Building Wealth
2018 INDUSTRY LEADER PORTFOLIO REVIEW BY CC WALKER
The Industry Leader Portfolio Review is an analysis report that uses a list of criteria that a company must meet to be included in our Industry Leader Portfolio. If a company passes all of the criteria that make up the Industry Leader Criteria Checklist then it indicates that the company is a leader in its industry and is added to our Industry Leader Portfolio.
The Industry Leader Criteria Checklist is an excellent list to have available for our readers anytime one feels nervous when the stock price of any company within the Industry Leader Portfolio goes down because of general market declines or other situations that are out of the control of investors. When this happens readers can use the Industry Leader Criteria Checklist as a reminder of why any particular company within the Industry Leader Portfolio is an industry leader and an excellent long-term investment, no matter what is happening in the economy or markets in general. The list is a good reminder for investors of the companies within the Industry Leader Portfolio that it is best for investors to focus on the quality of the companies, not the general economy or short-term movements of the markets.
It is the fundamentals of a company that matter most over the long-term when investing in a business, not short term news on the economy or short term market price movements. The Industry Leader Criteria List reminds investors of this. If anything, when a company in the Industry Leader Portfolio has a decreasing stock price we will recommend that our readers buy more shares of the company if the stock price reaches our price target, which is when it is trading below 8 times cash flow.
2018 INDUSTRY LEADER PORTFOLIO REVIEW
Welcome to 2018 Industry Leader Portfolio Company Criteria Checklist. In this report I will analyze each of the companies in the Industry Leader Portfolio using our Industry Leader Portfolio's Investment Criteria Checklist. This analysis of each company in the Industry Leader Portfolio using the Criteria Checklist will show readers why these companies are truly industry leaders.
But without further ado I introduce the Industry Leader Criteria list which we use to determine what companies are added to Goldindicator.com's Industry Leader Portfolio. Here it is:
Industry Leader Portfolio Investment Criteria Checklist
1. The company must have some type of competitive moat around its business which creates a barrier around its business making it very very difficult for any other company within its industry to compete with it.
2. The company must control the largest percent of the market within its industry. This is also referred to as the market share within its industry.
3. The company must have a long history of steadily increasing dividends, revenues, earnings, and cash flow every year.
4. The company must have little to no competition within its industry.
5. The company must be the lowest-costs producer within its industry, which also means that it must have the largest economy-of-scale operations within its industry.
6. The company must have a strong brand name or have the strongest brand name within its industry.
7. The company must have little to no debt and be able to easily service whatever debt they do have on their books.
8. The company must always have a substantial amount of cash on its balance sheet, which shows that the company has steady or high profit margins and consistently produces massive amounts of cash every year.
9. The company must be steadily expanding its operations within one country or within multiple countries if it is truly an industry leader.
10. After a company meets all of the investment criteria to become an investment within the Industry Leader Portfolio it must be trading at the right price at that time to invest new money in the company, which is under 8 times cash flow and 15 times earnings.
There it is. That is the criteria checklist that any company must meet to be added to the Industry Leader Portfolio and to stay in the portfolio. If a company within the Industry leader portfolio meets all of the criteria year after year it stays in the portfolio year after year. The companies that meet this checklist year after year are truly industry leaders and excellent long-term investments.
So without further ado here is an analysis of each company in the Industry Leader Portfolio for 2015 using the Industry Leader Investment Criteria Checklist:
Microsoft Corp. (MSFT)
1. Does Microsoft have a competitive moat around its business? Yes, Microsoft still has a 90%+ market share in the PC Operating Systems market as well as its Office Suite software that comes with all Windows operating systems. Also, Microsoft has a 90% market share in operating systems for servers. Indeed, all businesses are dependent on Microsoft to function because all data traveling over the Internet must have Microsoft's server operating systems in order to go from point A to point B. The more data that moves over the Internet, the more money Microsoft makes. Microsoft is really like an Internet toll collector.
2. Does Microsoft have the largest market share in its industry? Yes. As was stated, Microsoft has a 90%+ market share in the PC Operating System & Internet Server Operating System industry. Businesses and the whole Internet are dependent on Microsoft just to function.
*3. Does Microsoft have a long history of increasing dividends, revenues, earnings, and cash flow every year? Yes. Microsoft has increased dividends, revenues, earnings, and cash flow by 10% to 15% during the last thirty years. I will focus on dividends though since dividends are by far the most important criteria for a company to be an industry leader, in my opinion. Microsoft has increased its dividend by 12% every year since it paid its first dividend in February 2003. I always put a star next to this criteria because in my opinion dividend growth is the most important criteria for a company to qualify as an industry leader. Dividends don't lie. If a company increases its dividends to its owners, the shareholders, then something is going right with company. If a company increases its dividend to its shareholders year after year the company is a good long-term investment for us as shareholders because our dividend yield based in our principle investment in the company compounds at a faster and faster rate year after year after year. A company that had a dividend yield of 3% when we as shareholders invest in it but grow its dividend by 15% a year will eventually be paying us a dividend yield of 20% based on our original investment.
4. Does Microsoft have little to no competition in its industry? Yes. Being that Microsoft basically has a monopoly in the PC and Server Operating System industry it is very very difficult for any company to compete with Microsoft's 90% market share.
5. Is Microsoft the lowest-costs producer in its industry? Yes. Being that Microsoft has a monopoly in its industry it is very difficult for any company to even enter and compete against Microsoft, much less make the excellent gross and net profit margins that Microsoft makes selling its PC & server operating systems along with its Office Suite software. Microsoft produces a gross margin of 64% and a net profit margin of 22%, as of 2018.
6. Does Microsoft have a strong brand name or have the strongest brand name in its industry? Yes. It is very easy for any person to recognize the Microsoft brand name in most places. Microsoft's 90% market share in its industry gives it an easily recognizable name worldwide.
7. Does Microsoft have little to no debt and able to easily service the debt that they have on their books? Yes. Microsoft total debt at the beginning of 2018 was $93 billion. This is very manageable debt for a dominant company like Microsoft, especially since their revenues were nearly $96 billion in 2017. Also, Microsoft had total assets of $80 billion at the beginning of 2018. And that's not even counting Microsoft's intangible assets. With that said, Microsoft's debt is very easy for them to manage.
8. Does Microsoft always have a substantial amount of cash on its balance sheet? Yes, Microsoft had almost $140 billion in cash and cash equivalents at the beginning of 2018. This is a massive amount of cash for any company, much less for a company the size of Microsoft, which produced nearly $40 billion in earnings for 2017.
9. Is Microsoft expanding its operations worldwide? Yes. In 2017 Microsoft's products were exported to every country except Cuba, Iran, North Korea, Sudan, and Syria. Indeed, 90% of PCs, servers, and businesses worldwide depend on Microsoft's products just to properly function. And don't forget, the Worldwide Web depends on Microsoft's server operating systems to function.
10. As of 2018 Microsoft does not meet our valuation criteria to invest new money in it because it is trading for 33X cash flow and for 23X earnings. But anytime Microsoft trades below 8X cash flow and 15X earnings I will recommend Microsoft for new investment money.
Wal-Mart Corporation (WMT)
1. Does Wal-Mart have a competitive moat around its business? Yes, Wal-Mart's revenues were about $500 billion in 2017. Wal-Mart operates at low profit margins of about 3% to 4% so Wal-Mart's main competitive advantage is its sales volumes and economy-of-scale. Wal-Mart can purchase supplies in such large quantities from whole-salers and sell them at the cheapest price of any retailer in the world. Indeed, because of Wal-Mart's massive economy-of-scale operations there are no other retailers that can compete with Wal-Mart on pricing. Wal-Mart's thin profit margins and massive economy-of-scale retail operations give them a competitive moat around their business that no other brick-and-mortar retailer can compete with on pricing.
2. Does Wal-Mart have the largest share in its industry? Yes, Wal-Mart has a retail industry market share of 13.5% as of 2017 and recorded sales of nearly $500 billion in 2017. This gives Wal-Mart massive scale in pricing power due to its massive economy-of-scale operations, which none of its closest competitors can compete with.
3. Does Wal-Mart have a long history of increasing revenues, earnings, and dividend payments to its shareholders year after year? Yes, Wal-Mart has increased its dividend by 22.5% per year since it paid its first quarterly dividend of $0.0001 in 1974. Wal-Mart has paid 170 dividends in total as of 2017. Wal-Mart has increased its dividend by 12% per year during the last 5 years, which is phenomenal for an industry leader like Wal-Mart. Any information regarding Wal-Mart's dividend growth history can be found at www.buyupside.com using the dividend growth calculator.
4. Does Wal-Mart have little to no competition in its industry? Yes, Wal-Mart's closest retail competitors recorded sales that were not even close to Wal-Mart's sales of nearly $550 billion in 2017. Costco came in first with nearly $130 billion in sales Kroger came in second with $115 billion in sales for 2017. So Wal-Mart's closest competitors don't even come close to matching Wal-Mart's massive economy-of-scale operations that provide Wal-Mart a defensive moat around its business.
5. Is Wal-Mart the lowest costs producer in its industry? Yes, the reason being Wal-Mart's massive economy-of-scale operation that gives it the power to purchase the largest volumes of manufactured goods at the lowest prices available and then sell these manufactured goods at much lower prices than its competitors.
6. Does Wal-Mart have a strong brand name? Yes, Wal-Mart's name is known and recognized by every person in America and most people throughout the world. Indeed, when most people in America and many other parts of the world want to buy a lot of goods at low prices they first think of Wal-Mart.
7. Is Wal-Mart's total debt manageable? Yes. Wal-Mart's total debt is about $60 billion as of 2016, and its debt to equity ratio is 0.6 as of 2017. With annual interest expense of $3 billion in 2017, yearly revenues of nearly $500 billion in 2017, and total earnings of nearly $30 billion in 2017 Wal-Mart should have no problem servicing its debt payments going forward.
8. Does Wal-Mart always hold a substantial amount of cash on its balance sheet? Yes, Wal-Mart holds enough cash for emergencies and operations. Wal-Mart held about $7 billion on its books as of 2017. This is plenty of cash to hold for an industry leader that produces revenues of nearly $500 billion, and earnings of nearly $30 billion.
9. Is Wal-Mart steadily expanding its operations every year? Yes, as of 2017 Wal-Mart operates over 11,500 units under 65 banners in 28 countries and continues expanding in Europe, Asia, Africa, South America, Mexico, and Canada. Wal-Mart also has international expansion plans and national expansion plans for its Neighborhood Market subsidiary. So being that Wal-Mart already operates in 28 countries with plans to expand in many other countries, and is still expanding its Neighborhood Market subsidiary, Wal-Mart still has massive growth opportunities.
10. Wal-Mart passes all of the criteria of the Industry Leader Portfolio checklist with flying colors and immeasurably passes two of the most important criteria on the checklist: 1. A massive competitive moat around its business that protects its business from its closest competitors, and 2. A long history of increasing its dividends to its shareholders.
Proctor & Gamble (PG)
1. Does Proctor & Gamble have some type of competitive moat around its business? Yes. Proctor & Gamble has the largest sales in the Personal Care and Detergent industries. P&G recorded revenues of $65 billion in 2017. P&G had nearly 20 brands, as of 2017 that exceeded $1 billion in sales during 2016 including: Ariel, Bounty, Charmin, Crest, Dawn, Downy, Febreeze, Gain, Gillette, Head & Shoulders, Olay, Oral-B, Pampers, SK-11, Tide, Vicks, and Welle hair care products. All of these brands are easily recognizable, affordable, and of high quality to most people in the U.S. and many other countries throughout the world. This fact is exactly the point though. The fact the P&G sells the highest number of premium affordable products in its industry, leads sales in its industry, and can distribute its products through a massive distribution network worldwide means that P&G has a moat around its business that even its closest competitors will find hard to match.
2. Does Proctor & Gamble control the largest percent of the market in its industry? Yes. P&G's closest competitors in the Consumer Goods/Personal Care industry are Kimberly Clark and Johnson & Johnson. J&J recorded sales that were above P&G's 2017 sales, $76 billion vs. P&G's $65 billion. So J&J is P&G's closest competitor based on sales of premium affordable products in the Consumer Goods/Personal Care industry. With that said, P&G still has a number one market share in many of its top Personal Care/Detergent brands and has a loyal customer base that keeps growing worldwide year after year based on its market share increasing in many countries throughout the world.
3. Does P&G have a long history of steadily increasing its dividends, revenues, cash flow, and earnings every year? Yes. P&G has grown its dividend payment to its shareholders by 9% annually since its first quarterly dividend of $0.01 in 1970, which amounts to total dividend growth of 6,500%. P&G now pays a quarterly dividend of $0.69 and has increased its dividend by 5% per year during the last 5 years, as of 2018. P&G has grown its sales massively throughout its history. P&G reached sales of $1 million in 1859, 22 years after the partnership between Proctor and Gamble was formed. By 1980 P&G's sales reached $11 billion and by the end of 2015 it's sales reached $82 billion. P&G's sales have been flat over the past 5 years but, but that was mainly due to P&G's planned restructuring: P&G is selling off its non-core brands and focusing on its top selling brands in the Consumer Goods/Personal Care products industry. P&G announced in 2014 that they were planning to streamline the company, which would consist of dropping around 100 brands and focusing on the remaining 80% brands which produced 95% of the company's profits.
P&G's earnings/cash flow have grown steadily year, and in-line with it's revenues since 1980. After P&G completes its restructuring the company should continue increasing its dividends, revenues, earnings, and cash flow by 7%-10% going forward.
4. Does P&G have little to no competition in its industry? Yes. P&G does have 2 top competitors in its industry but P&G still leads in many Consumer Goods/Personal Care product brands & has a loyal customer following that grows steadily every year worldwide. All of P&G's brands listed in question one lead in sales in the Consumer Goods/Personal Care products industry.
