive” has sold off with the rest of the market.

Even though a lot more people are using electricity as they work from home, thousands of companies have closed shop and aren’t using power. Additionally, utilities are being discouraged from taking action against delinquent customers during the pandemic.

Long-term (and even medium-term and fairly short-term), I believe the sector will recover quickly, as the states in which utilities operate know the importance of the businesses being economically viable.

As the bull market raged, American Electric Power had been bid up to nearly $105/share — an outlandish 25 times expected 2020 earnings. Dominion had hit $90, more than 20 times projected earnings.

I try to avoid paying such high multiples even for go-go growth stocks, so I certainly don’t like being up in that stratosphere for relatively slow growers such as utilities.

By the time we made Monday’s buys, AEP and D were down about 35% from their highs, with P/E projections far more palatable to me as an investor.

As will be the case with TJX (and many other companies), projected earnings for AEP and D could end up getting reduced.

Nevertheless, I am comfortable with the prices we paid for these high-quality businesses.

I also feel confident that both companies will be able to maintain, and even continue to raise, their dividends.

About Those Dividends

In my previous articles about American Electric and Dominion, I extensively discussed each company’s dividend history.

D has raised its dividend for 16 consecutive years, AEP for 10, and the two now combine to generate some 12.5% of the IBP’s annual income.

Dominion has become the portfolio’s top income producer, and AEP checks in at No. 8. Anticipated payouts of all 30 positions can be seen on DTA’s Income Builder Portfolio home page.

Although I do not “chase” yield, it is worth noting that the 13 shares of AEP and 12 shares of D we just added will generate $81.52 in annual dividends — about $35 more than the TJX position we divested. That has lifted our portfolio’s projected annual income well past the $1,850 mark.

Wrapping Things Up

Many infectious disease experts still believe this pandemic will get worse before it gets better. And while society’s collective health obviously is the most important thing, watching the stock market has been “interesting” (to say the least).

As a DGI guy, I have been especially interested in companies’ dividend doings.

Troubled Boeing (BA), for example, has announced it is suspending its dividend — something I believe TJX could end up doing, too.

In my role as steward of DTA’s Income Builder Portfolio, I will keep doing my darnedest to select fundamentally sound companies that I believe will deliver reliable, growing dividends and solid, long-term total returns.

As always, investors are strongly urged to conduct their own due diligence before buying or selling any stocks.

— Mike Nadel

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