My year-end portfolio review led me to the conclusion that there were some stock positions in my portfolio which turned out to have problems with their business models, be it in the sense that they were hit by external market forces or had to undergo a fundamental change of their business model. In many cases, such characteristics are associated with stagnating dividends or even dividend cuts. Both features do not fit to the concept of dividend growth investing. I therefore felt that it is time to do some portfolio rebalancing.
As indicated in my article in January, the above mentioned characteristics exactly describe the developments of K+S and Intel. Besides the realignment of their business models, both companies are also rather cyclical in nature: K+S, being a producer of potash, depends on a great number of external factors such as general economic conditions, cyclical trends in end-user markets, supply and demand imbalances, weather conditions, and last but not least the potash price itself. Intel, simply being active in the technology sector, the most cyclical of all sectors.
I decided that the next investment should provide some exposure to less cyclical sectors like consumer products. While the usual suspects like Coca Cola, Procter & Gamble, and Johnson & Johnson trade at substantial premiums and feature rather modest dividend yields of 3% or below, I turned to the tobacco industry and its global player Philip Morris, which currently generates a yield of > 4.5%.
As can be seen in the chart below, the recent correction represents a good opportunity to buy this solid blue chip:
- Biggest producer of cigarettes worldwide with almost 30% global market share
- Exposure to mature & emerging markets: Western Europe, EEMA, Russia, Asia, Latin America, Canada, etc.
- 5 consecutive annual dividend increases
- Market capitalization of ca. USD 120bn
- S&P A investment grade rating
- However, negative equity and high leverage but this seems to be not so unusual for this industry sector (still need to further investigate why this is so!)
- Added 20 stocks at price of EUR 61.33 generating yield of 4.5%
Although the company recently reported some anticatalysts for further growth like higher governmental taxation, low-priced competition, challenging regulatory laws and illicit consumption, I am still of the opinion that the fundamental trend of PM remains intact. Even if growth conditions in some of its mature markets like Western Europe do not look favorable at the moment, PM has still the power to offset declining revenues in its overly regulated markets through organic growth and acquisitions in emerging markets. This characteristic holds even during recessions as people do not cut down expenses for everyday products like cigarettes…
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