5. Is P&G the lowest costs producer in its industry? P&G recorded sales of $65 billion in 2017, which gives it an economy-of-scale in manufacturing products within the Consumer Goods/Personal Care industry that few other companies can compete with. Johnson & Johnson is P&G 's closest competitor, with higher overall revenues in 2017, but P&G still continues to hold the number one market share with many of its top selling brands, such as the brands listed in question one.
6. Does P&G have a strong brand name in its industry? Yes. All of P&G's products that were listed in question one are top selling brands in the Consumer Goods/Personal Care product industry, and are easily recognizable by people worldwide.
7. Does P&G have little to no debt, and is P&G's total debt easy for P&G to service? Yes. P&G had total debt of $38 billion in 2018 and a book value of $52 billion, giving P&G a debt to equity ratio of about 0.7. P&G recorded sales of $65 billion, earnings of nearly $10 billion, and cash flow of nearly $15 billion in 2017. P&G had total cash of $19 billion on its balance sheet and total interest expenses of $700 million as of 2018. With that said, P&G should have no problem servicing its modest debt going forward.
8. Does P&G keep a lot of cash on its balance sheet at all times? Yes. P&G recorded cash of $19 billion on its balance sheet as of 2018. With total interest expense of $700 million per year, cash flow of nearly $15 billion, and earnings of nearly $10 billion in 2017, $19 billion in cash provides P&G with plenty of cash for any new opportunities or unexpected emergencies.
9. Is P&G steadily expanding its sales worldwide? Yes. P&G sells its products in every country except North Korea and Cuba, but Cuba is now opening up its economy to P&G's products. P&G doesn't have the market share of its top selling brands in emerging markets that it has in western markets but that is slowly changing as P&G continues growing its market share in many emerging markets by 7% to 10%. The U.S. still remains the number one market for P&G, representing 35% of company sales. But China now has the second largest market share for P&G's sales. Brazil now has the third largest market share, and Russia has now become the fifth largest market for P&G sales.
On top of the strong growth in emerging markets P&G sells premium branded personal care products that have extreme brand loyalty among its customers, so P&G is able to increase its brands' prices at a rate above inflation every year. With that said, even if P&G's customer base were to increase modestly or to stay flat every year P&G would still be able to increase sales and profits at a rate exceeding inflation every year.
10. P&G passes all of the criteria on the Industry Leader portfolio checklist to be a true industry leader, but it is not trading at a good valuation as of the beginning of 2018. With that said, we do not recommend adding to or buying new shares of PG at this time. If there is a market sell off in 2018, which we believe there will be, we will recommend buying shares of P&G below 8X cash flow.
Intel Corp. (INTC)
1. Does Intel have some type of competitive moat around its business protecting it from competition? Yes. Intel's biggest moat protecting its business is the fact that its processing chips dominate the PC and Server industries. Intel has a 90% market share in the Server Processing Chip industry and an 80% market share in the PC Processing Chip industry, which are both essential industries for the operation of the worldwide web and businesses. So you could say Intel is a utility company for the worldwide web, growing with the growth of data being processed over the worldwide web.
2. Does Intel control the largest percent of the market in its industry? Yes. This was shown in question one.
3. Does Intel have a long history of increasing its dividends, revenues, net cash flow, and earnings every year? Yes. Intel has increased its dividend by 20% per year since they paid their first quarterly dividend of $0.003 in 1992. Intel's current quarterly dividend is $0.30, as of 2018. That is total dividend growth of 7,600%. Intel's revenue was $20 billion in 1996 and its earnings were $5 billion. By 2015 Intel's revenue was nearly $56 billion and its earnings were recorded at $11.4 billion. Intel is now producing annual revenue of $62 billion and annual earnings of $10 billion as of 2018. Intel has grown earnings, revenue, cash flow, and dividends by roughly 10% per year over the last 5 years. This is excellent and steady dividend growth for a company that dominates its industry.
4. Does Intel have little to no competition in its industry? Yes. This is proven in the answer to question one. Intel's closest competitor in the PC and Server Processor Chip industries is Advanced Micro Devices, but being that Intel has a 90% market share in the Server Processing Chip industry and an 80% market share in the PC Processing Chip industry just means that AMD cannot even come close to competing with Intel's massive market share.
5. Is Intel the lowest-costs producer in its industry? Yes. Given Intel's massive economy-of-scale operations in the Processing Chip industry and its global market reach in the Processing Chip industry Intel has a monopoly position in the industry. Indeed, Intel's massive R&D spending and economy-of-scale production gives Intel a monopoly position in the Processing Chip industry that makes it very difficult for any of Intel's competitors to ever be able to compete with Intel's market share in the Processing Chip industry.
6. Does Intel have a strong brand name? Yes. Intel is recognized by most people all over the world. Intel was listed as one of the top 20 brands in the world by Business Insider in 2015, and was ranked number 7 on the favorite business brands list put together by American Cit Business Journals in 2015.
7. Does Intel have little to no debt and is its existing debt easily manageable? Yes. Intel had total debt of $27 billion, total cash of $15 billion on its balance sheet and a book value of nearly $70 billion as of 2018. This gives Intel a debt to equity ratio of roughly 0.4. This is very modest and manageable debt for a company like Intel that dominates its industry.
8. Does Intel always hold a substantial amount of cash on its balance sheet? Yes. Intel's cash balance is $15 billion as of 2018. That is 1.5 times Intel's net earnings.This is plenty of cash for Intel to use for emergencies, paying down debt, or future for aquisitions that increase profits.
9. Is Intel expanding worldwide? Yes. Intel now has employees in 46 countries and sells its chips in nearly every country. Intel's chips are installed in PCs and servers worldwide.
10. Intel passes the Industry Leader Criteria List with flying colors. Intel is a very profitable company that has a monopoly in the PC & Server Processor Chip industry. 2018 looks like a great year to purchase more stock in Intel, since it is trading very close to our price target. If there is a market sell-off in 2018 it may provide us with a great opportunity to buy more stock in Intel. We will alert are readers at www.goldindicator.com when the opportunity presents itself.
Coca-Cola (KO)
1. Does Coca-Cola have a competitive moat around its business protecting it from competitors? Yes. Coca-Cola has the largest market share in the non-alcoholic carbonated beverage industry, with nearly $35 billion in sales in 2017. Its closest competitor is Pepsi Corp, which had much larger total revenue of nearly $63 billion in 2017. But when one takes out Pepsi's food business revenue and just looks at Pepsi's non-alcoholic beverage revenues, Coca Cola dominates in the non-alcoholic beverage industry. Indeed, Coca-Cola sells over 3,500 different products in over 200 countries worldwide giving Coca-Cola a distribution network unmatched by any other carbonated beverage company. Coca Cola has 20 brands with over $1 billion per year in sales. While Coca Cola's revenues have decreased in recent years, 20% in 2017, mainly because of decreasing carbonated soda sales, we believe this trend will eventually bottom and Coca Cola's healthier drinks will become the fastest growing segment for Coca Cola in the coming years. Brands such as Dasani, Fuze Tea, Bon Aqua, Glaceau Vitamin water, Aquarius, and I Lohas. Coca-Cola's capital efficiency and leading carbonated beverage market share of nearly 49% in the U.S. as of 2017 provides Coca-Cola with a strong moat around its business protecting its business from competitors.
2. Does Coca-Cola have the largest market share in its industry? Yes. Coca-Cola has a 49% carbonated beverage market share in the U.S. while its closest competitor, Pepsi, has a 31% market share, as of 2017. Coca Cola is also a leader in the bottles water market, with four of its water brands in the top 10 by sales. While private labeled bottled water led sales in 2017 with $2.5 billion in sales, Coca Cola's Dasani bottled water took the number two position with sales of $1.1 billion in 2017.
3. Does Coca-Cola have a long history of steadily increasing its dividends, revenues, cash flow, and earnings every year? Yes. Coca-Cola has raised its dividend by 11.9% since they paid their first dividend in March of 1962. The first quarterly dividend Coca-Cola paid its shareholders was $0.0008 and Coca-Cola paid a quarterly dividend of $0.33 in 2015. That is total dividend growth of 41,672%. Dividend growth was in-line with revenue, earnings, and cash flow growth during that time period. Over the last five years sales and dividends have grown by 8% per year, as of 2017. Most likely Coca-Cola will continue growing its dividends over the next 15 to 20 years in-line with its latest five year revenue growth of about 8%, or possibly at a higher growth rate as worldwide growth of its water and health drink sales accelerate.
4. Does Coca-Cola have little to no competition in its industry? Yes. As was stated, Pepsi is Coca-Cola's closest competitor but Coca-Cola continue to dominate the non-alcoholic beverage industry. Also, Coca Cola's massive economy-of-scale distribution network within the non-alcoholic beverage industry spread throughout over 200 countries makes it very difficult for any other company in the Non-Alcoholic Beverage industry to compete with Coca-Cola in branding and pricing.
5. Is Coca-Cola the lowest-costs producer in its industry? Yes. Coca-Cola's costs to produce its soda syrups, health drinks, and bottled water gives Coca-Cola a profit margin of nearly 5%, which is a very good profit margin for a mass-scale producer of branded non-alcoholic beverages. As long as Coca-Cola continues steadily growing it's market share within the Non-Alcoholic Beverage industry and holds its profit margin at 5% or higher Coca-Cola will continue dominating the Non-Alcoholic Beverage industry, and continue producing increasing amounts of cash flow for its shareholders every year.
6. Does Coca-Cola have a strong brand name? Yes. Coca-Cola's name says it all. Coca-Cola's name is recognized by most people around the world and is consistently named as one of the most valuable brands in the world. According to Coca-Cola's company statistics, 96% of people worldwide recognize Coca-Cola' logos and brands.
7. Does Coca-Cola have little to no debt and are they able to service their debt easily? Yes. Coca-Cola has total debt of $48 billion, as of 2018. With total cash of $21 billion, total yearly revenue of $36 billion, yearly cash flow of $10 billion, and total interest expenses $90 million in 2017 Coca-Cola should have no problem servicing its debts going forward.
8. Does Coca-Cola have a substantial amount of cash on its balance sheet? Yes. Coca-Cola had total cash of $21 billion of 2018. That is plenty of cash for Coca-Cola to hold on its balance sheet for any type of emergencies such as paying down debt or any aquisition opportunities that present themselves. This amount of cash also gives Coca-Cola a margin of safety, being that it is enough cash to service its existing debt for 30 years.
9. Is Coca-Cola expanding worldwide at a steady pace? Yes. As was stated, Coca-Cola sells roughly 3,600 different products in over 200 countries worldwide. Coca-Cola has had steady sales and earnings growth of 8% per year over the last few years. Coca-Cola's biggest growth is coming from its water and health drinks, which is seeing double digit growth as of 2018.
10. Coca-Cola passes the Industry Leader Criteria list with ease, qualifying KO as a industry leader. Coca-Cola is not trading at a good valuation in 2018 though We will recommend buying more shares of Coca-Cola if it is trades at 8 times cash flow during 2018.
Johnson & Johnson (JNJ)
1. Does JNJ have a moat around its business protecting it from competition? Yes. JNJ produces the largest revenue in the Drug Manufacturer/Healthcare industry. JNJ's total revenue was $76 billion in 2017. Pfizer is JNJ's closest competition in revenue size, with revenue of $52 billion in 2017. JNJ's economy-of-scale that it receives from its position as the company with the highest revenue in its industry provides JNJ with a moat around its business protecting it from competition. While Pfizer's operating margins are a little higher than JNJ's, 28% vs. 25%, we favor JNJ over Pfizer because of its economy-of-scale and it's position as a leader in both the Healthcare/Drug Staples industry and the Health & Wellness Consumer Staples industry.
2. Does JNJ have the largest market share in its industry? Yes. According to JNJ's website, "70% of JNJ's sales come from JNJ products that have a number one or number two global market share position." With a number one position in its industry of $78 billion in yearly revenue and a leading operating margin of 25% in the Drug/Healthcare industry, as well as the Health & Wellness Consumer Staples industry, JNJ clearly leads in market share. JNJ is still the largest medical device maker in the world as of 2017, of which JNJ receives about 30% of its sales from. JNJ's highest percent of its sales come from its Pharmaceutical Division, which comprises nearly 40% of JNJ's sales. The rest of JNJ's sales come from its Consumer Division. Pfizer has higher total sales of pharmaceuticals than JNJ, but pharmaceuticals make up the majority of Pfizer's sales whereas, JNJ sells a more diverse line of products in the Healthcare & Wellness industry. JNJ's business fundamentals and profitability are much better than any other company within its industry. With that said, JNJ continues to have the highest all-around market share in the Drug/Healthcare & Health Consumer Staples industry overall
3. Does JNJ have a long history of steadily increasing its dividends, revenues, cash flow, and earnings every year? Yes. JNJ has increased its dividend by 13% per year since JNJ paid its first dividend on February of 1970. JNJ's first quarterly dividend was $0.00208 paid on February 16, 1970. JNJ now pays its shareholders a quarterly dividend of $0.84. That is total dividend growth of nearly 3,600%. JNJ's dividend has grown in-line with its earnings, revenue, and cash flow. Dividend and sales growth has grown by about 7% per year over the last five years and 11% over the last year, as of 2018. We predict sales and economic growth will continue at the 7% to 10% over the next 10 to 20 years.
4. Does JNJ have little to no competition in its industry? Yes. JNJ leads in sales within the Drug Manufacturer/Healthcare industry, as well as in the Healthcare & Wellness Consumer Staples industry. JNJ's brands are easily recognized worldwide, and once JNJ customers start using JNJ products they rarely switch products. JNJ has very strong brand loyalty from its customers.
5. Is JNJ the lowest-costs producer in its industry? Yes. JNJ's economy-of-scale gives it a great advantage, as far as costs of operations is concerned. JNJ is the largest medical device company in the world and sells its consumer products in the majority of countries. With sales of $76 billion JNJ's economy-of-scale distribution is hard for any company within JNJ's industry to compete with on price.
