This PACE Stock Can Help Boost Your Income and Provide Inflation Protection
Many investors look to gain income but also want inflation protection. The PACE portfolio looks to do exactly that as we build in precious metals, agriculture, commodities, energy, and world dominating businesses that pay a dividend.
One of my favorite areas in the PACE investing philosophy is energy. Energy has been and will continue to be one of the fast growing areas of demand.
The growing need for energy is a trend that will last for a long time:
- New techniques for extracting natural gas and crude-oil from the earth have helped ease concerns about the inability of U.S.-based energy producers to grow domestic supply and offset the country’s heavy dependence on foreign sources for these commodities.
- These unconventional new drilling techniques have lowered the overall cost structure for companies engaged in the exploration of traditional energy sources, such as crude oil and natural gas.
- More-productive drilling techniques have led to an overall increase in mid-continent U.S. oil production, which has led to lower pricing for refiners. (source: Fidelity.com)
Recently we added Helmerich & Payne, Inc. (NYSE: HP) to the PACE Portfolio. It is primarily engaged in the exploration, production, and sale of crude oil and natural gas and in contract drilling of oil and gas wells for others. These activities account for the major portion of its operating revenues. The company is also engaged in the ownership, development, and operation of commercial real estate.
Here are three reasons I like the stock:
- Its FlexRigs command a substantial premium while still completing wells at a lower total cost than the competition.
- Horizontal wells are more than 60% of the wells drilled in North America. Helmerich’s rigs are well designed to drill the more demanding horizontal wells and will likely continue to take industry market share from conventional drilling rigs.
- It recently hiked its dividend from $0.15 per share to $0.50 per share, showing it has strong free cash flow and a commitment to investor returns. It now pays nearly 2% in dividends.
The stock scores favorable upon my five-point stock inspection:
5-Point Stock Inspection on HP:
Financial Strength: Positive
Valuation: Positive – Buy up to $105
Risk: Positive – Moderate Risk
Earnings Trend: Positive
12-month price target: $125-$130
Take a look at its current chart:
Bottom line: Helmerich & Payne, Inc. (NYSE: HP) is a good buy up to $105/share. My 12-month price target is $125-$130, representing a potential 25-30% gain from its current levels. It also pays a 1.8% dividend.
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High quality and low volatility go a long way…
Making money in the stock market isn’t hard — there are hundreds of successful investing strategies out there. But ask any investor how to keep investors consistently safe and profitable, and it’s a different game. To find safe and profitable stocks that weather the storms that come and go through bull and bear markets, I look for high-quality investments with low volatility.
In this light, my favorite investments in today’s market are stocks that steadily pay dividends.
When you buy a dividend-paying stock, you should be concerned about a company’s expected growth and the stability of its dividend payments. I typically look for stocks that have a strong history of consistent dividend payments.
This requires looking at a company’s earnings trends. As a company becomes more profitable, it increases the likelihood of paying — and growing — dividends.
In addition, the company should be safe. This means it should provide a recession-proof product or service. For example, consumer staples companies such as Kimberly-Clark Corp. (NYSE: KMB) or Colgate-Palmolive (NYSE: CL) are always safer picks than some riskier small caps or pharmacy stocks.
But one of my favorite sectors to find safe and steady dividend payers is the food industry. Think about it, people need to eat no matter how the economy is doing. And one of the most sought-after food products is meat. The demand for meat has been steadily increasing since 1960. In developing countries, meat consumption has been continuously increasing from a modest average annual per capita consumption of 10 kg (22 pounds) in the 1960s to 26 kg (57 pounds) in 2000 and will reach 37 kg (81 pounds) around the year 2030, according to Food and Agriculture Organization (FAO).
And of the meat companies, my favorite is a classic dividend stock — Hormel Foods (NYSE: HRL). The stock has consistently paid dividends for 47 consecutive years. That is one of the reasons it is in our All-Weather Portfolio (AWP) and in a few moments you will see how amazing a rising dividend portfolio can be…
Bonds or Dividend Paying Stocks? You Be the Judge!
When you buy a dividend paying stock, you should be concerned about a company’s expected growth and the stability of its dividend payments. I typically look for stocks expected to perform in-line with the market or better with above average. dividend yields. I also want to find companies that have a strong history of paying a dividend and more important those that have consistently raised their dividends. This requires looking at its earnings trends. As a company becomes more profitable it increases the likelihood that the company can continue raising dividends. Additionally I look for companies in strong demand sectors that have the potential to thrive in good and bad times.
