Change. Disruption. Market pundits love to throw around those buzzwords, but what do they really mean?
I have quoted Supreme Court Justice Potter Stewart's pithy line -- about a very different topic -- many times in my Real Money columns and I'll do it one more time: "I know it when I see it." You should be able to scan your portfolio and do quick triage into these categories:
- Disruptive companies.
- Companies that aren't disruptive but return cash to shareholders AND can increase those distributions.
- Stocks you shouldn't own.
I took a few shots at Warren Buffett in my recent column, but Kraft Heinz (KHC) is a perfect example of category number 3. Kraft possesses no disruptive technologies -- assuming "light" mayonnaise is not going to change the world -- and a trained analyst could see last week's announcement of a reduction in KHC's quarterly dividend from miles away.
To be fair, I own a number of stocks that fit into category 2 for my clients. I spend about 95% of my time doing credit analysis on the dividend-paying stocks in my firm's portfolios. No one wants a Kraft Heinz moment.
Exxon Mobil (XOM) is a perfect example. I have owned it and so do my clients, and we probably always will.
I don't spend my time attempting to search for disruptive angles on what is a company that is clearly not changing the world. Exxon extracts hydrocarbons, and actually performs that task very efficiently. That supports the company's $0.82 quarterly dividend, a figure that I believe Exxon's board will increase yet again in April. It is what it is. It pays the bills.
There is an old bumper sticker that ends with "...no one rides for free." That's how I manage portfolios. If a company is not giving me the promise of future riches via the asymmetric returns that spring from technological advances, I am happy to be bought off with regular quarterly payments. We are all mercenaries on Wall Street. As I said, it pays the bills.
Where is disruption occurring? Healthcare and transportation jump to mind. I just sat through a presentation by Walgreens Boots Alliance (WBA) senior management at the SVB Leerink Global Healthcare Conference in New York City and it had me questioning my career choice.
I am a regular shopper at Walgreens' Duane Reade stores, but, again the company is offering nothing that will change the world. Yet, there are several small therapeutics companies at this conference (I will mention a few of them next time) that are doing amazingly cool things.
That's another lesson. Companies in the same industry may have very different profiles. I would rather hit myself with a ball-peen hammer than have to sit through another Jim Hackett-led Ford (F) conference call. If you own Ford for its dividend, I am telling you that a Kraft Heinz-style cut is coming from the Blue Oval, likely this year.
General Motors (GM) CEO Mary Barra, on the other hand, has done a wonderful job of managing the company's transition from an "old economy" carmaker to a mobility company. GM's strong cash generation means that its $0.38 quarterly payout is safe, unlike Ford's.
Take a look at your portfolio and use my tripartite categorization. A few hours of research will spare you from unpleasant surprises.