6. Does JNJ have a strong brand name? Yes. JNJ's brands are recognized by people worldwide. Many of JNJ's customers use JNJ's products on a daily basis. Brands such as: Band-Aid, Listerine, Tylenol, Neutrogena, Visine, Acuvue, Sudafed, Pepcid, Rembrandt, Nicorette, Motrin, Imodium, Dolormin, Benadryl, Mylanta, Zyrtec, Bengay, Rogaine, Aveeno, Red Cross Brand, Tucks, Baby.com, & Natusan. These are just a few. When the majority of people read the list of JNJ brands they easily recognize most if not all of the brands listed, and probably use many of the brands on a daily basis, which shows what a great brand JNJ has built.
7. Does JNJ have little to no debt and can they easily service their debt? Yes. JNJ's total debt is nearly $34 billion, which is easily manageable for a company that produces yearly revenue of nearly $80 billion and gross profits of $50 billion, as of 2017. JNJ's debt/equity is 57% as of 2018. JNJ has nearly $20 billion of cash on its balance sheet and total interest expense of about $900 million, so JNJ should have no problem servicing its debt going forward.
8. Does JNJ always hold a substantial amount of cash on its books? Yes. JNJ has total cash holdings of almost $20 billion, as of 2018. This is enough cash to service it's existing debts for 20 years. So this amount of cash on JNJ's balance sheet gives JNJ a very good margin of safety. '
9. Is JNJ steadily expanding worldwide? Yes. According to the JNJ website "JNJ has 265 operating companies in more than 60 countries employing 126,500 people and sells its products in virtually every country in the world. The JNJ family of companies comprise of: The world's sixth largest consumer health company, the world's most comprehensive medical device company, the world's sixth largest biologics company, and the world's largest pharmaceutical company.
10. Johnson and Johnson (JNJ) passes the Industry Leader Portfolio Criteria List with flying colors. JNJ is truly a diverse Pharmaceutical / Healthcare Consumer Staples company, and is an excellent company to invest in in order to own a healthcare company with a wide range of products in the Healthcare industry. JNJ trading at a good valuation at this time, beginning of 2018. JNJ is selling for about 10 times cash flow.
Altria Group (MO)
1. Does Altira have a moat around its business protecting it from competition? Yes, Altria spun off its international tobacco business a few years ago, listed as Phillip Morris International (PM), so Altria is a leader in the U.S tobacco industry. Altria also sells popular wine, smokeless tobacco, and e-cig brands. While those products made up only about 15% of Altria's revenues for 2017, revenues from these segments are are growing at a faster rate while the cigarette products are experiencing declining revenues. So Altria's wine, smokeless tobacco, and e-cigs will continue gaining a larger share of Altria's revenues as time goes by.
With that said, Altria leads in tobacco product sales in the U.S. with nearly $20 billion in revenue for 2017. Its closest competitor in revenue is British American Tobacco with $28 billion in revenue for 2017. While British American produces higher revenues British American receives its revenues worldwide, whereas Altria Group focuses on selling its products strictly in the U.S. Altria sold nearly 120 billion cigarette units for 2017, with Marlboro being the top selling cigarette brand in the U.S. for 2017. With that said, Altria's customers rarely change cigarette or smokeless tobacco brands once they start using one of Altria's brands.
Altria continues to lead in profitability in the tobacco industry, with a 52% profit margin for 2018 which is still growing every year. Altria's return on equity (ROE) of 72% continues to be one of the highest in the tobacco industry also, as of 2018.
Cigarette smoking has been declining in the U.S. though, which will effect Altria's top business segment. But there are a lot of former cigarette smokers now switching to top e-cig brands, such as Altria's top e-cig brand Mark Ten and its Green Smoke e-cig brands. According to Hexa Research the E-cig industry is expected to grow nearly 20% a year and reach nearly $50 billion sales by 2025.
Altria leading brands give Altria strong pricing power going forward. So Altria's ability to raise prices with inflation or expenses, along with its leading position in branding, provides Altria with a massive moat around its business protecting the company from competition. Altria continues to have the largest cigarette market share in the U.S., with a 50% market share as of 2017. Its Marlboro brand continues to be the top selling cigarette, making up nearly 45% of Altria's cigarette sales.
2. Does Altria have the largest market share in its industry? Yes. Altria has a U.S. market share of 50% in the U.S. tobacco industry.
3. Does Altra have a long history of steadily increasing its dividends, revenue, earnings, and cash flow year after year? Yes, Altria has grown its dividend by 12% per year since it paid its first dividend in 1970. Altria has grown its dividend in-line with its revenue, earnings and cash flow during that time period. Altria paid its first quarterly dividend of $0.0026 per share to its shareholders on June 10, 1970 and Altria's recent quarterly dividend of $0.70. That is total dividend growth of nearly 25,000% from 1970 to 2018.
Altria's revenue growth has slowed down over the last couple of years mainly due to decreasing cigarette sales in the U.S. which decreased about 1% in 2017. But Altria's e-cigarette sales and smokeless tobacco sales have been increasing by double digits over the last couple of years. So Altria is now focusing more and more on these two categories going forward. Altria has stated that its top selling e-cigarette, Mark Ten, will be a focus of large growth opportunities going forward. Smokers in the U.S. are becoming more and more health conscious, so more smokers are vowing to quit smoking traditional cigarettes and switch to healthier alternatives such as e-cigs. This will provide enormous growth opportunities for Altria's leading e-cig brands such as Mark Ten. We also believe that once Marijuana is legalized nationwide Altria will use its E-Cig segment as a platform to launch Marijuana vapor products, which will provide Altria with tremendous growth going forward.
4. Does Altria have little to no competition in its industry? Yes. As was stated: Altria does have a strong competitor in British American Tobacco, but Altria dominates the U.S. tobacco industry, with a 50% market share. With that said, we believe Altria will continue to dominate the U.S. tobacco industry going forward. Altria's strong brands such as Marlboro and Mark Ten will help Altria dominate market share in the U.S. tobacco industry. We also believe that Altria will use its fastest growing business segment, E-Cigs, as a platform for Marijuana vapor products once recreational Marijuana is legalized nationwide.
5. Is Altria the lowest-cost producer in its industry? Yes. With net profit margin of 52%, operating margins of 51%, and a return on equity (ROE) of 72% as of 2018 Altria is one of the most profitable companies in its industry.
Altria's closest competitor, British American Tobacco, is also a very profitable low-cost producer in the U.S. tobacco industry with a profit margin of nearly 35% and a return on equity of 108%. But Altria still continues to sell the top selling brands in the U.S. tobacco industry and continues to dominate market share in the U.S. Tobacco industry. This gives Altria an economy-of-scale in the U.S. Tobacco industry that most of its competitors will have a hard time competing with on costs.
6. Does Altria have a strong brand name? Yes indeed. Altria's Marlboro brand was the top selling cigarette brand in the U.S. in 2017. Altria continues to dominate U.S. cigarette sales, selling nearly 50% of all cigarettes sold in the U.S. during 2017.
Altria's e-cigarette brand Mark Ten grew its sales by nearly 10% of e-cig sales in 2017 and continues to be one of the most popular e-cig brands in the U.S. With that said, we believe Altria's E-Cig business segment will continue being its fastest growing segment going forward. We also believe that Altria's e-cig brand Mark Ten will become the most popular e-cig brand in the U.S. and dominate e-cig sales in the U.S. going forward.
7. Does Altria have little to no debt and is its debt manageable? Yes. Altria had $14 billion of total debt and total cash of $1.25 billion on its books at the beginning of 2018. With total annual revenue of $20 billion, total annual earnings of $10 billion, and total annual interest expenses of nearly $900 million in 2017 Altria should have no problem servicing its debt going forward. Indeed, Altria could nearly pay off its debt with one year's worth of cash flow.
8. Does Altria always hold a substantial amount of cash on it books? Yes.
Altria held about $1.25 billion in cash on its books at the beginning of 2018, which comes out to about 12% of its annual earnings. While this is down from nearly $2 billion in 2016 it is still plenty of cash for a company like Altria that produces massive amount of cash flow year after year. This amount of cash provides Altria with a good margin of safety if Altria wanted to pay off a portion amount of its debt.
9. Is Altria expanding worldwide? Yes and no, because Altria spun off its international business a few years ago as Phillip Morris International (PM) it is no longer expanding worldwide. But Phillip Morris is. Phillip Morris International sells all Phillip Morris tobacco products outside of the U.S. while Altria group sells all Phillip Morris products strictly within the U.S. I will discuss Phillip Morris International in the next section because it is also included in our Industry Leader Portfolio.
10. Altria easily passes all of the criteria on the Industry Leader Portfolio Criteria list. Altria is most likely going to grow its earnings, revenue, and dividends by about 9% to 12% going forward over the next 10 to 20 years. Altria is truly an industry leader and will provide its shareholders with steady returns of 10% to 15% going forward. 2018 is a great time to purchase more shares of Altria (MO), being that it was trading for less than 8 times cash flow as of the beginning of 2018.
Phillip Morris International (PM)
1. Does Phillip Morris International have a moat protecting its business from competition? Yes. As was stated with Altria, Phillip Morris cigarette brands have number 1 or number 2 market share worldwide. The Marlboro brand is the cigarette brand with the largest cigarette sales in the world, with nearly $500 billion in sales for 2017. Phillip Morris International controls about 15% of the world's cigarette market. Phillip Morris International sells about 6 of the top 15 cigarette brands worldwide and operates in 180 countries. Phillip Morris International's closest competitor in sales is China National Tobacco Corporation which has a 44% market share in the world's cigarette industry, according to Statista.com.
Phillip Morris International's closest competitor in the premium brand international cigarette industry is British American Tobacco which sells premium brands such as Pall Mall, Kent, and Lucky Strike. Phillip Morris continues to be the most profitable cigarette company in the world though, with a profit margin of 20% and an operating margin of 21%. Given Phillip Morris International's leading profit margins, it's position as selling the world's top selling premium cigarette brands, and it's #1 market share in the international premium cigarette industry makes it very difficult for other cigarette companies to compete with Phillip Morris International in the International Premium Cigarette industry, at least not at the same margins and economy-of-scale.
2. Does Phillip Morris International have the largest market share in its industry? Yes. As was stated in question 1, China National Tobacco Corporation has the largest market share in the International Cigarette industry but Phillip Morris International has the largest share of the market in the Premium Cigarette industry and British American Tobacco having the second largest market share in the Premium Cigarette industry.
3. Does Phillip Morris International have a long history of increasing its dividends, earnings, revenue, and cash flow? Yes, Phillip Morris International has increased its dividend by nearly 10% per year since it was spun off from Altria (MO) in 2008. Phillip Morris International paid its first quarterly dividend of $0.46 per share on June 6, 2008 and as of 2018 Phillip Morris International pays a quarterly dividend of $1.07 per share. That is total dividend growth of 133% in almost 10 years. Phillip Morris International's dividend growth has been in-line with its revenue and earnings growth, except for 2008 and 2015. Revenue and earnings were down a little in 2008 because of a worldwide recession and flat in 2015 because of slowing worldwide economic growth. We believe Phillip Morris International will continue steadily increasing its earnings by 5% to 11% per year going forward.
4. Does Phillip Morris have little to no competition in its industry? Yes. Phillip Morris International's closest competition in the premium brand cigarette industry continues to be British American Tobacco. Phillip Morris continues selling the number one cigarette brand in the world though. Phillip Morris also continues to be one of the most profitable cigarette companies in the world, with a profit margin of nearly 20% and an operating margin of 40%. Phillip Morris continues to lead in premium cigarette brands worldwide with brands such as L&M, Bond Street, Sampoerna A, Parliament, Phillip Morris, Chesterfield, Lark, Fortune, and Dji Sam Soe. Phillip Morris International continues to lead in many local brands too with brands such as U Mild in Indonesia, Champion and Hope in the Philippines, Diana in Italy, Optima and Apollo-Soyuz in Russia, Morven Gold in Pakistan. Just to name a few.
5. Is Phillip Morris the lowest-costs producer in its industry? Yes. Phillip Morris International produces a profit margin of 20% and gross margins of 40%, making PM one of the most profitable cigarette companies in the world. Phillip Morris continues to sell 6 of the top 15 brands in the world now operate in over 180 countries. With that said, it is difficult for any of Phillip Morris International's competitors to compete with Phillip Morris International's premium brand pricing and its massive economy-of-scale operations.
6. Does Phillip Morris International have a strong brand name? Yes. As was stated in question 4, Phillip Morris continues to sell the world's #1 cigarette brand, Marlboro, and continues to sell many leading cigarette brands worldwide such: Parliament, L&M, Fortune, and Chesterfield.
7. Does Phillip Morris have little to no debt and is its debt manageable? Yes. Phillip Morris International's total debt is $34 billion. This is a little high relative to its operating income of $12 billion in 2017 and relative to its $9 billion of cash on its books. But Phillip Morris had total 2017 interest expenses of only about $1.3 billion though. So Phillip Morris International can service its debt for about 7 years with just the existing cash on its balance sheet. Phillip Morris can easily service its debt with its $9 billion of yearly cash flow without touching it's cash balance.
8. Does Phillip hold a substantial amount of cash on its balance sheet at all times? Yes. Phillip Morris International held $9 billion of cash on its balance sheet as of 2018, which is enough to service its debt for nearly 7 years and it is plenty of cash for an industry leader like Phillip Morris that sells leading cigarette brands worldwide at exceptional profit margins.
9. Is Phillip Morris International expanding worldwide? Yes. As was stated, Phillip Morris International now sells its cigarette brands and smokeless tobacco products in over 180 countries. Phillip Morris continues to sell the world's best selling cigarette brands, such as Marlboro and Fortune. Phillip Morris International's leading cigarette brands continue to be recognized by people in nearly every country in the world.
10. Phillip Morris International passes all of the criteria to be a leader in its industry and continues to be one of the most profitable companies in its industry by far. The beginning of 2018 is not a good time to buy shares of Phillip Morris International because its shares are selling for nearly 18 times cash flow. Whenever Phillip Morris sells for 8 times cash flow or below during 2018 we will recommend buying shares of PM.
