So Far, So Good for My Buyback/Dividend Growth Portfolio

 | May 17, 2017 | 12:00 PM EDT
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One month since inception, my 2017 Buyback/Dividend Growth tracking portfolio (aka the experiment) is off to a decent start. The impetus behind this portfolio was the belief that the combination of companies that raise dividends while also buying back shares could be a powerful one. Since those actions don't happen overnight but rather over a number of years, one month is but a day. Still, progress or the lack there of should be measured.

By way of a reminder, 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

The portfolio is up 4.1% in the past month versus about 2.5% for both the S&P 500 and Russell 2000. Those early returns have little to do with the concept that I am trying to prove. Up markets can mask a great deal, and over the years I've been more interested in seeing how screening ideas work in down markets -- not that I'm hoping for the tide to turn.

The big winner so far is Wendy's (WEN) , which is up 21% in the past month and is the primary driver of this portfolios early success versus the broad markets. Part of that bump (5%) occurred in the afterglow of decent first-quarter earnings reported last week, where Wendy's modestly exceeded consensus estimates on both earnings (nine cents versus an eight-cent consensus) and revenue ($285.8 million versus $282.6 million).

During the quarter, Wendy's bought back 1.3 million shares at an average cost of $13.50 per share and still has an additional $132 million to spend on share repurchases under its current authorization, which will expire next March. The quarterly dividend remains seven cents a share, for an implied yield of 1.7%. The company last raised the dividend in February from six-and-a-half cents to the current rate, and prior to that, from six cents in November. Given recent history, I'd expect another increase within the next year. Still, Wendy's is not cheap at 29x 2018 consensus estimates.

The other winners so far include Timken (TKR) , up 13%, and Corning (GLW) , up 10%.

Timken reported great first-quarter earnings of 55 cents a share, handily beating the 43-cent consensus. Timken repurchased 185,000 shares during the quarter and paid its 379th consecutive quarterly dividend, although the dividend has been flat for two years.

Corning also exceeded first-quarter consensus earnings-per-share estimates (39 cents versus 35 cents). The company repurchased $400 million in stock during the quarter and plans to buy back a total of $2 billion during the year. In February, it raised the quarterly dividend 15% from 13.5 cents to 15.5 cents.

Those in the red during the past month include Kohl's (KSS) (down 5.2%), Harley-Davidson (HOG) (down 4.9%), Brinker International (EAT) (down 3.4%) and Travelers (TRV) (down 0.7%).

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