POST OF THE DAY
Dividend Growth Investing
Performing to Expectations

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By babyfrog
August 17, 2004

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Yesterday (August 16th, 2004) absolutely solidified why I think a diversified, dividend-growth based portfolio of companies, each purchased for no more than my estimate of fair value is the best investment strategy for me and my family.

First comes the diversification value. Two companies we own reported earnings, Sysco and Lowe's. On the news and forecast, Lowe's leaped $2.49 per share, and Sysco dropped $2.44 per share. The two moved almost exactly the same amount, in the opposite direction. While I happen to own a few more shares of Sysco, Lowe's leap pretty well covered for Sysco's dive. This drove home the value of owning a variety of companies in different industries - bad news affecting one company in one industry may be cancelled out by good news affecting an unrelated company in an unrelated industry.

The funny thing is, after having read both releases, I can't figure out anything fundamentally changed significantly enough in either company to justify such a large, one-day price swing. Lowe's news was not that good - they missed earnings estimates and same store sales estimates, but they did predict a rebound, which apparently was enough to light a fire under the stock.

Sysco beat my estimates - at least the estimates I used when estimating a value range for the company , and unless my eyes deceive me, they mentioned the 'extra' expenses for the upcoming year would be largely related to their expansion and cost savings plan. In fact, they specifically called out the depreciation on their new redistribution center as a primary driver of their additional costs. Now, my accounting may be a little rusty, but the last time I checked, depreciation is a non-cash cost - it's little more than an accounting cost for an already incurred capital expense. And since Sysco expects that center to help lower costs over time, I will be looking at subsequent quarters' cash flow to determine what the end result really turned out to be.

I expect that there is a very good chance that the company's operations may look healthier than GAAP accounting shows, at least for the next few quarters. It seems that Bill Mann's recent article on Berkshire Hathaway may also hold water for Sysco. Only time, and a deeper analysis of upcoming quarters' reports will tell for sure.

Showing the value of not paying too much for a company, a beaten down company I own in that same account, Mattel, managed to get downgraded by two analysts, as well. Nothing like kicking a company when it's down. In spite of a double-barrel shotgun downgrade from Lehman Bros and Smith Barney, Mattel managed to only fall $0.23.

All in all, the account that contains Mattel, Sysco, and Lowe's (among others) finished the day up 0.97%. That's a bit below the S&P 500's move on the day, but not bad for an account that had two earnings reports and a twice-downgraded company in it. Once again, diversification and keeping a eye out for intrinsic values protected my account from dramatic intra-day price swings caused by company specific news.

Sure - a diversified portfolio, built with an eye towards value is nice, and it does keep the overall portfolio on an even keel. Diversification alone, however, doesn't pay the bills. That's where the dividend growth part comes in to play. The largest position in our overall portfolio (though it's not in that aforementioned account) also happens to be our employer(*), which is a company on Mergent's "Dividend Achivers" list. Given that it's our largest position, it's held in accounts that reinvest dividends, and it's a member of Mergent's list, yesterday was also the largest single dividend payday for our household, ever.

Countermanding action that protects against single company problems. A company trading at a price so low that even two simultaneous downgrades can't knock it down much. A passive income stream that, while not currently large in an absolute sense, is growing year after year. There are no guarantees in life, and especially not in the stock market. It is nice to know, however, that the strategy that we're using has once again shown itself capable of performing in line with our expectations.

We strive to fill our portfolio with a diversified mix of dividend growth companies, purchased with an eye towards not paying too much for any given company. Once again, that portfolio passed a test with flying colors. Good to know, because it's our money at risk.

-Chuck

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(*)Yes - I know that it is generally considered unwise to have too much of one's net worth tied up in stock of the company one works for. The retirement program at work is primarily an ESOP funded with corporate contributions of company stock. If I didn't accept the stock, I wouldn't have much of a retirement program at all, aside from my own 401(k) and IRA savings. Fortunately, the company I work for is one that I believe I would be invested in, even if I did not work there.


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