Procter & Gamble Announces a Divestment While Waste Management Gets Trashed

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
Automaker Ford (NYSE: F  ) found itself on the wrong end of a lawsuit this past Wednesday from private company Paice, which alleges that Ford infringed on its hybrid engine technology patents to develop engines for its C-Max, Fusion, and the 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. 

Interestingly, 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 cardmembers using a new feature in Google's Android operating system known as Host Card Emulation. The goal being 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 a precipice of a major industrywide shift.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 08, 2014, at 12:01 AM, timalex13 wrote:

    one area of concern for WM stock is its P/E is skyhigh, at 200! This makes it less attractive.

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