Baker's Dozen Plus One Make Up My New Buyback/Dividend Growth Portfolio

 | Apr 19, 2017 | 12:00 PM EDT
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A tax-day celebratory trip through Wendy's drive-thru yesterday (yes, pathetically, that's how some value investors celebrate) was both eye-opening and a reminder of the past. It was eye-opening because the double with cheese I bought cost six bucks; as good as it was, that's a hefty price and displays some major burger inflation, but I'll save that topic for another day. The trip also was a reminder of the past because Wendy's (WEN) is a former holding that I finally gave up on several years after the merger between Wendy's and Triarc (parent of Arby's) merger bore no fruit. I pulled the plug too early, and it wasn't the first time.

Fast forward, and Wendy's shares not only have had a decent run -- more than tripling since 2013 -- bit the company also meets the criteria for inclusion in my new Buyback/Dividend Growth tracking portfolio, pursuant to last week's column on the potential of combining growing dividends with stock buybacks

Criteria for inclusion include the following: 

  • Minimum market cap: $2 billion
  • Minimum dividend yield: 2%
  • Reduction in shares outstanding 3-year average of 5% or more
  • Minimum 5-year dividend growth of 5% or more

Fourteen stocks made the cut. The thing that is most remarkable about Wendy's is that the company has slashed shares outstanding from 426 million in 2011 to 252 million as of the latest quarter, for a 41% reduction. During the same period, it has quadrupled the annual dividend from 7 cents to 28 cents. 

Now, I am not making a call on where Wendy's shares head from here, as WEN trades at 24x next year's consensus earnings estimates, and I've made it clear that I believe the restaurant sector is overpriced. However, it is an interesting example of a company that aggressively has bought back shares and raised the dividend. Plus, I've been dead wrong on this stock in the past. 

One other restaurant name, Brinker International (EAT) , parent of Chili's and Maggiano's, also met the inclusion criteria. Brinker has cut its shares outstanding in half and tripled the dividend since 2010. Currently yielding 3.2%, EAT trades for about 13x next year's consensus earnings estimates. 

The other companies making the cut include Boeing (BA) , Travelers (TRV) , Valero Energy (VLO) , Corning (GLW) , Ameriprise Financial (AMP) , Motorola Solutions (MSI) , Harley-Davidson (HOG) , Wyndham Worldwide (WYN) , Kohl's (KSS) , Assurant (AIZ) , Legg Mason (LM)  and Timken (TKR)

It's a fairly well-diversified group with an average market cap of $19 billion and average dividend yield of 2.8%. It will be interesting to see if these companies can continue to put money back in shareholders' pockets at the same pace as in the past, and whether investors will be rewarded.

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