What Your Portfolio Can Learn from Beast Mode

Buffett famously has a "too hard" pile where most stock ideas wind up. One of the hallmarks of his approach is avoiding complex situations, he is not going to try and figure out the next Genentech or Google.

On the other side, the polar opposite of "too hard" is Beast Mode - if you have the ball on the one yard line, hand the ball to Marshawn Lynch (disclosure: I am a Pats fan and glad that this did not happen). The point is that just like buying things that are too complex can you get you into trouble, and why you need a "too hard" pile. You can also miss good ideas by overthinking things, and that's where beast mode applies.

A good example here in my view is Exxon Mobil. Its impossible to consider all of the things that drive energy prices. But its very possible to look at Exxon's long history and see that Exxon yielding 3+% just does not happen that often and when it does its been a good bargain.

XOM Dividend Yield (TTM) data by YCharts

This is not to say that big picture complexity doesn't matter. It does and will in the short term, but Exxon has next to no debt (0.1 Debt/Equity) so they have the strength to see it through to the other side. Plus, Exxon has raised its dividend 9.8% on an annualized basis over the last ten years. The yield has not been this attractive in the last decade even including the crisis. Generally speaking, buying companies at crisis prices has worked out well.

Given that plus the fact that Exxon lowest ROE in the last ten years is 17%, and a 33% payout ratio that leaves plenty of room to grow the dividend, taken together this makes Exxon a solid pick for the 10th pick in the WMD portfolio.

As much as investors cheered on Apple's record quarter, from a defensive standpoint Exxon's is just as remarkable. Consider the smaller companies and drillers are cutting dividends, but Exxon has scale and refineries to generate cash in a downturn. There are other big integrated players, but Royal Dutch Shell has no way to grow its dividend because its payout ratio is north of 70% and are cutting capex. Chevron is in better shape but they had to suspend buy backs. That leaves Exxon who did not do layoffs, still plans to buy back $1B of shares in Q1, and has a very safe dividend. There are lots of ways that investors can make money from the energy downturn, but from defensive standpoint, Exxon stands alone.

Bottom line is that overthinking the macro environment can cause investors to miss simple, effective ideas. That's not to say investing is simple, the safety and quality checks must be in place. It is important to remember where the individual investor's advantage lies, which is patience and longer time horizon; trying to establish an edge of near term oil prices is not a path to paydirt.

Ninth Pick in the WMD Portfolio - Rolls-Royce Holdings

The more real they are, the more fun blogs are to follow. So in that spirit, rather than talking about ideas in the abstract I maintain a hypothetical portfolio to track ideas where I'll semi-regularly (and hypothetically) invest and track buying (and where required selling) shares.

For tracking purposes I will use $1,000 to keep it nice and simple. The overall goal is long run income and dividend growth. Portfolio page with goals and tracking is here.

I tend to like the economics of duopolies - Coke/Pepsi, Visa/MC, Fedex/UPS, Boeing/Airbus. Pricing tends to be pretty rational in these markets. The main suppliers of wide body jet engines  are General Electric and Rolls-Royce. GE is a fairly interesting business at these prices and it pays a solid 3.7% yield. Potentially more interesting is a main supplier for jet engines - Precision Castparts. The fundamentals of PCP are very attractive, however since they are focused on rolling up the supply chain the company prioritizes acquisitions not dividends so that rules it out for the WMD portfolio.

The other half of the duopoly - Rolls-Royce is a company whose investment profile ticks the main boxes for the Wide Moat Dividend portfolio. Rolls-Royce engines are used in the most advanced wide body aircraft today including Airbus A380, Boeing 777, and Boeing 787 Dreamliner. Think its easy to compete on jumbo jet engines? This BBC documentary shows exactly what goes in to building these engines. 

Civil and Military Aerospace account for over 50% of Rolls-Royce revenue. The rest is comprised of Power systems, Marine and Energy.

Rolls-Royce pays a 2.7% dividend which is a healthy premium to the yield on the S&P 500. The company has grown its dividend every year since 2010. Rolls-Royce can easily afford to continue raising its dividend, its payout ratio sits at 18%. 