McDonalds Corporation (MCD)
1. Does McDonalds have a moat around its business protecting it from competition? Yes. McDonalds is the largest fast food franchise in the world and is the most recognized fast food brand in the world, with 2017 revenues at $23 billion. McDonald Corporation's closest competitor is Yum Brands which produced revenues of $6 billion in 2017, which decreased over the last few years mainly because Yum Brands separated their U.S. division from their Chinese division.
On a side note, Yum Brands a leader in China's Fast Food industry. So Yum Brands China could be a good addition to the Industry Leader Portfolio when the price is right in the future.
Back to MCD. McDonalds has some of the best fundamentals of any fast food company worldwide. McDonald's restaurant locations are always built on the busiest street corners in every town, and most of them are sold off to franchisees. Essentially, McDonalds is a company based on prime real estate, while collecting steady royalty payments on that prime real estate. This business model has made McDonalds Corporation one of the most profitable fast food companies in the world, with profit margins of nearly 22% and operating margins of nearly 36% as of 2018. In comparison, Yum Brands has a profit margin of 22% and operating margins of almost 30% as of 2018. McDonald Corporation's massive economy-of-scale operations worldwide, it's highly recognizable brand name in fast food worldwide, and it's excellent profitability in the international fast food industry provide McDonalds with a strong protective moat around its business protecting it from competition.
2. Does McDonalds have the largest market share in its industry? Yes. McDonalds Corporation has a 22% worldwide market share in the fast food industry. Its closest competitor, Yum Brands, has a 10% global market share.
3. Does McDonalds have a long history of increasing its dividends, earnings, revenue, and cash flow? Yes. McDonalds has increased its dividend by 15% a year since 1976. McDonald's first quarterly dividend was $0.016 paid on October 20, 1987, McDonalds now pays a quarterly dividend of $1.01 per share, as of 2018. That is total dividend growth of 6,364% in a little over 30 years. McDonald's revenue, earnings, and cash flow have grown at roughly the same rate. In 1972 McDonald's revenue surpassed $1 billion. By 1976 revenue reached $3 billion. McDonald's net earnings in 1972 were $45 million. By 2017 McDonalds produced yearly revenue of nearly $23 billion and total net earnings of nearly $5 billion. Earnings have slowed over the last couple of years due to a more health conscious population, but sales are picking up a little since Mcdonalds reorganized it's menu to also cater to more health conscious customers. With that said, we believe that dividends and earnings will increase by about 8% to 10% a year going forward.
4. Does McDonalds Corporation have little to no competition in its industry? Yes. As was stated, Yum Brands is McDonald's closest competitor with yearly revenue of $6 billion as of 2017. McDonalds continues dominate market share in the fast food industry worldwide with a 22% market share, except in China. Yum Brands dominates fast food in China, with nearly a 42% market share. With that's said, Yum Brands China could be a good addition to the Industry Leader Portfolio in the future. McDonalds will continue dominating the U.S. and global fast food industry going forward.
5. Is McDonalds the lowest-costs producer in its industry? Yes. As was stated, McDonalds is the most profitable company in the fast food restaurant industry with a profit margin of nearly 22% and an operating margin of nearly 36%. McDonalds produces gross margins of nearly 40%. McDonalds has excellent fundamentals in profitability, especially for a massive fast food corporation that is valued at nearly $125 billion as of 2018.
6. Does McDonalds have a strong brand name? Yes. The McDonalds brand name is highly recognized by people all over the world. McDonalds was named as the most valuable fast food brand in the world for 2015 by Statista, with an estimated brand value of $81 billion. Starbucks came in second with an estimated brand vale of $30 billion. MCD was listed as the #9 most valuable company in the world by Forbes in 2017.
7. Does McDonalds have little to no debt and is its debt easily manageable? Yes. McDonalds had total debt of $30 billion as of 2018. This seems large but is modest compared to McDonald's total earnings of $6 billion, total cash flow of nearly $11 billion and its total revenues of $23 billion for 2017, Also, McDonald's interest expenses were only about $900 million in 2017. With that said, McDonalds could service its debt for nearly 11 years just with one year's cash flow. So McDonalds can easily service its existing total debt going forward.
8. Does McDonalds have a substantial amount of cash on its balance sheet? Yes. A modest amount. As was stated, McDonalds had about $2.5 billion on its books as of 2018. This is not a lot for such a large company, but a premium company like Mcdonalds that produces massive amounts of free cash flow steadily year after year doesn't need a massive amount of cash on its books to fall back on.
9. Is McDonalds expanding worldwide? Yes. As stated on Yahoo Finance in the profile section for McDonalds, " McDonalds Corporation operates and franchises McDonalds restaurants in the U.S., Europe, Asia/Pacific, Africa, Canada, and Latin America. As of 2016 McDonalds operated 36,258 restaurants, 29,544 of those are franchised." McDonalds has plans to start franchising the majority of its existing restaurants, which will unlock value for McDonald's shareholders through lower expenses and higher profitability for McDonalds going forward. McDonalds will also continue building new store locations in busy areas with increasing populations. Another way McDonalds plans to grow revenue and traffic per restaurant going forward is to revamp its menu. McDonalds has added healthier meals to its menu to attract health conscious customers to its restaurants. McDonalds also started serving breakfast all day in order to attract breakfast customers to eat at McDonalds throughout the day. McDonalds has been coming up with numerous ways to continue growing revenue, earnings, and dividends going forward.
10. McDonalds passes all of the criteria from the Industry Leader Portfolio Criteria list with flying colors. McDonalds continues to be the most valuable fast food brand in the world and has many growth prospects going forward including: continuous opening of new restaurants in busy areas with steadily growing populations, franchising the majority of its restaurants, and revamping its menu to attract more traffic per restaurant. We believe McDonalds will continue growing its dividends and earnings by 8% to 10% per year going forward for the next 10 to 20 years. We recommend purchasing shares of MCD during 2018 anytime MCD is selling for 8 times cash flow or less.
Exxon Mobil (XOM)
1. Does Exxon Mobil have a moat around its business protecting it from competition? Yes. Exxon is the largest publicly traded company in the Major Integrated Oil & Gas industry, with a market cap of roughly $350 billion and total revenue of nearly $250 billion. Exxon Mobil produced total earnings of nearly $20 billion in 2017. Exxon Mobil's closest competitor is Chevron Corporation, which had a market cap of nearly $230 billion as of 2018 and produced total revenue of $135 billion in 2017. Exxon Mobil's oil & gas production was 4 million BOE per day in 2017. Chevron Corporation's daily production was nearly 3 million BOE per day in 2017. Exxon added nearly 3 billion oil-equivalent barrels of oil and gas reserves in 2017, replacing 183 percent of production. Exxon's total reserves were 21 billion BOE in 2017, a 19 percent increase year over year.
Exxon is also the largest refiner in the world with 37 oil refineries in 21 countries, as of 2017. Exxon Mobil will continue to be the leader in the Major Integrated Oil & Gas industry, and the most profitable company in its industry, along with Chevron Corporation. Exxon's net profit margin is 8.3% as of 2018.
Exxon Mobil's massive scale provides the company with a moat around its business protecting it from competitors. We believe that Exxon Mobil will become an even stronger and larger company in its industry by continuing to buy assets from struggling energy companies and by continuing to increase its reserves at an excellent rate. This will increase Exxon's economy-of-scale even more, providing it with an even larger protective moat around its business, while at the same time increasing its profit margins even more. Chevron is in the same situation, which I will discuss in the next section that analyzes Chevron Corporation.
2. Does Exxon Mobil have the largest market share in its industry? Yes. As was stated, Exxon produces total revenue of nearly $250 billion and had total oil & gas production of 4 million BOE per day in 2017. Its closest competitor produced about 3 million BOE per day in 2017. Exxon Mobil is truly a massive company in the Major Integrated Oil & Gas industry. Exxon Mobil engages in refining and marketing of crude oil & natural gas in Australia/Oceania, Africa, Asia, Europe, the United States, Canada, and South America. Exxon also manufactures and markets commodity petrochemicals including olefins, aromatics, and polypropylene plastics; and transports & sells crude oil, natural gas, and petrochemicals. Exxon Mobil is the largest refiner in the world, with 37 oil refineries in 21 countries constituting a combined daily refining capacity of 6.3 million barrels. Exxon has a 1 percent world market share in total oil & gas reserves, which ranks it 14th in the world because most of the world's oil & gas reserves are owned by government-owned energy companies. But with total oil & gas reserves of nearly 21 billion BOE as of 2017 Exxon still ranked # 1 within the Major Integrated Oil & Gas Corporate industry, and Exxon had an excellent reserve replacement ratio of 183 percent in 2017.
3. Does Exxon Mobil have a long history of increasing its dividends, revenue, earnings, and cash flow? Yes. Exxon Mobil has increased its dividend by about 7% per year since 1970. Exxon Mobil's quarterly dividend was $0.02813 per share paid on May 7, 1970. Exxon's quarterly dividend is $0.77 per share as of 2018. That is total dividend growth of 2,495% since 1970. Exxon's revenue and earning's growth have been in line with its dividend growth since 1970. Exxon's revenue growth has recently increased, increasing by 21% year over year in 2017. We believe Exxon Mobil will continue growing revenue, earnings, dividends, and cash flow by 7% to 10% per year going forward over the next 10 to 20 years, possibly more as Exxon Mobil consolidates its market share.
4. Does Exxon Mobil have little to no competition in its industry? Yes. Exxon's closest competitor is Chevron Corporation which we have also added to the Industry Leader Portfolio because both companies have relatively close dominant market share within the Integrated Oil & Gas industry, and both will consolidate their market share within the energy industry in the coming years making them even more dominant. Exxon Mobil will continue to remain the largest oil & gas producer in the Major Integrated Oil & Gas industry though, with Chevron close behind.
5. Is Exxon Mobil the lowest-costs producer in its industry? Yes. As was stated, Exxon Mobil is the most profitable company in its industry. Exxon Mobil's ROE was nearly 11% and its profit margin 8% as of 2018. Its closest competitor, Chevron, produced an ROE of 6.2% and a profit margin of 7.2%.
6. Does Exxon Mobil have a strong brand name? Yes. Exxon Mobil's brand names is easily recognizable throughout the world. Exxon owns a total of 14,112 gas stations worldwide under the Exxon, Mobil, Esso, and Exxon Mobil brand names. This once again shows how diverse Exxon's energy assets are in the Major Integrated Oil & Gas industry.
7. Does Exxon Mobil have little to no debt and is its debt easily manageable? Yes. Exxon Mobil has total debt of $42 billion as of 2018. This total debt is easily manageable for a company that produced $250 billion of revenue and total profit of $21billion in 2017. Exxon has total cash on its books of $3.2 billion as of 2018. Exxon's total interest expense for 2017 was $601million, so technically Exxon Mobil could service its debt for nearly 6 years with just the cash on its books.
8. Does Exxon Mobil have a substantial amount of cash on its books? Yes. As was stated, Exxon has a total cash balance of $3.1 billion as of 2018, which is enough cash to easily service its debt if need be and plenty of cash for unforeseen expenses.
9. Is Exxon Mobil expanding worldwide? Yes. As stated on Yahoo Finance's profile of Exxon Mobil, "Exxon Mobil Corporation engages in refining & marketing of crude oil and natural gas in the United States, Canada/South America, Europe, Africa, Asia, and Australia/Oceania. Exxon also owns and operates 37 refineries in 21 countries constituting a combined daily refining capacity of 6.3 million barrels, as of 2018.
10. Exxon Mobil easily passes all of the criteria from the Industry Leader Portfolio checklist, and Exxon's stock is very cheap as of 2018 due to the energy bear market taking place. Exxon's stock is trading under 10 times cash flow, as of 2018. We recommend buying shares of Exxon anytime the stock is trading under 8 times cash flow during 2018.
Chevron Corporation (CVX)
1. Does Chevron Corporation have a moat around its business protecting it from competition? Yes. Chevron's closest competitor is Exxon Mobil, which has an economy-of-scale that is larger than Chevron's because of its larger revenue and production volumes. With that said, we added Chevron to the Industry Leader Portfolio because Chevron has the second largest economy-of-scale in the Major Integrated Oil & Gas industry, and it has the same excellent profitability as Exxon Mobil. Chevron and Exxon Mobil dominate the Oil & Gas industry in the U.S. The fact that Chevron and Exxon dominate such an extremely capital intensive industry with a very high barrier-to-entry industry is proof that these two companies are very capital efficient. This provides a moat around their businesses that makes it very difficult for their competitors to compete with. Chevron also has a massive market capitalization, massive infrastructure and massive revenues. Chevron has a market cap of $236 billion as of 2018, produced total revenues of $135 billion in 2017, and produced nearly 3 million BOE per day in 2017.
2. Does Chevron Corporation have the largest market share in its industry? Yes & no. As was stated, Chevron has the second largest market share in the Major Integrated Oil & Gas industry. With that said, even though Exxon Mobil has the largest market share in the industry Chevron dominates the industry alongside Exxon Mobil. Both companies together produce more than half of total U.S. oil & gas production, and nearly 40% of total U.S. oil & gas demand for 2017. Chevron & Exxon produced almost 7 million BOE per day of oil & gas, and the average daily demand for oil & gas in the U.S. was roughly 19 million BOE per day in 2017.
3. Does Chevron Corporation have a long history of increasing its dividend, revenue, earnings, and cash flow? Yes. Chevron has increased its dividend by 6.8% each year since 1987. Chevron's first quarterly dividend was paid on November 3, 1987. The dividend amount was $0.15 per share. By 2018 Chevron was paying its shareholders a quarterly dividend of $1.12 per share. That is total dividend growth of 647% since 1987. Chevron's dividend growth has grown in line with its with its earnings, revenue, and cash flow. Chevron's growth has accelerated as of 2018. Chevron's oil & gas production increased nearly 20% in 2017. Also, Chevron's revenues increased by 22% in 2017.
