𝗛𝗼𝘄 𝗜 𝗯𝘂𝗶𝗹𝘁 𝘄𝗲𝗹𝗹-𝗵𝗲𝗱𝗴𝗲𝗱 𝗱𝗶𝘃𝗲𝗿𝘀𝗶𝗳𝗶𝗲𝗱 𝘀𝘁𝗼𝗰𝗸 𝗽𝗼𝗿𝘁𝗳𝗼𝗹𝗶𝗼
$IMB.L (Imperial Brands PLC) Many wonder why I keep this stock in my portfolio, but here is the catch as I see it – tobacco is a high necessity product and Imperial Brands is one of the most stable companies when it comes to free cash-flow generation, which is being used for dividends and debt repayments. It is true that industry is in decline, but who cares if you get 7-8% in dividend payments (after tax) only, without any hassle? ROIC has been also remarkable stable at 7-12% during past 10 years. Not a surprise, that analysts assign wide moat for Imperial, due to it’s Intangible Assets and Cost Advantage.
The new CEO unveiled a five-year strategic plan that should drive returns to shareholders higher in the coming years. Share are very attractive at the moment, as intrinsic value is almost twice more than its current share price. 2015 acquisition of US cigarette and e-cigarette brands from Reynolds and Lorillard apparently worked well, as it has allowed company to grow revenue and cash flows. Still, it is deep value stock, not a growth. And I like that. I am a true believer that, in the absence of acquisition targets which benefit existing shareholders, company should repay capital back to shareholders either by dividends or share buybacks, because shareholders can figure out better place for these money. Any growth always comes with opportunity costs. For me, opportunity costs arise when acquirer is paying too much for the value it’s getting in return. And, as shareholder, I don’t want to bear such costs.
$BIIB (Biogen Inc) Company was very stable at producing free cash-flow stream (cash flow left after investing in growth). LACFY (liability-adjusted cash-flow yield) calculated based on average 5-year cash flows is 10%, very attractive level for this kind of company. In 2020 alone, they used 6 bln USD to buyback shares – at current market capitalization it’s 14% yield. I very much like buybacks, but only when done at appropriate price. Since I almost never participate in buybacks, this is the way for me to increase my shareholding in the company by, for example, the same 10%, and I don’t have to pay tax on it.
I also very much like Biogen’s remarkable 10-Yr median ROIC at 21%. While it is true that some of the pipeline products are subject to competition from biosimilars and generics, Company still has a strong drug portfolio, which should ensure decent performance for many years to come.
Biogen has achieved strong profitability based on its Roche collaboration in oncology and diversified multiple sclerosis franchise, and has the Intangible Assets to support a wide moat.
$GILD (Gilead Sciences Inc) Almost half of it’s 10-year free cash flow company spent on acquisitions. As a result, free cash flow generation has grown 10% during the same period. There is, however, a risk for healthcare industry that legislation will be adopted which will have impact on drug pricing policy.
$HFC (HollyFrontier Corp) This is one of my hedges against inflation rise. HollyFrontier is a relatively small player, with four refineries totaling 405,000 barrels per day of crude oil throughput capacity. However, all its facilities are in the midcontinent, Rockies, or Southwest region. As a result, each refinery benefits from the difference in price between inland light crudes and other high-quality waterborne crude such as Brent. Very attractive 10-year median ROIC at 9% and ROE at 12.2%. At the same time Price/Book of 0.9 means, if historical performance will continue, you are buying 13% return investment.
$INGR (Ingredion Inc) Here are some of the reasons why I like the Company. ROICs have averaged over 11% over the trailing 10-year period, safely above estimated 8.3% WACC. None of Ingredion’s reporting segments has delivered even a single quarter of operating losses since 2010. With operations in 26 countries, Company’s products and technologies support sustainable trends that are shaping the global food and beverage industry. 68% of 2020 global new product launches in the food industry contain the kind of ingredients produced by the Company. Through 32 Innovation Centers they collaborate with customers to develop new ingredients, many of which are protected by intellectual property.
To summarize, I expect my portfolio to slightly underperform when markets are growing and 𝘀𝗶𝗴𝗻𝗶𝗳𝗶𝗰𝗮𝗻𝘁𝗹𝘆 outperform when markets fall. This will be achieved by holding proportion of cash and VXX. You can also look for companies with beta less than 1, if you want some hedge against possible market downside. From the list analyzed, Gilead Sciences (0.4), Biogen (0.4) and IMB (0.65) have the lowest 5-year beta. Put it simple, if market fall by 10%, Biogen is expected to fall only by 4%.
In any case, we should never forget that stock market is not a sprint, it’s a marathon.
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