Its a cyclical business. In the post crisis years the ROE has ranged from 14% (2010) on the low side to 43% (2012) on the high side. In my view the recent lows are not too bad and the good years are very good. The Debt/Equity ratio is 0.3.

Neil Woodford is a fan and has Rolls-Royce as one of the largest holdings in his portfolio.

Unlike most of the market today, Rolls-Royce is a relative bargain which sells at near 2008-09 lows. The current P/E is 7.4 and the P/CF is 8.7. To me this looks like a quality company at a discount price.

Seventh Pick in the WMD Portfolio - Occidental Petroleum

The more real they are, the more fun blogs are to follow. So in that spirit, rather than talking about ideas in the abstract I maintain a hypothetical portfolio to track ideas where I'll semi-regularly (and hypothetically) invest and track buying (and where required selling) shares.

For tracking purposes I will use $1,000 to keep it nice and simple. The overall goal is long run income and dividend growth. Portfolio page with goals and tracking is here.

The previous pick in the WMD Portfolio was Spectra Energy. I am taking further advantage of falling energy prices with Occidental Petroleum. I have no idea if this is the bottom and it probably isn't. For all I know oil prices could go much lower and stay low for years.

But we have to balance the positives. Oxy has simplified its business model. At the end of November Oxy spun off its California assets into a separate company (California Resources). Oxy also plans to sell off its Middle East/ North Africa assets. Those transactions will leave Oxy as a focused player in the Permian basin.

Since, I have no idea what oil prices will do, Balance Sheet safety is paramount. Levered players are already starting to get washed out. Oxy has a Debt/Equity ratio of 0.2 they can weather low prices.

During the financial crisis, Oxy continued to raise its dividend. In 2004, Oxy paid $0.55/share in dividends and today its $2.80/share. That is excellent dividend growth. The current yield is 3.5%.

Oxy is a very shareholder friendly company. They have steadily brought down the share count. Management plans a major buy back which could result in retiring almost 10% of its shares. Since Oxy is trading at its lowest P/E valuation since 2008 this should be an excellent time to shrink the share count.

All in all, even with the vast uncertainty around oil markets, Oxy's simpler business model, safe balance sheet, and shareholder friendly actions make it a good addition to the WMD portfolio. 

Sixth Pick in the WMD Portfolio - Spectra Energy

The more real they are, the more fun blogs are to follow. So in that spirit, rather than talking about ideas in the abstract I maintain a hypothetical portfolio to track ideas where I'll semi-regularly (and hypothetically) invest and track buying (and where required selling) shares.

For tracking purposes I will use $1,000 to keep it nice and simple. The overall goal is long run income and dividend growth. Portfolio page with goals and tracking is here.

With all the churn in energy prices, prices reverting back to long term lows, there will be winners and losers. We are already starting to see losers shake out of the process. But what about winners? The big integrated companies like Exxon and Chevron are weathering the storm pretty well. I would like to add one of these type of companies to the WMD portfolio at some point, but at the same time the fact they are weathering the storm means the shares are not as cheap relative to the rest of energy. What about smaller E&P? These are pretty risky and while I am sure there are bargains, I am also sure I am not smart enough to know which ones are the right ones to pick.

But whether through ETFs or bots or other reasons, there does seem to be interesting knock on effects in many parts of the energy space. Pipeline operators are also getting blown away, but some of these have limited direct exposure to the price of oil or gas at any given time. One of these is Spectra Energy, which is mainly in natural gas, not oil.

Spectra's pipelines give it the ability to move natural gas across most of the eastern US and beyond.

Spectra's yield is at 3.7%, the company announced a 10.5% dividend increase for Q4. The company has a long list of projects in motion and a well covered distribution so it should be able to deliver double digit dividend growth for near to mid term. I am sure there are better bargain prices in energy than  Spectra. But Spectra's 3.7% yield offers a fair deal for quality income over the long haul.