4. Does Chevron have little to no competition? Yes. As stated, Chevron's largest competition is Exxon Mobil. Chevron and Exxon dominate the Major Integrated Oil & Gas industry together and both companies have similar profitability & cost-of-operations that are unmatched in the industry. Chevron's gross margins are nearly 35% and its profit margin is 8%, as of 2018. Exxon's gross margins are nearly 25% and its profit margin is 8.3% as of 2018. These are excellent margins for both companies.
5. Is Chevron the lowest costs producer in its industry? Yes. Chevron has similar fundamentals and profitability with Exxon. With that said the two companies can produce oil & gas, as well transport it to their customers, at a costs very few other integrated oil & gas companies can. Chevron's massive economy-of-scale and diversification within the energy industry gives Chevron an advantage no matter where oil & gas prices are at. Indeed, low oil & gas prices work in Chevron's favor because Chevron can buy bankrupt oil & gas companies for pennies on the dollar during oil & gas bear markets.
6. Does Chevron Corp. have a strong brand name? Yes. Most people can easily recognize the Chevron name through its massive number of retail gas stations. According to Chevron's website "Chevron's products are sold in nearly 8,000 Chevron and Texaco retail stations in the United States." Chevron also owns five refineries in the U.S. that "have a combined capacity to process approximately 960,000 barrels of oil per day." Chevron is also a leader in plastics & chemicals through its 50% ownership of Chevron Phillips Chemical Company LLC and it's affiliates.
7. Does Chevron have little to no debt and is its total debt easily manageable? Yes. Chevron had total debt of $38 billion as 2018. Chevron's EBITDA for 2017 was $22 billion. Chevron could pay off its entire debt in about 1.5 years with just it's EBITDA. Also, Chevron holds total cash on its books of nearly $5 billion as of 2018. Chevron's total interest expense for 2017 was about $307 million for 2017, so Chevron could service its total debt for about 14 years with just the cash on its books without touching any of it's earnings. With that said, Chevron should have no problem servicing its debt going forward.
8. Does Chevron always carry a substantial amount of cash on its books? Yes. Chevron had about $5 billion of cash on its books as of 2018. As was stated, this is enough cash to service it's debts for nearly 14 years.
9. Is Chevron expanding worldwide? Yes. According to Chevron's website "Chevron is an American multinational energy corporation and is active in more than 180 countries. Chevron is engaged in every aspect of the oil, natural gas, and geothermal energy industries, including hydro-carbon exploration and production; refining, marketing, and transport; chemicals manufacturing and sales; and power generation. Chevron's downstream operations manufacture and sell products such as fuels, lubricants, additives and petrochemicals. The company's most significant areas of operations are the west coast of North America, the U.S. Gulf Coast, Southeast Asia, South Korea, and South Africa. Chevron's alternative energy operations include geothermal, solar, wind power, biofuel, fuel cells, and hydrogen." Chevron Corporation is on of the largest integrated energy companies in the world, producing 3 million BOE of oil & gas per day and expects 2% yearly production growth going forward. As you see, Chevron has energy production operations expanding the globe and is a highly efficient energy company in the Major Integrated Oil & Gas industry.
10. Chevron passes all of the criteria on the Industry Leader Portfolio Criteria Checklist with flying colors. Chevron is a true leader the Major Integrated Oil & Gas industry. We recommend purchasing shares of Chevron anytime they trade below 8 times cash flow during 2018.
AT&T (T)
1. Does AT&T have a moat around its business protecting it from competition? Yes. AT&T operates in an industry that has a high costs-to-entry, just like all Utility companies do. It takes a massive amount of capital to build large-scale telecom infrastructure. Once a company builds a large-scale nationwide telecom network, like AT&T has, that company will dominate the telecom industry because of the very high capital required to build it. With that said, AT&T has the largest revenue in the Telecom Services industry. AT&T produced yearly revenue of $160 billion in 2017. AT&T is the largest company in the U.S. Telecom industry by market cap, with a market cap of nearly $250 billion as of 2018. AT&T's infrastructure is massive, with total assets of nearly $500 billion as of 2018. AT&T's massive economy-of-scale in the Telecom industry provides AT&T with a very large moat around its business that makes it difficult for competitors to compete with.
2. Does AT&T have the largest market share in its industry? Yes. According to Statista.com AT&T's U.S. market share of wireless telecommunication 34.1% and its U.S. market share in mobile cellular services is nearly 45%. Verizon is AT&T's closest competitor with a wireless telecommunications U.S. market share of 33%, followed by T-Mobile with a U.S. market share of 16%. Verizon has a similar market share as AT&T, which is why we also added Verizon to the Industry Leader Portfolio. We believe AT&T will continue to dominate the U.S. market share in the Telecom Services industry going forward though.
3. Does AT&T have a long history of increasing its dividends, cash flow, revenue, and earnings every year? Yes. AT&T has grown its dividend by 4.1% per year since 1987. AT&T's first quarterly dividend was $0.145 per share paid to shareholders on October 5, 1987. As of 2018 AT&T pays a quarterly dividend of $0.50. That is total dividend growth of 245% a little over 30 years. AT&T's dividend growth was in line with its earnings & revenue growth. AT&T's shareholders experienced total gains of 8% to 10% a year (dividend plus capital gains) since 1987.
4. Does AT&T have little to no competition in its industry? Yes. As was stated, Verizon is AT&T's closest competition with a similar market share in the Telecom Services industry, but VZ compliments AT&T because of high barriers-to-entry in the Telecom industry. They will both continue to dominate the U.S. Telecom Services industry going forward.
5. Is AT&T the lowest-cost producer in its industry? Yes. AT&T has an economy-of-scale in Telecom & Internet Services that can be brought to its customers in an efficient and costs effective manner that few other telecom companies can compete with. And with their purchase of Direct TV AT&T can combine TV services with its existing telecom services, thus attracting more subscribers and advertising. Direct TV has a very large satellite TV subscriber base, with nearly 50 million subscribers across the Americas. Also, AT&T's $48 billion purchase of Direct TV has made AT&T the largest Pay-TV operator in the world as of 2017. AT&T continues to have very strong profitability in 2018, with gross margins of 54% and a net profit margin of 18.4%. AT&T's Return on Equity (ROE) continues to be strong at nearly 22%. AT&T's efficiency and economy-of-scale in the Telecom Services industry gives AT&T a competitive position in regards to operating costs.
6. Does AT&T have a strong brand name? Yes, because of its dominant market share in the Telecom Services industry AT&T has a brand name many can easily recognize. Indeed, AT&T was one of the original telephone & telecom networks spun off from MaBell. With that said, AT&T has built & dominated the Telecom Infrastructure industry for a long time, compounding its brand name through its massive subscriber base which has nearly 157 million wireless customers in the U.S. and Mexico as of 2017. AT&T also has about 400 million people that access its 4G
LTE network as of 2017.
7. Does AT&T have little to no debt and is its debt easily manageable? Yes. AT&T's debt is a little high relative to its earnings as of 2018, at $165 billion vs. 2017 earnings of $30 billion, because of its $48 billion aquisition of Direct TV and it's up-and-coming aquisition of Time Warner. But AT&T's yearly interest expense was $6.3 billion in 2017. With revenue of $160 billion, cash flow of $40 billion, and total earnings in 2017 of $30 billion AT&T can easily service its debt going forward. AT&T also had total cash on its balance sheet of nearly $50 billion, so technically AT&T could service its debt for nearly 9 years with just their cash balance.
8. Does AT&T always carry a substantial amount of cash on its balance sheet? Yes, as was stated, AT&T carried nearly $50 billion in cash on its balance sheet as of 2018. This is enough cash to service its debt for nearly 9 years.
9. Is AT&T expanding worldwide? Yes. Through AT&T World Connect Value plans subscribers can connect to telecom & Internet services in 225 countries. As more & more customers in the Americas stream more & more data through the AT&T national & World Connect service AT&T will collect more telecom service fees, slowly providing strong/steady revenue & earnings growth going forward. Also, with AT&T's purchase of DirecTV AT&T can package its DirecTV services with its domestic World Connect Telecom services thus providing more and more telecom data traffic on AT&T's telecom network which means massive telecom service fees going forward. Indeed, the DirecTV service will provide massive amounts of TV subscription fees, telecom service fees, and advertising fees going forward. AT&T will dominate all aspects of Telecom mobile media going forward.
10. AT&T is truly a leader in the Telecom Services industry. AT&T, along with Verizon, dominates the Telecom Services industry. In the coming years everything we do will be done through Internet service networks: from watching TV, to operating a business, to operating appliances. This is all being done more & more with on-the-go mobile devices such as tablets & smart phones, which means massive growth opportunities for a company like AT&T that provides the infrastructure to facilitate this increasing traffic on the internet. We see yearly growth of 8% to 10% for AT&T over the next 10 to 20 years, possibly more if AT&T dominates TV services going forward. Now is a good time to buy shares of AT&T because AT&T is selling for about 7 times cash flow in 2018. We recommend buying shares of AT&T anytime its stock trades for less than 8 times cash flow during 2018.
Verizon (VZ)
1. Does Verizon have a moat around its business protecting it from competition? Yes, as with AT&T, Verizon now has a market share of nearly 35% in the Wireless and Telecommunications industry. The Wireless & Telecommunications industry has a very high barrier-to-entry because of the massive amount of capital investment required to build and maintain the industry's infrastructure. Verizon and AT&T now dominate the Wireless Telecommunications industry with a nearly 70% market share nationwide as of 2017. So it is very difficult for the majority of Telecom companies to compete with Verizon's massive Wireless & Telecommunications infrastructure.
2. Does Verizon have the largest market share in its industry? Yes. As was stated, Verizon along with AT&T dominate the Wireless and Telecommunications industry with a 70% market share nationwide.
3. Does Verizon have a long history of increasing its dividends, cash flow, revenue, and earnings every year? Yes. Verizon has increased it dividend by nearly 4% a year since they paid their first dividend on March 26, 1984. Verizon's earnings and revenues have grown by nearly 5% every year during the same period. VZ's earnings growth accelerated in 2017, coming in at 315%. Verizon has increased its dividend by 3% per year over the last 5 years and by 3% during 2017. VZ will most likely continue increasing its dividend by 3% to 4% a year going forward.
4. Does Verizon have little to no competition in its industry? Yes. As was stated, AT&T is Verizon's closest competitor, with roughly the same market share in the Telecommunication industry. We continue to believe that AT&T and Verizon will continue to dominate the Wireless/Telecommunication industry, which is why both of them were added to the Industry Leader Portfolio.
5. Is Verizon the lowest-costs producer in its industry? Yes. Being that Verizon, along with AT&T, dominates such a capital intensive industry provides them with an economy-of-scale unmatched in the Telecom industry. This enables Verizon to sell their wireless & telecommunications services at an excellent profit margin of 24%, as well as produce gross margins of 60%. VZ's ROE is excellent at 89%, as of 2018.
6. Does Verizon have a strong brand name? Yes. As with AT&T, nearly every person in the U.S. is familiar with Verizon's name. With a total number of 145 million wireless subscribers as of 2017. Verizon has become the largest telecommunications company in the U.S. based on their number of subscribers.
7. Does Verizon have little to no debt and is its existing debt easily manageable? Verizon's debt to equity ratio is a little high at 260%, but high debt levels are normal in capital intensive industries such as the Telecom industry. Verizon has about $117 billion in total debt outstanding as of 2018, and the majority of it is long-term debt. Verizon produced yearly cash flow of nearly $37 billion and had total cash on its balance sheet of $2 billion as of 2018. Verizon's yearly interest expense is only $5 billion as of 2017. So Verizon can easily service it's debt going forward with only 13% of its yearly cash flow.
8. Does Verizon carry a substantial amount of cash on its balance sheet? Yes. Verizon had about $2 billion on its balance sheet as of 2018. This isn't a substantial amount for such a large, but it is plenty of cash for a dominant company like Verizon that produced $74 billion in gross profit and nearly $37 billion in cash flow for 2017.
9. Is Verizon expanding worldwide? Yes. Verizon is steadily growing services throughout the world through partnerships or roaming services with telecom service providers throughout the world. Verizon continues growing the subscriber numbers of its international mobile service plans, which bring in more revenue per subscriber than national service plans. Another service that will help Verizon grow its services throughout the world is its recent purchase of AOL. This provides Verizon with a major web portal that will connect AOL users throughout the world with advertising. AOL provides Verizon with a major web portal that will help Verizon grow its cash flow though web advertising and various services to AOL users throughout the world.
10. Verizon is truly an industry leader in the Wireless and Telecom Industry, and Verizon now dominates the industry in the U.S. with 145 million subscribers, and growing. Verizon will also see added growth in media and advertising through its recent purchase of AOL. Also, Verizon will get more growth in advertising and media through its decision to purchase Complex Media in 2016 through a joint venture with Hearst Media Partners. Verizon will continue to be a great investment in the Industry Leader Portfolio. Verizon shareholders will most likely continue to see dividend and capital gains growth of about 10% over the next 20 to 30 years. Now is an excellent time to buy more stock in Verizon because Verizon it is trading under 8 times cash flow as of 2018.
Realty Income Corp. (O)
1. Does Realty Income Corp. have a moat around its business protecting it from competition? Yes. Realty Income Corporation is in a special type of REIT industry: Realty Income Corp. buys retail businesses that produce steady cash flow, (businesses such as mini mart gas stations or pharmacies), through what's referred to as a buy leaseback. In a buy leaseback a company buys a business then leases it back to the original owner/operator. This allows the company that bought the business to receive steady cash flow from leasing the business to the original owner, while at the same time eliminating any operating risk since the original owner continues to operate the business. There are not many companies like Realty Income Corp. in this niche REIT industry. They are the best at this niche industry in the REIT sector. They have been excellent at picking the best retail business locations to invest in over the years. Realty Income Corp usually turns down about 90% of the potential retail businesses they analyze each year. They only pick the best locations to buy, locations that experience increasing foot traffic and increasing cash flow every year. Their method for picking excellent retail business locations to purchase and leaseback to the owner has worked very well for them and their shareholders. Realty Income Corp has increased its dividend by 5% per year since 1994 and by 14% in 2017. Over the last year growth has accelerated, with revenue increasing by 8% during 2017.
