Ideas for the Income Portfolio

 | Jun 10, 2013 | 4:00 PM EDT  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

uve

,

stsa

I recently had three very important conversations. One had to do with the woeful status of the Baltimore Orioles' starting pitching. The other two focused market-related topics. A 1976 interview with Ben Graham that floated around the Internet this weekend focused on the mechanical value formula he developed after he retired. Graham said that a simple quantitative measure of picking stock using low price-to-earnings ratios and low debt-to-equity ratios had outperformed the market in the 60 years leading up to 1976. Tobias Carlisle and Wesley Gray updated the study in their excellent book Quantitative Value. They found that since 1976, the strategy has continued to work with a compound annual return of more than 17%.

The third conversation has to do with the almost desperate need for income investors to find suitable securities. Intense buying has lifted many of the traditional alternatives to unsustainable levels. The Wall Street commission machine is in overdrive creating products, many of them potentially toxic, to feed the need for income. I am frankly surprised that retirees in need of income are not staging furious rallies at the Federal Reserve and Capital Hill as government policies have destroyed their retirement plans.

While I can do nothing about the Orioles pitching, I might be able to combine Graham's formula for successful investing with the need for equity income ideas. I added an income component to Graham's basic screen and came up with ideas worth including in an income portfolio. It looks like this could be a very fertile and productive approach for income investors.

Universal Insurance Holdings (UVE) is a Florida-based insurance company that primarily underwrites homeowners insurance. It recently extended operations into six more states. It has a specialty division, American Platinum Property and Casualty Insurance Company, which writes multi-peril homeowner coverage on homes in Florida worth more than $1 million. There is nothing overly exciting about the company but it shows solid results and pays a dividend yield of 4.5%. The shares trade at just 8.7X earnings with cash balances in excess of its $278 million market cap and more than 10x times outstanding debt. It recently purchased 4 million shares from the former CEO at a discount to the market price, reducing the overall share count by 16%.

Sterling Financial (STSA) is the holding company for Sterling Savings bank in the northwestern U.S. Based in Spokane, the bank has 174 branches in Washington, Oregon, Idaho and California and total assets of $2.96 billion. Sterling has chosen to be a buyer in the current depressed market for bank stocks and has made several acquisitions this year including the Puget Sound operations of Boston Private Bank and Trust. It is also the leading Small Business Administration lender in Washington and Oregon so far in 2013. Once again, this not a very exciting stock but a sound institution with a decent dividend yield of 3.7%.

The company did a private equity-led recapitalization in 2010, and Warburg Pincus and Thomas Lee Partners still own 20% of the shares outstanding, respectively. Since then, they have sold problem assets and cleaned up the balance sheet. Now total nonperforming assets are just 1.6% of total assets and the equity-to-assets ratio is above 15. The bank is in good shape and should be able to grow both organically and by acquisition for the next decade. The stock trades at less than 5x trailing earnings.

Building an income portfolio using the techniques developed by Ben Graham is a worthwhile exercise in today's complicated markets. I will note that there were several additional stocks that were cheap with decent yields that seemed to have an adequate margin of safety for individual investors, but they are too small to write about here. I am going to continue exploring the possibilities of solving the dire need for investment income using basic time-tested value techniques, as develop by Graham and practiced by folks like Walter Schloss, Irving Kahn and the folks at Tweedy Browne. I suspect this approach to income investing will work a lot better than whatever high-yield product of the week is churned out by Wall Street.

Columnist Conversations

FB is trading $75.88, up 6.4% with IV30™ down 33.4%. This is a follow up to the post yesterday: FB - Ear...
Bloomberg reporting around 2pm ET Zillow for Trulia...Z declined to comment, TRLA won't comment on spec. Few t...
With just over 40% of S&P 500 components having reported 2Q earnings, 158 of them or about 77% have surpri...
DHI is the biggest loser in the S&P 500 today. The homebuilder is off over 10% on its heaviest downsi...

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.