Fifth Pick in the WMD Portfolio - Tupperware

The more real they are, the more fun blogs are to follow. So in that spirit, rather than talking about ideas in the abstract I maintain a hypothetical portfolio to track ideas where I'll semi-regularly (and hypothetically) invest and track buying (and where required selling) shares.

For tracking purposes I will use $1,000 to keep it nice and simple. The overall goal is long run income and dividend growth. Portfolio page with goals and tracking is here.

I first came across Tupperware as an investment idea some years ago, through the work of one of the finest investors I know - Jeff Fischer who runs Motley Fool's Pro service.

Tupperware has a lot to recommend it on the business side. The most famous characteristic is the parties themselves and how they illustrate the Liking principle that Robert Cialdini describes - "People are easily persuaded by other people that they like. Cialdini cites the marketing of Tupperware in what might now be called viral marketing. People were more likely to buy if they liked the person selling it to them."

There is a lot to like in how Tupperware is able to engage with its target market, from Cialdini's book Influence - "It’s gotten to the point now where I hate to be invited to Tupperware parties. I’ve got all the containers I need; and if I wanted any more, I could buy another brand cheaper in the store. But when a friend calls up, I feel like I have to go. And when I get there, I feel like I have to buy something. What can I do? It’s for my friends.”

Its hard to find anything resembling a good price, so why is Tupperware in a zone of reasonableness? One guess as to why Tupperware shares are priced well compared to the market overall is that investors conflate them with Herbalife which is undergoing lots of scrutiny as to its business model. However, Tupperware gets its income from the consumers at the parties. 

Tupperware 10-Q: "The vast majority of the Company's products are, in turn, sold to end customers who are not members of its sales force."

Tupperware is a truly global business, its focused on the emerging market consumer. The U.S. is less than 10% of its business, and its sees India and Indonesia as its top markets going forward. Tupperware levels the playing field for women in emerging economies. The business model enables women all over the world to create profitable businesses.

The regional sales breakdown is as follows:

• AsiaPAC 32%
• Europe 28%
• North America 25%
• South America 15%

Tupperware sees itself as an AND company as in Developed Markets AND Emerging Markets. Still the latter plays the biggest role going forward - Argentina, China, Indonesia, Brazil, and Turkey grew over 20% last twelve months.

With so much to like about the business model, what about the goals of the Wide Moat Dividend portfolio - Safety, Dividends, and Growth?

The first red flag is the Debt/Equity level which sits at 2.4, that normally would be enough to stop the analysis. However, looking to Todd Wenning's single most important metric Free Cash Flow cover shows that Tupperware's Free Cash Flow provides ample coverage.

Tupperware has the Free Cash Flow to pay its dividend, and with an Interest Coverage ratio of 7.5 it also has the ability to handle its debt load.

Tupperware's current yield is 4.0%. It has a five year annualized dividend growth rate of 23%. Tupperware buys back its shares, and has reduced its overall share outstanding from 64m in 2010 to 51m outstanding today.

Tupperware puts up very strong ROE and ROIC metrics year after year.

The overall combined effect shows a good opportunity for quality income. Tupperware's 4% yield is substantially better than average and above even what many Utilities pay today. But Utilities have pretty limited growth, whereas Tupperware more than doubled its revenue in the last decade.

Tupperware's current valuation also looks relatively attractive. Its P/E is 15.4 versus a five year average of 16.6. Its Price/Cash Flow is 12 versus five year average 13.4. Add it all up you get quality, income, and a fair price for an excellent business.

Last year, Tupperware "logged 24 million Tupperware parties worldwide in 2013, up incrementally from 22 million in 2012, 21 million in 2011, and 18 million in 2010." The company has a motivated, global sales force, treats its shareholders well, and room to grow.I plan to buy the shares, and keep them sealed up for a long time.

Fourth Pick in the WMD Portfolio - Raven Industries

The more real they are, the more fun blogs are to follow. So in that spirit, rather than talking about ideas in the abstract I maintain a hypothetical portfolio to track ideas where I'll semi-regularly (and hypothetically) invest and track buying (and where required selling) shares.