2. Does Realty Income Corp. have the largest market share in its industry? Yes. Realty Income Corporation is in a niche Retail REIT industry called Free Standing Retail Businesses. Most Retail REITs that rent their properties own whole shopping centers or malls. Free standing retail REITs own free standing retail businesses, such as mini marts or gas stations. Realty Income's closest competitor is National Retail Properties. Realty Income has a larger market cap at about $15 billion as of 2018 vs. $6 billion for National Retail. Realty Income owns a larger number of free standing retail properties, at 5,000 properties vs about 2,764 for National Retail. Realty Income truly dominates its market within the Free Standing Retail Property REIT industry.
3. Does Realty Income Corp. have a long history of steadily increasing its dividends, cash flow, revenues, and earnings every year? Yes. Realty Income has steadily increased its dividend, sales, cash flow, and earnings by about 5% per year since it paid its first dividend in 1994. Revenue and dividend growth have actually increased over the last year, with revenue increasing by 8% during 2017 and dividend growth coming in at 14% for 2017.
4. Does Realty Income have little to no competition its industry? Yes. As was said, its closest competitor is National Retail Properties REIT which matches Realty Income on most fundamentals. Realty Income is double the size of National Retail Properties based on Market Cap and the number of properties it owns though. Realty Income also has a better long term track record. Realty Income's size and its track record give it an economy-of-scale that is hard for most companies within the Freestanding Retail REIT industry to compete with.
5. Is Realty Income the lowest costs producer in its industry? Yes. Although National Retail Properties matches Realty Income on most of its fundamentals, allowing National Retail to operate at similar costs, we still believe that Realty Income has the edge due to its much larger size and its better track record. Indeed, Realty Income's better track record proves to us that Realty Income only picks the very best locations to buy freestanding retail properties in. When analyzing Realty Income's property locations on their website, www.realtyincome.com, one can clearly see how valuable the retail property locations in their portfolio are. Realty Income's management clearly only picks the best retail property locations, which are mainly property locations that experience increasing foot traffic year after year after year.
6. Does Realty Income Corporation have a strong brand name? Yes. Realty Income Corp's name is well known in the investment community because of its excellent track record. Also, the retail companies that Realty Income buys properties from to leaseback are leading brands and leaders in their industries. Its top 20 tenants are some of the most well known companies in North America. Realty Income owns 203 Walgreens, 43 Fed Ex locations, 532 Dollar General stores, 53 L.A. Fitness locations, 468 Dollar General / Family Dollar stores, 32 AMC Theaters, 15 BJ Wholesale properties, 76 CVS Pharmacy properties, 134 Super America / Andeavor properties, 216 GPM Investments / Fas Mart properties, 25 Regal Cinema properties, 69 Rite Aid properties, 11 Lifetime Fitness properties, 159 TBC Corporation properties, 51 Wal-Mart / Sam's Club properties, 19 Freedom World / Camping World properties, 298 Circle K properties, 17 Treasury Wine Estates properties, 111 7-Eleven properties, and 14 Kroger properties. All of the details and updates on Realty Income's portfolio can be found at www.realtyincome.com.
7. Does Realty Income Corp. have little to no debt and can it easily manage its existing debt? Yes. Realty Income Corp has total debt of $6.1 billion as of 2018, which gives them a Debt/Equity ratio of 82%. Realty Income's yearly interest expense is $61 million, as of 2018. Realty Income produces yearly cash flow of about $875 million, as of 2017. With that said, Realty Income can service its debt with only about 6% of its cash flow going forward. So Realty Income's total debt is easily manageable going forward.
8. Does Realty Income Corp carry a substantial amount of cash on its balance sheet? Yes. It held $7 million in cash on its books, as of 2018. Realty Income Corp doesn't have a substantial amount of cash on its books relative to its debt, but most companies in the Retail REIT Industry don't retain much cash because they put the majority of their cash flow into shareholder dividends or into new income producing properties that produce steady cash flow. Also, 90% of the income from REITs is generally paid out to shareholders for the tax benefit. So most earnings produced by REITs are paid out to shareholders or invested back into new properties.
9. Is Realty Income expanding worldwide? No, because Realty Income only purchases properties within the United States. But they are growing across the United States. They have averaged $500 to $800 million worth of yearly aquisitions over the last ten years and they own properties in every state in the U.S. With that said, Realty Income analyzes many possible properties all across America to acquire each year, and narrows it down to the best. Indeed, Realty Income usually refuses to buy about 90% of the retail properties it analyzes, picking only retail properties in the very best locations.
10. Realty Income Corp is truly a leader in the Freestanding Retail REIT industry and continues to outperform its closest competitors. Realty Income Corp is trading at a valuation that is too high at this time but once it trades at the right valuation we will alert readers in our monthly newsletter.
Western Union (WU)
1. Does Western Union have a moat around its business protecting it from competition? Yes. Almost 85% of Western Union's revenues come from consumer to consumer money transfers. The other 15% come from Global Business Payments. Western Union is a leader in the Consumer to Consumer Money Transfer industry. Western Union truly dominates this niche industry, with more than 500,000 agents worldwide. The majority of consumer-to-consumer money transfers worldwide are transferred through Western Union because of their massive economy-of-scale and their presence in over 200 countries.
2. Does Western Union have the largest market share in its industry? Yes.
Western Union has the largest market share worldwide in Money Transfer & Bill Payment industry, with a little over 19%, and they dominate the Consumer to Consumer Remittance industry. Western Union has growing competition from PayPal and Moneygram International, but these companies cannot compete with the economy-of-scale in consumer-to-consumer cash transfers that Western Union has built worldwide. Moneygram International is Western Union's closest competitor in the Consumer-to-Consumer Remittance industry because the majority of Moneygram's revenue also comes from consumer-to-consumer money transfers.
3. Does Western Union have a long history of steadily increasing its dividends, revenues, cash flow, and earnings? Yes. Western Union has increased its dividend by 30% each year since they paid their first dividend in December 2006. Western Union's earnings and revenues have grown by 5% per year during the last 10 years. It's dividend has outpaced its earnings and revenue growth over the last ten years, but WU's dividend payout ratio is only 40% as of 2018. Also, Western Union has slowed its dividend growth to 20% over the last 5 years and will most likely slow it down more being that WU is continuing to grow earnings and revenues at about 5% a year as of the 1st quarter of 2018.
4. Does Western Union have little to no competition within its industry? Yes. As was stated, Western Union's closest competition in the Consumer to Consumer Money Transfer industry is Moneygram International. Moneygram International cannot compete with Western Union's economy-of-scale though because Moneygram is a much smaller company. Moneygram International's market cap is about $470 million compared to Western Union's market cap of nearly $9 billion. Moneygram International produced revenues of $1.6 billion compared to Western Union's $5.5 billion in 2017. It is hard for Moneygram International to compete with Western Union's massive economy-of-scale in the Consumer-to-Consumer Money Transfer payments industry. With that said Moneygram International has very similar fundamentals as Western Union. Western Union and Moneygram International produce gross margins of nearly 50%, as of 2018. But Western Union dominates the industry in sales and number of transfers. As long as this is the case Western Union will continue being the leader in Global Money and Payment Transfers industry and a great long-term investment in the Industry Leader Portfolio.
5. Is Western Union the lowest costs producer in its industry? Yes. Western Union's economy-of-scale in the Consumer-to-Consumer Money Transfer industry relative to its closest competitor enables Western Union to efficiently process consumer-to-consumer money transfers very efficiently, while producing gross margins of nearly 50%.
6. Does Western Union have a strong brand name? Yes. Western Union is easily recognizable by most people throughout the world. Indeed, most people think of Western Union when they need to send cash to another person quickly. The majority of consumer-to-consumer money transfers worldwide are processed through Western Union. While companies such as PayPal and many social networks are growing their volume of money transfers, Western Union will still continue to dominate the Consumer-to-Consumer Money Transfer & Payment industry because of its effectiveness and efficiency in transferring money quickly when people need it. Western Union was ranked 91st in the ranking list of top 100 most powerful brands worldwide by Tenet Partners for 2017.
7. Does Western Union have little to no debt and can it manage its existing debt very easily? Yes. Western Union had total debt on its books of $3 billion as of 2018. This is easily manageable for Western Union. Western Union's yearly interest expense is $141 million, as of 2018. Western Union held total cash on its books of $841 million, as of 2018. With that said, Western Union could service its debt for nearly 6 years with just the cash on its books. Also, Western Union produced total yearly cash flow of $735 million in 2017. So Western Union can easily service it's debt with only 19% of its cash flow each year going forward. That provides an excellent margin of safety for Western Union.
8. Does Western Union hold a substantial amount of cash on its balance sheet? Yes. Western Union held $841 billion in cash on its balance sheet as of 2018, representing about 10% of the company's size.
9. Is Western Union expanding worldwide? Yes. As was stated, Western Union has over 500,000 agents in over 200 countries. With that said Western Union has operations all over the world so most of their growth will come not from expanding to new countries, since they already operate worldwide, but will grow mostly through reaching more customers through their online presence and through increasing money transfer volume. Western Union is also a leader in remittance payments worldwide, which is the transfer of money by a foreign worker to his or her home country. This will provide a boost to Western Union's growth since the number of migrant workers worldwide continues to increase. Migrant workers make up almost 5% of the world population as of 2017, compared to 2.9% in 1990. Western Union's mobile app will provide the most growth in the coming years as money transfers though mobile are the fastest growing money transfer method for consumers. Western Union's online money transfer revenue increased nearly 30% each year over the last five years.
10. Western Union is truly an industry leader in the Consumer-to-Consumer Money Transfer industry and will continue to dominate the industry worldwide. With over 500,000 agents operating in over 200 countries Western Union has the economy-of-scale that will allow them to continue dominating the Consumer-to-Consumer Money Transfer industry, and to continue dominating the Remittance Payments industry. Also, with a strong presence in mobile money transfer payments worldwide, Western Union can streamline its existing infrastructure with its mobile & online money transfer operations to continue dominating the industry. Western Union's online transfer payments grew nearly 30% in 2017 and will continue growing strongly going forward. This may boost Western Union's growth more than many investors imagine. With that said, we see Western Union growing earnings by at least 5% to 10% per year over the next 10 to 20 years. Western Union's earnings growth combined with dividend growth should provide investors with at least total compounded annual returns of roughly 10% going forward.
Cisco Systems (CSCO)
1. Does Cisco Systems have a moat around its business protecting it from competition? Yes. Cisco Systems is a leader in Internet infrastructure. Indeed, the Internet cannot function without its products. Cisco Systems dominates the Internet Infrastructure industry within the Networking & Telecommunications industry. Cisco Systems dominates the world market for routers, Internet switches, and data centre equipment. Cisco Systems has an economy-of-scale that few companies can compete with in these three Internet & Networking infrastructure products, with a worldwide market share that is over 60% as of 2017. These three products are essential for the Internet to function, and with most of the world's Internet providers using their products the world will continue replacing or installing their products whenever new Internet infrastructure is built. With Cisco Systems dominating the market in the Internet Infrastructure industry most companies will continue using Cisco's products so that everything streamlines together efficiently with Cisco's existing switches, routers, and data centre equipment. Indeed, Cisco Systems has reached the economy-of-scale that gives them a monopoly in the Internet Infrastructure industry.
2. Does Cisco Systems have the largest market share in its industry? Yes.
As was stated, Cisco Systems dominates the Internet Infrastructure industry. Cisco has a 70% market share worldwide in ethernet switches, and a 60% market share routers & data centre equipment, as of 2017. Cisco's closest competitor is Hewlett Packard Enterprises (HPE) but HPE comes nowhere close to Cisco in Internet Infrastructure products, and HPE has a much smaller market cap at $26 billion vs. Cisco's $215 billion market cap. Cisco's revenue is much larger too, $50 billion vs. $29 billion for HPE, as of 2018. With that said, there are no companies with the dominant position that Cisco has in the Internet Infrastructure industry. Cisco's steady growth year after year is guaranteed because Internet data traffic continues increasing every year. In order for Internet Data traffic to increase companies must buy Cisco's products. Indeed, the Internet must have Cisco's products to function.
3. Does Cisco Systems have a long history of increasing its dividends, revenues, cash flow, and earnings every year? Yes. We believe Cisco's sales will experience rapid growth in the coming years as Internet data traffic grows very rapidly in the coming years, forcing companies to build out existing and new Internet infrastructure in the coming years. Also, telecom companies such as the three companies in our portfolio will start building their 5G infrastructure starting in 2018 to 2020. This will provide tremendous internet infrastructure spending in the coming years. Cisco Systems has increased its dividend by 27% a year since they paid their first dividend in 2011 and increased its dividend by 19% in 2017. This shows us that Cisco's management is very confident that Cisco will record strong growth going forward.
4. Does Cisco Systems have little to no competition its industry? Yes. Cisco Systems has built an economy-of-scale in the Internet Infrastructure industry that gives it a monopoly position in the sale of routers, switches, and data centre equipment. Cisco Systems has a 60% worldwide market share in the sales of these three products. HPE is Cisco's closest competitor overall but Cisco's only close competition in router sales is Juniper networks, which has a 30% market share as of 2017. HPE is Cisco's closest competitor in the ethernet switch market with a market share of 10%. Cisco Systems does have a few competitors in the Internet Infrastructure industry but continues to dominate the industry by a wide margin. A good website to keep up with Cisco's competitors is www.networkworld.com
5. Is Cisco Systems the lowest costs producer in its industry? Yes. When competitors the profitability of Cisco's competitors we can clearly see that Cisco Systems is able to sell its products at competitive prices with a much better profit margin. Cisco System's operating margin is 26%, and its gross margin is 50% as of 2018. HPE's operating margin is about 3%, and its gross margin is 25% as of 2018. Juniper Network's operating margin is 18% and its gross margin is 50%, as of 2018. This shows that Cisco can sell their products at the lowest cost possible to compete with its competitors, while still being a more profitable company than its competitors.
