Procter & Gamble Goes to the Dogs, Ford Roars in China, and Chevron Warns

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!

Apr 14, 2014 at 6:05PM

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

$954.23

(3.6%)

Intel 

$23.22

42.64

$1,116.32

12.7%

NextEra Energy

$87.94

11.26

$1,071.39

8.2%

MasterCard

$64.557

15.30

$1,050.80

6.4%

Chevron

$124.95

7.93

$928.05

(6.3%)

Select Medical

$8.96

110.49

$1,494.93

51%

Ford

$17.50

56.57

$884.19

(10.7%)

American Water Works

$43.13

22.96

$1,044.68

5.5%

Procter & Gamble

$81.29

12.18

$983.66

(0.7%)

AvalonBay Communities

$133.95

7.39

$977.33

(1.3%)

Cash

   

$0.88

 

Dividends receivable

   

$198.74

 

Total commission

   

($100.00)

 

Original Investment

   

$10,000.00

 

Total portfolio value

   

$10,705.20

7.1%

S&P 500 performance

     

6.2%

Performance relative to S&P 500

     

0.9%

Source: Yahoo! Finance, author's calculations.

It was an incredibly strong week for the Basic Needs portfolio, with the broad market getting hammered but the portfolio losing just 0.1%. The end result is the very first outperformance of the Basic Needs portfolio compared to the S&P 500 since I began this experiment in early August. Of course, it's important to remember that this portfolio isn't designed to "beat" the S&P 500 on a week-to-week basis, but to instead use the steady cash flow and healthy dividends of these companies to outperform the index over a longer time period. To that end, everything appears to be right on track!

Let's take a look at some of the most pertinent news-driven events this week.

Show me the money
It was perhaps the worst performer this week, but payment processing facilitator MasterCard (NYSE:MA) went ex-dividend this past week in anticipation of paying out $0.11 per share on May 9. MasterCard's dividend yield is the weakest in this portfolio, but it also holds the greatest promise for growth with what I suspect could be a multidecade double-digit foreign growth opportunity. A majority of transactions around the globe are still conducted in cash, leaving plenty of opportunity for MasterCard and its rivals to expand. Considering that it has generated more than $4 billion in operating cash flow over the trailing 12 months, and that its payout ratio is a mere 14% of projected 2014 earnings per share, I'd consider this dividend on the up and up.

Perfect timing
Hospital and outpatient facility operator Select Medical (NYSE:SEM), which finds itself on the other end of the spectrum as this portfolio's top performer (and by a long shot), last Monday received an upgrade from research firm RBC Capital to outperform from sector perform. RBC also boosted its price target to $21 from $9, implying potential upside of 67% based on the April 4 close prior to the upgrade. Select Medical has for years instituted cost cuts that are finally starting to translate into positives for the company's bottom line. The real catalyst, however, is Obamacare, where health-insurance enrollment surged dramatically in March by roughly 3.3 million people. More enrollments likely mean fewer uninsured Americans, which could result in Select Medical writing off less revenue as uncollectable because of uninsured and underinsured patients receiving treatment. In turn, this could mean beefier profits and potentially even a bigger dividend.

Hitting the high gear
Automaker Ford (NYSE:F) continued to show that it's a well-oiled machine this past Tuesday when it reported that total unit sales in China in March crossed the 100,000 monthly mark for the first time. Sales last month rose 28% from the prior year, with quarterly sales up 45%. As a company press release noted, Ford-branded car sales jumped 35% last month. The combination of improved efficiency, sleek styling, competitive pricing, and the introduction of more than a dozen new vehicles over a multiyear stretch in China is fueling Ford's profit growth. At this pace, it's quite possible that Ford could garner 10% market share in China within the next five years.

Going to the cats and dogs
In a move bound to get plenty of barks and purrs of approval, consumer goods giant Procter & Gamble (NYSE:PG) on Wednesday announced that it was selling a significant portion of its pet food business to Mars Inc., for $2.9 billion in cash. The deal will include the Iams, Eukanuba, and Natura brands in major markets and will expand Mars' already impressive portfolio of pet foods including Pedigree, Whiskas, Banfield, and Royal Canin. As Procter & Gamble CEO A.G. Lafley noted in a press release, "Exiting Pet Care is an important step in our strategy to focus P&G's portfolio on the core businesses where we can create the most value for consumers and shareowners." Lafley was brought back to the CEO role in 2013 after a four-year absence to refocus P&G, and it looks as if he's wasting no time in those efforts. I like what I'm seeing of late, and so should shareholders.

The buddy system
Finally, integrated oil and gas giant Chevron (NYSE:CVX) announced on Thursday that its subsidiaries had signed agreements worth $1.6 billion with YPF in Argentina to continue the development of the Vaca Muerta shale formation. Under the terms of the agreement, the two companies will explore the 49,400-acre Narambuena area for recoverable oil and gas. This deal also signals Chevron's commitment to boosting production abroad where it sees collaborative opportunities aplenty.

On Wednesday Chevron also issued an interim update for its first-quarter results, noting that oil and gas production would slip from its already weak fourth-quarter report. Chevron said it anticipates first-quarter earnings "similar" to the fourth quarter without charges, implying something in the neighborhood of $2.57 in earnings per share. By comparison, Wall Street was looking for $2.74 in EPS. While this is not the best news, considering that oil prices are rising and Chevron remains one of the few vertically integrated oil and gas companies with diverse assets and monstrous cash flow, I wouldn't be too concerned.

If you think Chevron has potential, you should take a closer look at the company that has OPEC quaking in its boots
Imagine a company that rents a very specific and valuable piece of machinery for $41,000 -- per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool free report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock and join Buffett in his quest for a veritable landslide of profits!

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 Waste Management, Ford, Intel, and MasterCard. It also recommends Chevron and Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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