For tracking purposes I will use $1,000 to keep it nice and simple. The overall goal is long run income and dividend growth. Portfolio page with goals and tracking is here.

The current portfolio consists of Coca Cola, GlaxoSmithKline and IBM. Stalwarts all. Raven is a bit different than the rest, for one thing its a small cap with a $987M market cap, but its earned its place all the same. Raven has three main divisions: Applied Technology, Engineered Films & Aerostar Division and they serve industrial, agriculture and defense customers.

On the quantitative side, Raven has a low yield (1.8%) relative to the S&P, though that is a little bit more attractive if you compare Raven's yield of the Russell 2000 index which yields 1.3%.  Raven has some positives, for starters Raven is a Dividend Champion. They've paid dividends 27 consecutive years. On top of that,  Raven has committed to growing their dividend, they have a ten year annualized dividend growth rate of 15.5%.

Does Raven have a moat? Todd Wenning covered Raven in his informative investigative series on Small Cap moats:

"This business has two potential moat sources. One is switching costs; once a farmer has installed a Raven precision ag system across a fleet of equipment and learned how to use the programs, there's an added cost of switching to a competitor's offering. The second source is network effects; a reputable, well-established company with a wide breadth of support, service, and training has an edge over any newcomer."

Small cap moats are different from the behemoth moats like IBM in mainframes, Glaxo in vaccines and Coca Cola, but there is a case to be made that Raven, through advanced manufacturing skill and long term focus, has carved a profitable niche for itself. The numbers bear this out

	RAVN
Debt/Equity	0
Payout ratio	44%
Fwd Dividend Yield	1.8%
10 yr Div Growth	15.5%
ROE 5 yr avg	26%
Forward P/E	18

(Source: Morningstar)

Raven is a manufacturer with a great track record and yet has no debt, this provides a margin of safety. If Raven can continue to come close to its long run ROE and dividend growth averages this should be a good investment over the 5-10 year timeframe. The shares are not super cheap but the company is very innovative (even providing tech (balloons) to Google for Project Loon). Its a shareholder friendly company and at today's prices, Raven is right about at its 52 week low.  Put it all together and it looks like a fair price for a high quality company with a years of dividend growth ahead of it.

IBM Will Survive and Thrive

IBM is the third stock I added to the Wide Moat Dividend portfolio. Its a company with substantial positives - a 2.4% yield with plenty of room to grow. IBM has a payout ratio of 25% and a five year dividend growth rate of 14.3%. The Return on Equity averages 75% over five years. And the price is right IBM's trailing P/E is 12.

In a market with next to no bargains, why is IBM on sale? The company gets lumped in with the other "old" tech - Cisco, Microsoft, Oracle, et al.  aka the IT shop of the 90s-2000s. No one wants to own the next Blackberry tech company that fades away. No doubt they all these players have their challenges with Cloud, Mobile, BYOD and on and on. But I think IBM is unique and in the best position of any of them to survive and thrive. Unlike Blackberry there is no one silver bullet that can take down IBM's franchise. Still the old tech sectors is on sale

	P/E	Yield
IBM	12	2.4%
Cisco	17	3%
Microsoft	17	2.6%
Oracle	17	1.2%

(Source: Morningstar)

None of the old tech players are richly valued on conventional metrics. Investors are right to be concerned with how they each navigate the shifting sands of Cloud and Mobile. Cloud and Mobile present real challenges to each but in different ways. In some ways Microsoft is the most exposed here since they have both client and server side franchises. At the same time Microsoft is executing and moving aggressively to defend its turf, with Azure the Pepsi to Amazon/AWS' Coke in the Cloud space. Microsoft has yet to enjoy the same level of success in Mobile.