6. Does Cisco Systems have a strong brand name? Yes. Cisco System's dominant position in the Internet Infrastructure industry (with a 70% worldwide market share in the Ethernet switch industry, and a 60% worldwide market share in the router & data centre equipment industry) puts the company in a strong position. IT companies worldwide easily recognize and use Cisco System's products for their IT infrastructure needs. Cisco was ranked number 15 by Interbrand for Best Global Brand in 2015 and ranked number 15 by Forbes for Most Valuable Global Brand for 2016.
7. Does Cisco Systems have little to no debt and can it manage it's debt very easily? Yes. Cisco Systems has total debt of $40 billion but holds nearly $75 billion in cash as of 2018. So Cisco Systems is in a very safe position with leverage, having the ability to pay off all of its debt with cash and still have roughly $35 billion in cash leftover Even if Cisco were to just continue paying interest expenses on the debt they would still be in a very safe position. Cisco's total yearly interest expense was $923 million, as of 2018. So Cisco Systems could service its total debt for over 80 years with just the cash on its books. This shows investors how safe Cisco Systems is as an investment.
8. Does Cisco Systems hold a substantial amount of cash on its books? Yes. As was stated, Cisco Systems held $75 billion in cash on it's books as of 2018. So Cisco could pay off all of their debts and still he about $35 billion is cash on its books. This puts Cisco Systems in an extremely safe position.
9. Is Cisco Systems expanding worldwide? Yes. Cisco Systems operates in and has sold its products to over 200 countries worldwide. The majority of the world is connected to the Internet and the 3rd world countries with lower Internet penetration rates are now experiencing fast mobile connectivity to the Internet. As more people worldwide connect to the Internet and increasing amounts of data travel though the Internet, massive amounts of Internet & IT infrastructure will need to be built. Every time new IT and Internet infrastructure is built Cisco sells it's products & services, being that it's Internet & IT infrastructure products are essential for the Internet to function. I guess you could say that Cisco Systems is an Internet Utility. With that said, Cisco Systems has guaranteed worldwide growth built into it because Cisco is essential for the worldwide Internet & IT functionality.
10. Cisco Systems is truly a leader in the Internet & IT Infrastructure industry. Cisco has the leading market share in Ethernet switches, routers, and data centre equipment. As data traffic continues increasing every year more and more Internet & IT infrastructure will have to be built to enable this data traffic growth. The largest amount of Internet data traffic growth will be in mobile, as more and more people use mobile devices as their personal computers. Indeed, it is predicted that global mobile data traffic will grow by 53% per year through 2020. Total global mobile data traffic will grow from 3.7 exabytes per month in 2015 to 30.6 exabytes per month in 2020. This shows the massive growth in Internet data traffic taking place over the coming years. Cisco will be one of the essential companies that provide the Internet infrastructure that enables this Internet data traffic growth. We believe that Cisco Systems will provide investors with investor returns between 15% to 20% over the next 20 to 30 years, possibly more being that Internet and IT infrastructure will be one of the fastest growing industries for many years.
China Mobile (CHL)
1. Does China Mobile have a moat around its business protecting it from competition? Yes. Telecom & Mobile Communications companies in China have a built in monopoly in China, being that half of the shares of Telecom & Mobile Communications are owned by the Chinese Government. With that said China Mobile has the largest market share in Telecommunications infrastructure in China, handling nearly 70% of Internet & Telecom Mobile data traffic each year. China Mobile's only competitors are China Telecom and China Unicom. These two companies handle the majority of the remaining Internet & Telecom/Mobile data traffic in China. China Unicom has a market share in the Mobile Operator industry of nearly 20% and China Telecom has a market share of nearly 10%, as of 2017. China Mobile has the largest economy-of-scale in the China Telecom & Mobile Industry, with a market cap of about $200 billion as of 2018, compared to China Unicom's $40 billion market cap and China Telecom's $42 billion market cap. China Mobile has a total subscriber base of nearly 1 billion users as of 2017, making it the largest mobile operator in the world. This economy-of-scale provides a massive moat around China Mobile's business that will provide them with excellent growth in one of the fastest growing sectors, as ever increasing amounts of mobile/internet data travel over China Mobile's massive Internet & telecom/mobile networks. Also, as China Mobile continues rolling out its nationwide 5G network growth will accelerate.
2. Does China Mobile have the largest market share in its industry? Yes. As was stated China Mobile has the largest market share in China's Mobile Telecommunications industry, with a market share of almost 70% and a total mobile subscriber base of about 1 billion subscribers in China. This not only makes China Mobile the largest Telecom Mobile company in China based on total subscribers, but also the largest Mobile Telecommunications company in the world.
3. Does China Mobile have a long history of increasing its dividends, revenue, cash flow, and earnings every year? Yes. China Mobile has increased its dividend by about 20% per year since they paid their first dividend in 2003, and they increased their dividend by 84% per year during the last five years. The reason it accelerated s much over the last five years is due to the fact the CHL has been paying out special dividends every year in recent years. This is one reason the stick has been relatively flat in recent years, which gives us a good entry price as of 2018.This is excellent dividend growth and we expect China Mobile to continue increasing its dividend by at least 10% a year going forward, possibly more since mobile data traffic is expected to increase 50% a year worldwide through 2020. Revenue and earnings growth has been flat over the last five years due to a lot of CHL's cash flow being diverted to new Telecom infrastructure invest, such as a nationwide 5G network, but earnings have grew by almost 10% for 2017. China Mobile earnings growth will accelerate as the 5G nationwide network and new Telecom infrastructure increases productivity and margins going forward. We believe CHL will continue recording excellent earnings and cash flow growth being that they are the leader in an industry that has excellent and guaranteed growth over the coming years.
4. Does China Mobile have little to no competition in its industry? Yes. China Mobile's two closest competitors, China Telecom & China Unicom, will have a hard time competing with China Mobile's massive mobile network in the Mobile Operator industry. With a total mobile subscriber base of nearly 1 billion China Mobile will continue to dominate the mobile Internet data traffic in China and provide the majority of the mobile infrastructure needed to enable this increasing amount of mobile internet data traffic to function efficiently in China.
5. Is China Mobile the lowest costs producer in its industry? Yes. Because of China Mobile's massive economy-of-scale in the Mobile Operator industry it can provide mobile and Internet services at competitive prices more efficiently and profitably than its competitors. This shows in its gross margins, return on equity, and its net profit margin. China Mobile has gross margins of 70%, net profit margins of nearly 16%, and a return on equity of 12% as of 2018. China Mobile's closest competitors are close on some fundamentals but overall China Mobile's profitability is stronger. China Telecom's gross margin is 80%, its net profit margin is 5%, and its return on equity is 6% as of 2018. China Unicom's gross margin is 88%, its net profit margin is 1%, and its return on equity is 1% as of 2018. These numbers prove that China Mobile can provide China's mobile services efficiently at the lowest costs in the industry, providing them with leading profit margins in the Telecom Mobile industry.
6. Does China Mobile have a strong brand name? Yes. China Mobile has the strongest brand name in China's Mobile Operator industry, being that they have a nearly 70% market share in China's Telecom Mobile industry. Also, with nearly 1 billion mobile subscribers China Mobile has the largest number of mobile users in the world. This gives China Mobile a very strong brand name by default. China Mobile was ranked as China's most valuable brand in 2015 by the British brand valuation consultancy British Finance. China Mobile was ranked 13th on the World's Most Valuable Brands list by British Finance.
7. Does China Mobile have little to no debt and can it easily manage its total debt? Yes, very easily in fact. China Mobile held about $16 billion in total debt and held total cash on its books of nearly $4 billion, as of 2018. It's debt is a little high relative to its cash, but CHL's yearly interest expenses on its debt was only $32 million for 2017. So CHL could service its total debt for nearly 125 years just with its cash. Of course, most of the debt matures way before that but it just shows that CHL can service its debt for many years with just its cash. China Mobile's total yearly earnings were nearly $16 billion for 2017, so technically China Mobile could pay off all of its debt with just one year of earnings. China Mobile's debt is easily manageable going forward.
8. Does China Mobile hold a substantial amount of cash on its books? Yes. China Mobile held total cash on its books of $4 billion as of 2018, which is about 25% of its yearly earnings.
9. Is China Mobile expanding worldwide? Yes. China Mobile's core Mobile Operator telecom mobile networks are in China. China Mobile's core mobile network of 1 billion subscribers as of 2018 will continue growing and continue using more mobile data services every year. But China Mobile will also grow internationally through mergers & acquisitions in other countries, or through partnerships. One such investment was China Mobile's 2014 purchase of a nearly 20% stake in Thai Telecom's group True Corp for nearly $1 billion. China Mobile can strategically acquire assets outside of China that streamline with its business. Indeed, with its massive cash flow China Mobile can easily acquire or invest in any opportunities outside of China when an opportunity presents itself.
10. China Mobile is truly an industry leader in China's Mobile Operator industry and will become an international leader as worldwide expansion opportunities present themselves. China Mobile is a world leader in the Telecom Mobile industry with the largest number of subscribers in the world, at 1 billion and growing. The majority of China Mobile's growth will come from growing mobile data growth, as mobile users increase the amount of data they use on China Mobile's mobile network. Indeed, mobile data is expected to grow by 50% a year through 2020. It may grow at a faster rate in China being that China's economy is one of the fastest growing economies in the world. China Mobile is the most profitable Mobile and Telecom company in China, and one of the most profitable companies in the world. China Mobile's profit margin was 16% and they produced total earnings of nearly $16 billion in 2017 on revenue of $102 billion. We believe China Mobile will continue to produce total returns for its investors of roughly 10% to 15% over the next 20 years, possibly more being that it has a monopoly position in one of the fastest growing industries going forward. This is excellent time for readers to buy CHL stock because CHL is only trading for 5 times cash flow as of the beginning of 2018.
Apple Inc. (AAPL)
1. Does Apple have a moat around its business protecting it from competition? Yes. Apple is the world leader in premium smartphones, tablet computers, laptops, and PCs. That is one reason Apple is named the most valuable company in the world year after year by publications such as Forbes or Fortune. Also, Apple has an Eco system connected to all of its products that people do not want to give up once they have been in its Eco system for a long time. My wife and I have experienced this first hand. Once we bought our first Apple products, which were an iPod and iPad, we ordered so much through our iTunes account that we always buy Apple products when we decide to buy a new phone or PC. Add that to the fact that the quality of Apple's products are fantastic overall, one can see how Apple's unique high-quality products provide a powerful moat around its business. It is very hard for any of Apple's competitors to beat Apple on quality and it's flawless functionality. Samsung tries every year and while it may seem they come close to Apple at times Apple shows its ability to lead the premium phone and PC industry with its leading profit margins. Apple still has the highest profit margin in its industry. Apple's profit margin is 22% while Samsung's profit margin is 17% as of 2018. Apple has many moats surrounding its business protecting it from competition, and readers will see more in the coming sections.
2. Does Apple have the largest market share in its industry? Yes. Apple's iPhone, Mac PC, and iPad make up the largest percent of its sales, at nearly 80% of sales, so I will focus mostly on its smartphone, Mac PC, and iPad sales. Samsung is Apple's closest competitor, with the second largest share in the Smartphone & Tablet industry. Although Samsung sells many other electronic products such as television sets and semi-consuctors, which Samsung is a leader in, we will be focusing on its Premium Smartphone, Tablet, and PC segments since those are the segments that Apple dominates in. As we will show, even if Samsung produces many other products Apple still beats Samsung in total revenues and profits year after year. Apple's iPhone contributed to nearly 62% of its sales, its iPad contributed to nearly 9% of its sales, and its Mac PCs contributed to 11% of its sales in 2017. Apple's operating system for its iPads have a 50% market share in the Tablet Computer industry as of 2017. Google's Android OS has a 40% market share in the Tablet industry, which is the OS that Samsung and numerous other Tablet computer makers use as of 2018. So this shows the dominance that Apple has in the Tablet Computer industry. Samsung actually has an overall larger market share in smartphones, selling 27% of the world's smartphones vs. 15% for Apple, but Apple still leads in revenues and profits. Apple produced total revenue of $240 billion and a net profit $50 billion for 2017. Samsung produced revenue of $223 billion and a net profit of $38 billion for 2017. This shows how powerful Apple's pricing power for its products are and how strong its leadership position in high-quality premium smartphones, laptops, and iPads is.
3. Does Apple have a long history of increasing its dividends, revenues, cash flow, and earnings every year? Yes. Although Apple stopped paying a dividend in 1995 they decided to start paying a dividend again in July 2012. Apple has steadily grown its dividend every year by 20% since they first started paying a dividend again in July 2012. Apple paid a quarterly dividend of $0.43 in 2013. By 2017 Apple was paying a quarterly dividend of $0.63 per quarter. As far as revenue and earnings growth, we will focus on only the last few years since Apple has mainly become an iPhone and iPad company over the last few years, being that the majority of its sales come from these two products. Over the last 3 year Apple's earnings and revenue growth has been because of its decreasing sales of its top two products, but we believe that Apple's market share in its other product categories, such as iTunes, will grow at a faster rate and balance out any decrease in its sales of core products. In 2017 Apples fastest growing segments were Services and Other Products. The Services segment consists of the App store, Apple Care, iTunes, Licensing, and Apple Pay. This segment grew by 23% in 2017. Apple's Other Products segment consists of Apple TV, Apple Watch, Beats products, Airpods, iPods, and accessories. This segment grew by 16% in 2017. We believe Apple's revenue will grow about 5% to 10% per year over the next 20 to 30 years.