Companies who offer recession proof products around the globe should continue to thrive! With 70%–80% of the world’s population living in developing countries, emerging markets have been a growth area for many consumer staples companies, especially food. As per-capita wealth has risen in these emerging economies, goods considered staples in developed countries have become universal needs and wants. With the increase in global consumption, staples companies have great opportunities to increase their market volumes and accelerate their earnings growth rates.
That is why I love stocks like Hormel Foods. Hormel is a leader in its industry because it trumps the competition by selling value-added meat products, as opposed to distributing solely raw meats and other commodities. Hormel’s notable brands include Spam, Jennie-O, Country Crock, Lloyd’s and Chi-Chi’s.
Here are a four other reasons I like the stock…
It focuses primarily on convenient products, which are in high demand today with so many people on the run. This should be a growth opportunity for Hormel as more people are eating meals at home and looking for time-saving meal options.
2. Successful acquisition
In January, Hormel purchased Skippy — the 81-year-old peanut butter maker — from Unilever for about $700 million. This should allow Hormel to expand its brand across the globe further, as Skippy is sold in more than 30 countries.
3. Lean supply chain
Hormel has a strong, vertically integrated supply chain that takes advantage of economies of scale. This keeps new competitors from eating into Hormel’s current market share. For example, Hormel raises about 70% of the turkeys needed to meet sales volume. This lowers its costs and allows it to have a competitive advantage.
4. Strong financials
Hormel’s financial health is very impressive. At the end of 2012, its current and quick ratios were about 3 and 1.7, respectively. As a quick background, the current ratio is used to calculate the company’s ability to payback its short-term liabilities (bills, debt, etc.) with its short-term assets. The higher the current ration, the more capable the company is of paying back its obligations. The quick ratio shows a company’s ability in quickly converting inventory into cash.
With EBITDA covering interest expense almost 70 times at the end of 2012, it looks like Hormel is in great shape for the future. Hormel’s forward price-to-earnings (P/E) is low — at roughly 17, compared to the industry average of 27.
In addition, Hormel’s operating margins should continue to average around 10% during the next few years as a result of its recent success in generating cost savings throughout the supply chain.
Hormel foods (NYSE: HRL) is an Attractive Investment Opportunity! Putting Hormel to the Test
Many investors choose bonds for income over quality dividend paying stocks and this can often is a huge mistake. Let’s go all the way back to January of1990 for an example. 1989 had been a tough year. There had been a recession, inflation was at 5.1%, and economic growth had come to a screeching halt. The Fed decided to raise rates to combat inflation also slowed the economy down. By 1990, economic trouble continued with the Gulf War, which would lead to massive spikes in oil prices. So investors were nervous to say the least with high unemployment, massive government budgetary deficits, and slow Gross Domestic Product (GDP) growth. Interest rates were hovering around 8%.
Let’s say an investor decides to forgo the stock market and look for safety in the bond market. They decide to put $100,000 in a quality bond paying 8% maturing in 2013. This investor would have received $8,000 a year for the past 23 years and then receive their original $100,000 back at maturity. Not to shabby!
However, what if this same investor looked at a quality dividend paying stock and planned to hold the stock just like the bond all the way until 2013. One of my favorite sectors is the food industry. Think about it: people need to eat no matter what the economy is doing and the global population keeps growing! And one of the most sought after foods is meat. Of the meat companies, my favorite is Hormel Foods (NYSE: HRL). Now this is a classic rising dividend stock.
Investors who purchased $100,000 worth of the stock on Jan. 2, 1990, would have gained $2,910 annually with a yield of about 3%. This yield might have not meant much in 1990, but fast forward to today and you will be amazed at the compounding effect on the gains.
Take a look at the table below…
|Hormel Foods (NYSE: HRL) Bought on 1-1-90
|20-Year Treasury Bond, @8% Interest 2013 Maturity
The Rising Dividend Stock Crushed the Bonds!
Today, the Hormel’s stock yield is only 1.6% about half of what it was back in 1990. That’s because as you probably know, as a stock’s price rises, its yield falls. The stock has had significant growth, so its share price has risen dramatically to nearly $40. Despite a much larger annual dividend today (68 cents a share vs. 6.5 cents a share in 1990), its yield has fallen yet income has increased substantially.
Bond investors, however, enjoyed a steady 8% income for 23 years, but they were shocked when they had to renew their investment at a measly 2.7% after 20 years.
BOTTOM LINE: As you can see Hormel stock rose 1,793% from 1990-2013. Income from the stock rose from just over $2,900 per year in 1990 to $30,493 in 2013, a 1,048% increase in income. While the bond produced no gain and income decreased from $8,000 per year down to $2,680, a pay cut of 66%!
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