Cisco in theory is less exposed than Microsoft because Cloud and Mobile drive up demand in networking gear which they sell. However, the knock on effect of Cloud and Mobile is buyer concentration, where the large Cloud providers increasingly build their own systems soup to nuts and do not rely as much on companies like Cisco. Inside the enterprise, the data centers move to the Cloud which eliminates more sales potential from Cisco. On the Mobile side, sure the bandwidth utilization keeps going up, but then Cisco has to deal with entrenched, large scale players with more bargaining power. Oracle is a bit aimless, without many clear wins to point to, however, they are so deep in the backend that many of the new developments will take longer to reach their base. Mobile is a client side technology and Oracle has never had anything cooking there to begin with. Still the shrinking IT shop is a headwind for Oracle's growth.

That brings us to IBM. For a start, IBM is a totally different animal from the above players, for one thing they have a massive services business a la Accenture that the other players do not have. Steve Ballmer joked about why he avoided services saying if you are in the pharma business why would you want to go into the hospital business? Fair enough, and the services margins will never equal a hit software franchsie, but as Accenture proves when services are done well the result can be profitable and evergreen.  In IBM's case their estimated services backlog at December 31 was $143 billion. That should see them through a rough patch or two. This is a lower (but not low) margin business than software but way steadier and will help them ride through the vissicitudes of technology churn.

As to Cloud, IBM's core customers are among the least likely to headlong into the Cloud, think banks and other transaction oriented businesses.The Cloud is not going to deliver the control and security that these customers need. There is an old tech saying, if a Unix server goes down you have a bad day, if a mainframe goes down the world stops spinning on its axis.

“Planes don’t fly, trains don’t run, banks don’t operate without much of what IBM does,” Ms. Rometty said.

The shortage of growth at IBM is partly by design — and has been for years. Since 2000, the company has sold off businesses that collectively generated $16 billion in sales, including personal computers and disk drives. Since Ms. Rometty became chief executive in 2012, units with $2 billion in revenue have been shed, and when the sale to Lenovo is completed this year, she will have divested operations with revenue of $6 billion.

Profit trumps growth at IBM. “We don’t want empty calories,” Ms. Rometty said. “So when people keep pushing us for growth, that is not the No. 1 priority on my list.”

IBM’s largest single investment in growth is in helping companies exploit the digital data deluge from corporate databases, sensors, smartphones, the web, social networks and elsewhere. That push into the field now called big data began years ago, and Ms. Rometty played a central role in shaping the strategy before she became chief executive.

IBM's core customers have its technology woven into the fabric of their businesses. In many cases, they have been optimizing and extending the code since the 1970s. This is not going to be replaced by the Cloud.  and if anything will look to build their own private clouds with IBM's help and/or use . Then you have the Snowden effect, Ginni Rometty at Mobile World Congress:

"Enterprises will want—and need—to manage their data in the cloud with the same rigor as if it were on-premises. Companies will want to ensure visibility, auditability, security. This will be also be driven by regulation. Roughly 100 nations and territories have adopted data protection laws. In Europe, many countries require that citizens’ data be housed within national borders. This is why IBM is aggressively expanding its global cloud footprint. We currently have 25 data centers globally, and the new $1.2 billion investment announced in January will see the opening of 15 more, in the US, the UK, Australia, Japan, India, Canada, Mexico and China."

Ginni Rometty's speech was the first time an IBM CEO spoke at Mobile World Congress, and that portended a very interesting development in mobile.  IBM  did not have much going in mobile until recently, the Apple-IBM deal that Ginni Rometty and Tim Cook (an ex-IBMer) put together is still early days but could be a very big win.

Apple has the devices and the mobile platform, but you need servers and mainframes to do something interesting, Apple does not play there, has never played there and IBM has them in spades. Security is a core concern and IBM is a major player there as well. Its a deal right out of Ricardo. Its early days, Apple-IBM could be the Wintel of the Mobile world. If nothing else, the deal shows creativity on IBM's part to go from a bystander to being in the center of the ring in Mobile.

For sure, IBM has any number of challenges, I think the old guard of tech will see one or two of the current players not make the leap into this new world, its just the way of the tech world. I agree that as a group old tech players can fairly be discounted from the market P/E, but in IBM's case its overdone.
 I think IBM has a better shot than any of the old guard at getting the next waves right and they have several ways to win - Cloud, data center, services, and mobile partnership with Apple. IBM should not only weather the storm, they have ways to thrive in Cloud and Mobile and continue to innovate.

