This is my March 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.
‘Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years.’ - Warren Buffett
‘We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.’ - Warren Buffett
We are certainly living in ‘interesting times’ and I strongly suspect they are going to become even more ‘interesting’ over the next several months.
As much as we all want life to resume as it was prior to the onset of COVID 19, I am of the opinion that this will not be possible until such time as a vaccine is discovered. Although several companies are working on coronavirus treatments or vaccines, the FDA US Food and Drug Administration Drug Review Process is lengthy and rigorous. In a best case scenario I would not expect a vaccine before early/mid 2022.
Judging from what is being reported out of Washington and Ottawa, unemployment levels are skyrocketing. Complicating matters even further is the fact that so many people have been living ‘on the edge’ during good times. Now that the good times have come to an abrupt halt for many, it would not surprise me to see a surge in bankruptcies within the next few months (see here). While these projections are for Canada I strongly suspect US is in a similar predicament.
Despite the magnitude of the stimulus measures recently announced in Canada and the US, the proposed financial assistance is unlikely to service the monthly obligations of many recipients.
As if COVID 19 wasn’t enough of a problem! We also have the world’s largest oil and gas producers at loggerheads. The current massive oversupply has resulted in oil and gas prices not witnessed in years. Many producers are at the point where they are better off shutting operations!
While I might be coming across as a ‘doom and gloom’ this is not my intent. In fact, I encourage you to view what we are experiencing in financial markets as an opportunity. If your financial house is in order then look upon the current situation as a wonderful opportunity.
Following several months in which we witnessed irrational exuberance in the markets, we now have companies whose stock price has plummeted. Although it is extremely difficult, if not impossible, to determine a company’s valuation in this environment, long-term investors should appreciate that long-term returns generated through an investment in high quality companies will very likely be far superior if shares are purchased during a difficult environment as opposed to purchases made when shares are priced to perfection.
I do not dispute that many wonderful companies will experience challenges over the next several months. In fact, it would be unrealistic to think that companies such as Visa, MasterCard, Chevron, CN Rail, and Automatic Data Processing will not take a hit. What investors need to realize with these companies is that they have historically generated strong Free Cash Flow, they have competitive advantages, their financial health will enable them to weather the current conditions better than many other companies, they have great management, and they provide essential services.
I do not have a crystal ball with which to predict what will happen with many publicly traded companies. Based on my years of investing experience, however, I decided years ago to focus on high quality companies. I have lived through a few economic downturns and came to the realization many, many years ago that my tolerance for risk is low.
It is for this very reason that I refuse to invest in junior mining companies, junior oil and gas companies, and Master Limited Partnerships which have sizable cash distributions to unitholders; paying close attention to debt ratings is something I also factor into my investment decision making process.
I also gravitate to companies which provide essential services. While Visa’s and Mastercard’s volumes have recently dropped significantly, the use of their services will not ‘dry up’. The same can not be said for other industries (junior oil and gas companies, cruise lines, the hospitality and entertainment industries).
Investing in highly fragmented industries (restaurants, for example) is fraught with risk as the mortality rate in this industry is high. As a result, I have restricted my exposure to this industry through my investment in McDonald’s. Even McDonald’s will suffer but certainly not to the same extent as other companies in this industry.
I have significant exposure to the Canadian banking sector through my investments in the Big 5 and minimal exposure to the US banks. I am reasonably confident the Big 5 will be able to weather the storm; they fared far better than their international competitors during The Financial Crisis.
According to the President and CEO of the CIBC group of companies (CM):
‘The Canadian banking sector is incredibly well-capitalized. We’ve worked with the Bank of Canada, the department of finance, and our regulator to make sure that we have all the tools in place to ensure that credit is moving to businesses.’
‘I’d say one thing that’s incredibly important: the Canadian investors that invest in our banks rely on those dividends for income and every source of reliable income that we can provide to Canadians – and Americans, and our other shareholders that are investing in our banks – is incredibly important in this moment in time where cash flow reduces anxiety.’
I do not expect dividend increases from the Big 5 as The Office of the Superintendent of Financial Institutions (OSFI) has told banks not to increase dividends or offer share buybacks during this tumultuous period.
On the healthcare front I have exposure to Johnson & Johnson, Becton Dickinson, and Stryker. I have absolutely no interest in investing in companies which do not generate significant free cash flow (eg. most biotechs).
The holdings within the FFJ Portfolio’s ‘Core’ and ‘Side’ accounts can be accessed here; these holdings are in addition to accounts for which I do not disclose details.
Although the aggregate value of the FFJ Portfolio has declined in recent months, this is of little concern to me as my intent is to retain these holdings for the long-term. In fact, I welcome lower share prices.
The dividends generated from these holdings are automatically reinvested to acquire additional shares so I benefit from lower share prices; the monthly dividend income generated from the holdings within the FFJ Portfolio can be accessed here.
Subsequent to publishing my two interim March reports, I have added to my positions in the following companies:
- Canadian National Railway Company (CNR)
- Intact Financial Corporation (IFC)
- Becton, Dickinson and Company (BDX)
- Brookfield Renewable Partners L.P. (BEP)
- Brookfield Property Partners L.P. (BPY)
- Brookfield Infrastucture Partners L.P. (BIP)
- CME Group Inc. (CME)
- Stanley Black & Decker, Inc. (SWK)
Having tracked the dividend income received on a monthly basis for the last several years I am able to relatively accurately anticipate what income I can expect to receive in the upcoming months.
My current plan is to continue to automatically reinvest dividends to increase my exposure to existing holdings. Although it is entirely possible that one or more of the companies in which I have invested could cut or temporarily suspend the payment of the dividend, the portfolio is reasonably well balanced so this is of little concern to me.
On April 3rd, United Technologies Corporation (UTX) will be spinning off its Otis and Carrier divisions; my April FFJ report will reflect Carrier Global Corporation (CARR) Otis Worldwide Corporation (OTIS) holdings. UTX will also be renamed Raytheon Technologies Corp. (RTX).
In addition to increasing my exposure in existing holdings, I have a short list of companies in which I would be happy to initiate a position. Two such companies are Waste Management, Inc. (WM) and Waste Connections, Inc. (WCN) the largest and 3rd largest industry participants in a fragmented industry.
Attractive features of this industry are that it:
- is highly regulated;
- provides services required regardless of the economic environment.
Naturally, initiating a position in either of these companies will be determined on other investment opportunities presented.
We are certainly living in ‘interesting times’ and I can appreciate that investing for the future is the last thing on the minds of many. If, however, you are NOT in the predicament where you have more month than money, I encourage you to heed the words of the following successful money managers:
‘Invest for the long haul. Don’t get too greedy and don’t get too scared.’ - Shelby M.C. Davis
‘History provides a crucial insight regarding market crises: they are inevitable, painful and ultimately surmountable.’ - Shelby M.C. Davis
‘You make most of your money in a bear market, you just don’t realize it at the time.’ - Shelby Cullom Davis (April 1, 1909 – May 26, 1994)
Stay safe. Stay focused.
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.