The next selection for the Inflation-Protected Income Growth portfolio is yard titan Scotts Miracle-Gro (NYSE:SMG). Perhaps best-known as the official lawn-care company of Major League Baseball, Scotts Miracle-Gro has provided mainstay products for gardeners for years.
Why it's worth owning in the iPIG portfolio
To earn a spot in the portfolio, a company has to pass a series of tests related to its dividends, its balance sheet and valuation, and how it fits from a portfolio-diversification perspective.
- Payment: Scotts Miracle-Gro's dividend sits at $1.75 a share -- a yield of about 2.8% based on Friday's closing price.
- Growth history: Scotts Miracle-Gro is a fairly new member of the dividend growth club, with its pattern of annual payout increases only starting in 2010. Still, the dividend has increased significantly since then, rising from $0.50 per share in 2009 to the current $1.75 annual rate.
- Reason to believe the growth can continue: With a payout ratio of about 55%, the company retains almost half of its earnings to invest for future growth. That reasonable payout ratio gives Scotts flexibility to maintain its payment even if growth doesn't materialize as expected.
Balance sheet and valuation:
- Balance sheet: A debt-to-equity ratio of roughly 0.8 indicates the company does use debt, but it hasn't overleveraged itself to the point where a near-term financial hiccup would derail it.
- Valuation: By a discounted cash-flow analysis, the company looks to be worth about $4.8 billion. That makes its recent market cap of $3.9 billion seem reasonable.
The other active holdings in the iPIG portfolio include:
- An industrial conglomerate
- A generic-pharmaceutical powerhouse
- A provider of staple foods
- An auto parts distributor
- A safety equipment provider
- A high-tech (software) titan
- A toy maker
- A shipping company
- A pipeline giant
- A drugstore
- A semiconductor superstar
- A two-for-one railroad special
- A fast-food juggernaut
- A medical-device maker
- A supplemental-insurance writer
- An air chemicals business
- A defense contractor
- An industrial-engineering and electrical-equipment company
- A major bank
As the first lawn-care company to make its way into the portfolio, Scotts Miracle-Gro fits pretty well from a diversification perspective.
Why pick it over its peers?
Spectrum Brands Holdings (NYSE:SPB), maker of several competitive lawn-care products, hasn't been consistently profitable over the past few years. Thus it's unlikely that Spectrum Brands has reached the point where it can begin reliably increasing the dividend it instituted in 2012. Because the iPIG portfolio looks to dividend growth to provide inflation protection, Spectrum Brands doesn't look like a great match.
Similarly, Central Garden and Pet (NASDAQ:CENT)(NASDAQ:CENTA), maker of competitive grass seed and soil supplements, recently reported a loss for its fiscal year. Because Central Garden and Pet does not currently pay a dividend and, with a recent loss, does not look likely to institute one in the immediate future, it is not a strong candidate for this dividend-growth-oriented portfolio.
What are the risks?
Of course, no investment is without risk. As both Spectrum Brands and Central Garden and Pet have shown through their weak financial performance, it's a tough business in which to reliably make money. Lawn and garden care is incredibly seasonal and weather-dependent. In addition, there is always the potential that regulatory shifts regarding things like chemical runoff to the water supply could make one or more products economically unfeasible.
What comes next?
When the Fool's disclosure policy allows, I plan to buy Scotts Miracle-Gro stock for the Inflation-Protected Income Growth portfolio, so long as it remains below $65 a share. I expect to invest about $1,975 in a 5% allocation in the portfolio, primarily using the cash generated from the recent NV Energy acquisition.
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