On top of that an IBM investor gets as shareholder friendly a business as there is, IBM's repurchases and dividend policies are top notch.

IBM Dividend data by YCharts

IBM is in a solid place on fundamental metrics. It does compete in highly contested spaces, but its unique mix of franchises and R&D (repurchases and dividends) give investors a decent chance of earning solid total returns over the long term.

GlaxoSmithKline - Stout Yield Worth the Risks?

GlaxoSmithKline is the second stock that I added to the Wide Moat Dividend (WMD) portfolio. The positives are pretty clear - a 5.6% yield really stands out in this yield parched world. All the better when it comes from a defensive company like Glaxo and sells for a discount to the market, Glaxo's trailing P/E is 14. With a decent price and a five year average ROE at 58%, this is a stock that Joel Greenblatt would love, and in facts its one of his holdings.

Still as Joel Greenblatt is the first to point out, you do not make it through his magic formula screen when everything is rosy. There has to be a lot of hair on any company that can those generate those ROEs and still sell so cheaply - Glaxo faces a number of near and mid term challenges.

As great as the yield, P/E and ROE metrics are, there are troubling numbers, too. Glaxo's payout ratio is 81% and its Debt/Equity is 2.4. There is not a lot of room to maneuver here if things go poorly. However there are some factors that balance out some of the negative.

The stock price was hit when Glaxo recently lowered guidance and stopped buybacks. However, for the purposes of the WMD portfolio I care more about the dividend than buybacks. On dividends, the the focus of Glaxo management shines through, they raised the dividend 6%.

I use a simple 5+5 metric for the WMD portfolio, the yield plus dividend growth should exceed ten percentage points. With a 5.6% yield plus a 6.6% five year annualized dividend growth rate, Glaxo earns a 12.2. Things are not perfect at Glaxo, but prioritizing dividends over buybacks is a good tradeoff here in my view.

The list of challenges facing Glaxo is not short, however that is what gets you a price like we see today. There are not guarantees, but management's priorities appear to be in order, favoring shareholders. Despite its current standing as sector whipping boy, Neil Woodford views Glaxo's troubles as temporary, has Glaxo as his fund's second largest holding, around 7% of the fund. Woodford's comments could be construed as talking his book until you realize that he has purchased his Glaxo shares in the last two months.

There is a lot to do for Glaxo to be successful, like any pharma company they have to continue to roll out successful platforms, in Glaxo's case its respiratory. The company is adding less glamorous areas like vaccines and consumer health (which will soon represent more than half Glaxo's income). One analyst derided them as "The market is changing around them, and there's a sense Glaxo is the granddad stuck in the corner." I have no problem with boring, actually that sounds favorable to me.

Its not a no brainer investment, despite the gaudy price, yield and quality metrics. While Glaxo's risks are real, at a 5.6% yield, investors have a chance to earn a stout income as the process unfolds.

Second & Third Picks in WMD Portfolio - GlaxoSmithKline & IBM

The more real they are, the more fun blogs are to follow. So in that spirit, rather than talking about ideas in the abstract I maintain a hypothetical portfolio to track ideas where I'll semi-regularly (and hypothetically) invest and track buying (and where required selling) shares.

For tracking purposes I will use $1,000 to keep it nice and simple. The overall goal is long run income and dividend growth. Portfolio page with goals and tracking is here.

The first pick was Coca Cola, today I am "adding" two other great dividend payers - GlaxoSmithKline and IBM.

Its very hard to find a 5+% dividend yield today from a high quality operation, but that's what GlaxoSmithKline offers. The current yield is 5.5% albeit with moderate growth (6.6% five year annualized dividend growth).

IBM's forward dividend yield is 2.4%, that is not super high but still well above the overall market. Since their payout ratio is 25%, it can grow comfortably for many years. IBM management is willing to raise the dividend with five year annualized dividend growth at 14.3%. Its as high quality a company as there are anywhere in the world. The 5 year average ROE is 75% all for a very good price, the trailing P/E is 12. About the only negative on IBM's metrics is that debt has risen to do buybacks, but at this price point is surely makes sense and the company can cover its payments.

