Procter & Gamble Announces a Divestment While Waste Management Gets Trashed

A three-year-long experiment intent on showing that life's most basic needs can result in market-beating portfolio gains, hefty dividend income, and a good night's sleep!

Feb 24, 2014 at 5:35PM

In May, I announced my intention to create a portfolio that embodied life's basic needs. To that end, over a period of 10 weeks, I detailed 10 diverse companies that I think will outperform the broad-based S&P 500 over a three-year period because of their ability to outperform in both bull markets and bear markets, as well as their incredible pricing power in nearly any economic environment.

If you'd like a closer look at my reasoning behind each selection, just click on any, or all, of the following portfolio components:

Let's look at how our portfolio of basic-needs stocks has fared since we began this experiment.

Company

Cost Basis

Shares

Total Value

Return

Waste Management

$42.60

23.24

$952.61

(3.8%)

Intel

$23.22

42.64

$1,040.78

5.2%

NextEra Energy 

$87.94

11.26

$1,042.23

5.3%

MasterCard

$64.557

15.30

$1,158.21

17.3%

Chevron 

$124.95

7.93

$893.55

(9.8%)

Select Medical

$8.96

110.49

$1,252.96

26.6%

Ford

$17.50

56.57

$857.60

(13.4%)

American Water Works

$43.13

22.96

$1,016.44

2.6%

Procter & Gamble

$81.29

12.18

$949.67

(4.1%)

AvalonBay Communities

$133.95

7.39

$950.80

(3.9%)

Cash

   

$0.88

 

Dividends receivable

   

$139.79

 

Total commission

   

($100.00)

 

Original Investment

   

$10,000.00

 

Total portfolio value

   

$10,255.52

2.6%

S&P 500 performance

     

7.4%

Performance relative to S&P 500

     

(4.8%)

Source: Yahoo! Finance, author's calculations.

We had a little bit of everything from the Basic Needs Portfolio this past week, including two earnings reports, a noncore business divestment, a lawsuit filed against one of these companies, and the introduction of a new technology for one company.

Mixed earnings
It's certainly been a mixed earnings season for this portfolio, and that trend continued this week with refuse giant Waste Management (NYSE:WM) headed to the garbage heap after its report, while Select Medical (NYSE:SEM) danced its way down the hospital halls following its results.

For the fourth quarter, Waste Management reported a modest 1.9% expansion in revenue to $3.5 billion as core prices for its services rose 4%. These gains were offset by weaker commodity prices in its recycling operations, as well as a 2.2% decline in internal revenue growth. Adjusted EPS, excluding one-time charges, came in at $0.56, which is $0.01 lower than what it reported during the fourth quarter of 2012 and $0.05 shy of Wall Street's estimates. Looking ahead, Waste Management is forecasting $2.30-$2.35 in EPS for fiscal 2014 with free cash flow expected to again exceed $1.3 billion. By comparison, the Street had been looking for $2.41 in full-year EPS.

While the results certainly aren't pretty, Waste Management did boost its dividend by a penny to $0.375 per quarter and authorized a $600 million share repurchase in an effort to boost shareholder value. Given that the refuse business has little competition and that it's a necessity business, I'm not too concerned about Waste Management's ability to control costs and raise prices moving forward.

The story was completely different for hospital and outpatient rehabilitation center operator Select Medical, which on Thursday reported market-topping revenue of $746.2 million versus an expectation of $737.8 million, and matched the Street's EPS estimate of $0.21. Although revenue rose by less than 1% year over year, net operating revenue from its rehabilitation segment witnessed the biggest jump, up nearly 7%. For fiscal 2014, Select Medical reaffirmed its previous forecast of $0.84-$0.93 in EPS on $3.05 billion-$3.15 billion in revenue, marginally ahead of the $3.04 billion consensus estimate.

Were that not enough, Select Medical also declared its quarterly dividend of $0.10 per share, which will be payable to shareholders on March 10. Select Medical's current 3.5% yield is among the highest in this portfolio. As Obamacare begins to transform the health care landscape, Select Medical should see fewer instances of treating uninsured people, which, I believe, should lead to more revenue recognition and beefier profits.

A clean slate
Earlier this week, consumer goods giant Procter & Gamble (NYSE:PG) announced it would be divesting its worldwide bleach business in its ongoing effort to remove non-core brands from its portfolio. The sales will include brands such as Ace, Magia Blanca, and Lavansan Bleach, which can be found in Latin America, Eastern Europe, the Middle East, and Africa, per USA TODAY.

Furthermore, Procter & Gamble made it pretty clear that there are no acquisitions on its horizon as it intends to focus on building up its core brands. This strategy is consistent with CEO A.G. Lafley's plan of jump-starting growth at P&G through organic strength in household brand-name products.

Fueling a lawsuit
On Wednesday automaker Ford (NYSE:F) found itself on the wrong end of a lawsuit from private company Paice, which alleges that Ford infringed on its hybrid engine technology patents to develop engines for its C-Max, Fusion, and Lincoln MKZ. According to a report from Bloomberg, Ford had licensed one of Paice's patents back in 2010, with the two parties agreeing to not to litigate until 2014. As the report notes, though, the negotiations on a settlement for Paice's patent were "short and one-sided," leading to this past week's lawsuit. 

Paice has already won a similar patent-infringement suit against Toyota over the use of its technology in the Prius. Paice was awarded $4.27 million, as well as a royalty of $25 per car, which was later changed to $98 per car. Ultimately, this isn't a game-changing lawsuit for Ford, but given that Paice already defeated Toyota in court, it's quite possible Ford could wind up in the losing column as well. Keep your eyes peeled for new info on this case as it progresses.

Say hello to NFC
Last but not least, payment processing facilitators MasterCard (NYSE:MA) and Visa both announced last week that they'll be delivering more near-field communication options for card members using a new feature in Google's Android operating system known as Host Card Emulation. The goal is to allow users to simply touch their phone to a contact payment device at an authorized merchant to pay for goods and services, thus improving convenience and also security. NFC technology has been expected to take off for years, but this step by MasterCard and Visa could be the first sign that this is a viable technology on the precipice of a major industrywide shift.

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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of, and recommends Ford, Google, Intel, MasterCard, Visa, and Waste Management. It also recommends Chevron and Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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