This is my February 2020 FFJ Portfolio update. The portfolio was created in January 2017 for the purpose of demonstrating how investing in high quality companies with competitive advantages and with a record of consistently increasing dividends can assist investors in reaching their long-term financial goals without the need to speculate or to chase dividend yield.
In my January 2020 dividend income report I reiterated the following message I have made on several previous occasions.
‘So….as I patiently wait for high quality companies I currently deem to be overvalued to retrace to attractive/fair valuation levels, I continue to have confidence that the high quality companies in which I have exposure will not give me cause for concern….even if we experience a broad market correction.’
I certainly had no idea when a broad market pullback may occur nor did I know what would trigger a pullback but what we have witnessed in recent days is what I have been long awaiting.
I don’t know how long this pullback will last but am of the opinion the broad market still has room to fall further because:
The coronavirus is far more serious than many imagine and central banks are somewhat powerless in the face of this virulent pandemic;
The rapid decline in stock prices will likely trigger margin calls in which investors will be unable to shore up the margin shortfall in their investment account(s). This will place downward pressure on stock prices.
Looking at recent FINRA statistics we can see the use of debt for investment purposes has ballooned in recent years. When an investor is unable to satisfy a margin call, the investor’s brokerage firm must take appropriate action to ensure the margin shortfall is rectified. This often results in the liquidation of securities at the most inopportune time.
Imagine thousands of investors being unable to meet their margin calls and brokerage firms liquidating investments to satisfy these margin calls. This will place downward pressure on stock prices which will lead to further downward pressure which in turn leads to further downward pressure which in turn...you get the idea. A ‘snowball effect’…and not in a good way.
Although I think the broad market still has room to fall further, the share price of some companies has fallen to the extent where I have begun to gradually deploy funds. I have very recently acquired shares in the following:
Exxon Mobil Corporation
On February 25th I disclosed in this article that I had increased my exposure to XOM through the acquisition of 400 shares within one of the ‘side accounts’ within the FFJ Portfolio. While XOM’s share price has fallen slightly subsequent to this purchase, I am not concerned and explain in my article why I acquired shares in this ‘unloved’ company.
In this November 2019 article I disclosed that I had initiated a position in SYK. On February 28th I purchased additional SYK shares at a price of ~$189 in an account for which I do not disclose details.
This Corporate Overview provides a concise overview of the company.
On February 28th I initiated a new position in ECL at an average price of ~$177.86. These shares are held in an account for which I do not disclose details.
While my most recent previous ECL article was published May 30, 2019, I have been regularly monitoring the company in the hope of being able to acquire reasonably valued shares.
What appeals to me about ECL is that it is the global leader in the cleaning and sanitation industry. It provides products that help its hospitality, food-service, and healthcare customers do laundry, wash dishes, and fix appliances when they break.
Its cleaning and sanitation scale dwarfs the competition. In fact, it generates more than twice the revenue of its largest rival (Diversey) which is owned by Bain Capital Private Equity.
The industry is very fragmented, with much of the market made up of regional and local companies.
ECL controls roughly 11% of the $125B+ global market and with its unrivaled scale and breadth of product offerings it is an attractive partner to global hospitality and food-service firms.
In December 2019, ECL announced that it had reached an agreement to spin-off and merge its upstream energy business with Apergy, the oilfield services business spun out of Dover in 2018. The transaction will be structured in a tax-efficient manner in which ECL shareholders will receive 62% of the new company; management is targeting the end of Q2 2020 for the deal to close.
The new company will assume roughly $0.5B of ECL debt which should allow ECL to maintain healthy leverage ratios following the spin-off.
On February 18th, ECL released its Q4 and FY2019 results and FY2020 guidance at which time management indicated:
‘Our improving new business wins and continued pricing should yield better sales gains through 2020. When coupled with our ongoing productivity and cost efficiency work, we expect to deliver another year of strong adjusted earnings per share growth and more than offset headwinds from pension, coronavirus and currency. We expect full year 2020 adjusted diluted earnings per share to increase 9% to 12% to the $6.33 to $6.53 per share range reflecting improving top line growth, flattish delivered product costs and benefits from cost efficiency programs. This forecast includes estimated unfavorable headwinds of $0.08 per share from pension and $0.05 per share from the first quarter effects of the coronavirus; we are not yet able to estimate and forecast the virus impact for the second quarter through fourth quarters.’
ECL’s dividend history can be accessed here.
On February 27th, ECL declared a regular quarterly cash dividend of $0.47/share to be paid April 15th to shareholders of record at the close of business on March 17th; ECL has paid cash dividends on its common stock for 83 consecutive years.
In its December 4, 2019 dividend increase announcement, management explained why ECL’s dividend was only increased by ~2% which is smaller than the typical increase.
Moody’s currently rates ECL’s senior unsecured debt Baa1 (top tier of the lower medium grade category) and S&P Global rates ECL A- which the lowest tier of the upper medium grade category (it is 1 notch higher than Moody’s rating.
ECL is certainly not valued at a bargain basement level. The problem is….it very rarely ever is attractively valued.
In FY2019, ECL generated $5.33 in diluted EPS. On the date of the earnings release, ECL was trading at ~$207.50; share rose to ~$210 on February 19. We were essentially looking at a diluted PE of ~39.
With the recent market pullback to my ~$177.86 purchase price, I picked up share at a diluted PE of ~33.4.
FY2020 adjusted diluted EPS guidance is $6.33 - $6.53 (+9% to +12% growth). Improving new business growth, pricing and cost efficiencies are expected to more than offset investments in the business and an estimated unfavorable $0.05/share from the coronavirus outbreak in Q1.
This certainly is not a bargain basement valuation, and therefore, I have not initiated a full position. I am of the opinion ECL’s share price has a very real possibility of pulling back further. Should this occur, I intend to acquire additional shares.
When you compare the month end reports for January and February 2020 you will see that the FFJ Portfolio has declined in value. I am not in the least bit concerned about the drop in value since I am a long-term shareholder with no intent of selling shares any time soon. In fact, I am on the hunt to invest in attractively/fairly valued high quality companies and want share prices to drop.
When looking to purchase a vehicle, real estate, etc., I want a fair/attractive price. The same applies to the acquisition of shares in high quality companies!
FFJ Portfolio Dividend Income
The dividend income generated in the FFJ Portfolio can be accessed here. February, May, August, and November are the months in which the portfolio holdings generate the least dividend income.
I think we can expect further downward pressure on stocks prices over the coming weeks. I, therefore, continue to have funds ready for deployment.
I will be on a ski trip March 2nd - 13th and monitoring North American equity markets will not be at top of mind. I will occasionally check to see what is happening in the business world and if I see attractively valued shares I may deploy funds. I will, however, be in no position to provide a timely update of any activity and March 14th will be my earliest opportunity to disclose any activity I initiated while on vacation.
I wish you much success on your journey to financial freedom!
Note: Thanks for reading this article. Please send any feedback, corrections, or questions to [email protected].
Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.
I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.