	GSK	IBM
Debt/Equity	2.4	2.0
Payout ratio	81%	25%
Fwd Dividend Yield	5.6%	2.4%
5 yr Div Growth	6.6%	14.3%
ROE 5 yr avg	58%	75%
Trailing P/E	14	12

(Source: Morningstar)

These companies are not perfect, both have higher debt loads than you would like. Glaxo's payout ratio is a bit too high. However, they both should have no problem meeting their debt obligations. One metric for selection I use is a 5+5 metric - dividend yield plus dividend growth should be 10 or higher. Both GSK (12.2) and IBM (16.7) clear this hurdle with room to spare. The quantitative side looks excellent; however there are qualitative reasons why Glaxo and IBM are priced cheaply and I will explore these in future posts.

First Pick in WMD Portfolio - Coca Cola

The more real they are, the more fun blogs are to follow. So in that spirit, rather than talking about ideas in the abstract I am launching a hypothetical portfolio to track ideas where I'll semi-regularly (and hypothetically) invest and track buying (and where required selling) shares.

For tracking purposes I will use $1,000 to keep it nice and simple. Portfolio page with goals and tracking is here.

 The first selection was pretty straightforward - Coca Cola. I have written a couple of times about Coke. Its a company that does not ever get too cheaply priced, but its seems fairly priced to me now. What's driving that price? Is it slowing consumption of soda in the US or moderating emerging markets growth? Or more likely both?

On some level those issues are washed away by Coke's quality, safety, and growth. Consider:

• Debt/Equity: 0.6
• Dividend Yield: 3.2%
• 5 year dividend growth: 8%
• Payout Ratio (FCF): 63%
• Return on Equity: 26%

There is a lot to like with Coke - at $38.44 its look undervalued by double digit percentages, with room for continued growth, and dividend growth. Its a bit nerve wracking putting stock picks on paper (ok on a post) and then tracking them - especially starting this whole thing at an all time market high - but I believe in the process of buying above average companies at below average prices. Coke gives investors both of those things at today's price. So Coke at $38 feels like a great place to start a journey in search of wide moat dividends.

Follow the progress of the WMD Portfolio here.

WMD Portfolio

For tracking purposes, I am launching the WMD Portfolio - a journey in search of Wide Moat Dividends.

This is an idea tracking portfolio, rather than just tracking ideas as tickers its more interesting to simulate the process to see weight and growth over time, and so I will track purchases and sell of shares that would cost around $1,000 at time of hypothetical purchase.

WMD Portfolio Stock selection process identifies equities with the following characteristics:

• Wide Moat - stocks selected for the portfolio should exhibit a durable competitive advantage to protect the company's shares and the ability to payout dividends

• Income - A higher than average dividend yield. At the time of this writing the current yield for S&P 500 stocks is around 1.9%, the WMD Portfolio generally looks for companies with the ability to pay at least 50% more than the current S&P 500 yield

•  Safety - Low payout ratio  (generally less than 60% of earnings and free cash flow) of their overall profits as dividends. This is to protect the dividend in the event of downturns.

• Dividend growth - stocks selected for this portfolio should be able to support a dividend growth rate that combined with their current yield exceeds 10 percentage points. For example, a stock paying 3.5% dividend yield should be able to grow its dividend by at least 6.5% or more each year

The primary metrics that I will use to measure the performance of the WMD Portfolio are as follows:

• Total Return: the combined return of the stocks’ capital gains plus the dividend income received

• Current Yield: the “look through” yield of the portfolio as a whole

• Dividend Raises and Cuts: tracking the total number of the Portfolio companies’ dividend raises and cuts over time

Portfolio Selections:

1. Coca Cola
2. GlaxoSmithKline
3. IBM
4. Raven Industries
5. Tupperware
6. Spectra Energy
7. Occidental Petroleum
8. Diageo
9. Rolls-Royce Holdings
10. Exxon Mobil