4. Does Apple have little to no competition in its industry? Yes. Apple's only close competitor in premium smartphones and tablet computers is Samsung. But the fact that Samsung never reaches the profitability and branding strength that Apple has reached shows that Apple dominates the Premium Smartphone & Tablet Industry. Even with Samsung's dominant market share in the Smartphone industry of nearly 30%, as of 2017, Samsung cannot produce the revenue and profits that Apple produces. Apple produces yearly revenue of $240 billion and net profits of nearly $50 billion of 2017. Samsung produced total revenue $223 billion and a net profit of $38 billion for 2017. The most recent smartphones built, the iPhone X & the Galaxy S9 sell $999 and $648 for the lowest-costs models. This shows the pricing power that Apple has, and it shows the premium buyers are willing to pay for the latest iPhone model.
5. Is Apple the lowest-costs producer in its industry? Yes. As we have shown Apple is able to produce premium iPhones, iPad tablet computers, laptops, and personal computers at the highest net profit margins in the industry. Its closest competitor, Samsung, produces its consumer electronics at lower profit margins than Apple. Samsung's net profit margin is 17% vs. nearly 22% for Apple. This shows the pricing power that Apple has. Apple is able to produce its products at excellent costs and sell its products at an industry-leading profit margin.
6. Does Apple have a strong brand name? Yes, the best brand in the world by many publications and company rating agencies. Publications such as Fortune and Forbes have listed Apple as the most valuable brand in the world year after year over the last few years. It shows in Apple's profit margins. Customers are still willing to pay top dollar for its products, providing Apple with the highest profit margins, at nearly 22%, in the Computer & Mobile Device industry.
7. Does Apple have little to no debt and is its debt easily manageable? Yes. Apple has total debt of $122 billion and a cash balance on its books of $77 billion as of 2018. Also, Apple's interest expense million was $2.5 billion as of 2018. So technically Apple could service its debt for about 30 years with just its cash balance.
8. Does Apple hold a lot of cash on its books? Yes. Apple has total cash on its books of $77 billion as of 2018. This is roughly 1.5 times its totally yearly earnings and enough to service it's total debt for nearly 30 years going forward. This massive cash balance gives Apple plenty of leeway to pay off debt, research new products, increase its dividend at faster rate, or acquire IT companies at a discount that streamline well with its existing products & services.
9. Is Apple expanding worldwide? Yes. Apple sells its products in nearly every country through retail dealers and mobile service carriers, 125 countries as of 2017. There are roughly 220 countries in the world as of 2018, so Apple still has a lot of growth ahead while it expands it sales to the remaining 95 countries of the world. Apple also owns and operates nearly 500 Apple stores in 20 countries. A little over half of the stores are in the U.S. as of 2017. Apple has plenty of potential growth worldwide and still has many countries to expand its products into.
10. Apple is truly an industry leader in the Premium Computer & Mobile Product industry. With the largest revenue and net profits in the industry, at $230 billion in revenue and nearly $50 billion profit as of 2017. Apple continues to sell its products at the highest profit margins in the industry, with a net profit margin of nearly 22% as of 2018. Apple's closest competitor, Samsung, has a profit margin of about 17% as of 2018. Apple continues to be named as the most valuable brand in the world by publications such as Forbes and Fortune. Apple tends to retain its existing customers at a high rate, being that once Apple's customers experience the quality of its products and once they are in their Eco system Apple users tend to continue upgrading or sticking to Apple products. Apple iPhone users have a retention rate of about 90% according to Apple Insider. Apple will provide investors with total yearly returns of at least 5% to 10% over the next 20 to 30 years. We recommend readers purchase Apple's stock anytime it trades below 8 times cash flow in 2018.
CVS Health Corporation (CVS)
1. Does CVS have a moat around its business protecting it from competition? Yes. CVS dominates the Pharmacy Chain Store industry in the U.S. with over 9,600 store locations as of 2017. CVS's closest competitor is Walgreens Boots Alliance (WBA) which has around 8,600 hundred pharmacy chain stores across the U.S. While Walgreens is very close to CVS in market share CVS still continues to dominate the industry. Also, CVS has much better growth prospects going forward with its focus on PBM (Pharmacy Benefits Management), due to its 2006 purchase of Caremark Rx and its recent 2014 purchase of Omnicare Inc. (the leading provider of pharmacy services to long-term care facilities). CVS also purchased Target's pharmacies and retail clinics in 2015, which added 1,600 pharmacy store locations to CVS. Together Walgreens and CVS dominate the Pharmacy Chain industry, with a 50% market share nationwide, but CVS continues to dominate with a nearly 30% nationwide market share as of 2017. CVS's stronger revenue & earnings growth together with its dominant market share in the Pharmacy Chain industry provide a moat around its business for many years to come. CVS's revenue and earnings grew by nearly 20% over the last three years, while Walgreens revenue and earnings have grown by about 14% over the last three years. CVS's focus on PBMs will help it streamline its customers' pharmacy benefits with their pharmacy drug purchases, thus providing CVS with more control over costs and more business efficiencies. This provides an even larger moat around CVS's business protecting it from its competitor.
2. Does CVS have the largest market share in its industry? Yes. As was stated, CVS now has over 9,600 pharmacy chain store locations nationwide and bought two Pharmacy Benefits Management companies over the last few years. This gives CVS a nearly 30% market share in the Pharmacy Chain industry as of 2017. Walgreens has a roughly 20% market share in the industry. With CVS's faster growth CVS may grow its market share at a faster rate than Walgreens in the coming years. Even if they don't though, Walgreens and CVS will continue to be neck and neck as far as market share competition is concerned. We believe that CVS will continue to dominate the Pharmacy Chain industry, based on its better growth prospects and its focus on buying Pharmacy Benefits Management companies.
3. Does CVS have a long history of increasing its dividends, revenue, cash flow, and earnings? Yes. CVS has an excellent dividend growth history. CVS has increased its dividend by nearly 8% per year since they paid their first dividend in 1987. CVS's first quarterly dividend was $0.055 per share paid to shareholders on October 20, 1987. CVS's quarterly dividend is $0.50 per share as of 2018. That is total dividend growth of about 800% over 31 years. CVS has increased its dividend at a faster rate over the last five years, increasing it by 18% per year. CVS is a true dividend aristocrat and its dividend payout ratio is only 30% as of 2018, so CVS still has plenty of leeway to increase its dividend every year going forward even during years when the economy slows. Most likely though, even during years when the economy slows CVS's revenues and earnings will continue increasing because people always buy the essential drugs that they need, even during hard times. CVS's revenue and earnings continue steadily growing year after year. Over the last three years CVS's revenue and earnings grew by about 20%, and may accelerate going forward as over 75 million baby boomers are retiring in the U.S. and will require more medicine as they age.
4. Does CVS Health have little to no competition? Yes. The only competition CVS has is Walgreens Boots Alliance, which has a market share that is close to CVS, and has similar fundamentals. But CVS Health has grown revenue and earnings at a faster rate. Also, CVS Health continues to dominate the Pharmacy Chain industry by a few percentage points relative to Walgreens. CVS Health may gain in market share going forward as it has better growth prospects than Walgreens going forward from 2018, such as managing pharmacy benefits in-house and its 2014 aquisition of all of the Target pharmacies.
5. Is CVS Health the lowest costs producer in its industry? Yes. While its closest competitor Walgreens Boots Alliance produces a net profit margin close to CVS Health's profit margin, 3.3% versus 3.5% for CVS, we believe that CVS Health will decrease costs & increase profit margins going forward as it gains market share in the industry and realizes long-term costs savings from managing customers' drug benefits in-house. CVS has increased margins over the last five years, increasing their net profit margin from 2.5% to 3.5% as of 2018.
6. Does CVS Health have a strong brand name? Yes. Indeed, CVS Health was listed as the 18th most valuable brand by Fortune for 2016. The ranking is up from 30 in 2015, and with CVS Health becoming more health conscious with their recent ban on selling any tobacco products their brand ranking may continue improving every year. This is way ahead of Walgreens Boots Alliance, being that Walgreens is not even in the top 100 most valuable brands Fortune ranking.
7. Does CVS Health have little to no debt and is its total debt easily manageable? Yes. CVS Health has about $27 billion of debt on its books as of 2018, which is down from $28 billion in 2017. CVS Health has a cash balance of $2 billion as of 2018, and they produced cash flow of about $10 billion in 2017. So CVS Health's total debt is only 2.8 times their yearly cash flow. CVS Health's interest expenses on their total debt were only $1.1 billion for 2017. So CVS Health's yearly cash flow of $10 billion covers its yearly interest expense by nearly 10 times. So CVS can easily service its total debt going forward.
8. Does CVS Health hold a large amount of cash on its books? Yes and no. It cash balance of $2 billion isn't tremendous relative to its size but is plenty of cash for a non-cyclical company like CVS that produces massive cash flow year after year.This is also plenty of cash to use for emergencies or to service its existing debt.
9. Is CVS Health expanding worldwide? No. CVS Health owns and operates its pharmacy chain stores only in the U.S. so in this case we added the dominant pharmacy chain of the U.S.
10. CVS Health passes all of the criteria to be a leader in its industry, except for number 9, but that criteria doesn't matter in this situation since we added CVS Health to the Industry Leader Portfolio as a nationwide leader in the U.S. Pharmacy Chain Industry. Prescription drug sales in the U.S. grew by about 10% in 2017, and are expected to grow by 6% to 8% going forward. Prescription drug sales are expected to grow by at least 6% going forward through 2025 according to the Family Kaiser Foundation. So we here at Building Wealth expect CVS Health investors to experience total yearly compounded gains (capital gains plus dividends & dividend growth) of 10% to 15% going forward over the next 29 to 30 years. CVS Health is trading at an excellent price as of the beginning of 2018, trading for about 9 times cash flow. We recommend readers purchase CVS shares anytime they are trading under 8 times cash flow during 2018.
Duke Energy (DUK)
1. Does Duke Energy have a moat around its business protecting it from competition? Yes. In general utility companies all have moats around their businesses, being that typically their utility operations have a monopoly in each area they operate in and being that utility rates are typically regulated by the government. With that said, Duke Energy's moat around its business goes one step further because they are the largest utility company in the US, with a market cap of about $60 billion and yearly revenue $23 billion as of 2017. Duke Energy's closest competitor is Southern Company, with a market cap of $46 billion and produces yearly revenue of $23 billion. Southern Company is very similar to Duke Energy, as far as market fundamentals and size go, but we will focus on the largest utility company for the Industry Leader Portfolio. With that said, Southern Company is also a great company for investors that want to add a second utility to an industry leader portfolio. Both companies have an economy-of-scale that can easily streamline large aquisitions throughout the U.S. and give them larger utility monopolies throughout the U.S. We believe Duke Energy will be able to streamline large utility aquisitions more easily though going forward, given its massive size.
2. Does Duke Energy have the largest market share in its industry? Yes. Duke provides energy to nearly 7.5 million customers in the Carolinas, Florida, Ohio, Kentucky, and Indiana as of 2017. They also provide natural gas services to 1.5 million customers in the Carolinas, Ohio, Kentucky, and Tennessee. It's total electric generating capacity measured in at about 50,200 MW as of 2018. It's closest competitor, Southern Company, measured total electric generating capacity of 46,000 MW as of 2018.
3. Does Duke Energy have a long history of increasing its dividends, revenue, cash flow, and earnings every year? Yes. Duke Energy has increased their dividend by 5.5% per year since 1987, and by about 3.2% over the last 5 years. That's total dividend growth of about 410% over 30 years. While their dividend growth decreased over the last five years Duke increased their dividend by 5.5% in 2017. Duke Energy's revenue and earnings increased by about 10% over the last three years. Duke Energy provides us with safe and steady dividend and earnings growth going forward. Indeed, Duke Energy is in a non-cyclical industry with government regulated rates. This means steady earnings and dividend growth is guaranteed for us going forward.
4. Does Duke Energy have little to no competition? Yes. In general, large utilities have built in monopolies. With that said Duke Energy is the largest utility in the U.S. which gives it an economy-of-scale that can easily streamline large aquisitions with its existing infrastructure. Duke Energy's closest competitor, Southern Company, is in the same position. This is why we say that Southern Company is a good addition to an industry leader portfolio for those investors that want to diversify their utility holdings more. Duke Energy has an economy-of-scale that is hard to beat though, which is why Duke Energy has been our top utility pick for the Industry Leader Portfolio since we started it in 2009.
5. Is Duke Energy the lowest costs producer in its industry? Yes and no. Utility rates, in general, are regulated by the government. So while it is hard for utilities to raise rates based solely on market rates and efficiencies, regulated rates do provide steady predictable cash flow & dividends for investors. With that said, Duke Energy's profit margins are excellent. Duke's profit margin is nearly 14% as of 2018. It's closest competitor, Southern Company, produces a profit margin of about 4% as of 2018.
6. Does Duke Energy have a strong brand name? While Utilities don't necessarily rely on branding to sell their services, being that they have built in monopolies in the areas the provide utilities services is, the largest utilities do have strong branding power in the states they operate in. Given Duke Energy's size in the states they provide utility services in, Duke has a brand that residents in those states easily recognize. Duke was ranked 63 by Forbes on the America's Top Public Companies ranking, and ranked 106 on America's Best Employers list for 2017.
7. Does Duke Energy have little to no debt, and is its total debt easily manageable going forward? Yes. Duke Energy's debt is a little high relative to it's equity, at 130%, but it's yearly interest expenses are easily manageable going forward. Utilities in general carry higher debt loads than many other industries, being that their cash flow is regulated and guaranteed every year. Duke Energy held total debt on its books of $54 billion and produced yearly cash flow of $7 billion, as of 2018. Duke Energy's yearly interest expense on it's total debt was about $2 billion for 2017, so their yearly cash flow covers their interest expenses 3 times over. With that said, Duke Energy can easily service it's existing debt going forward.
8. Does Duke Energy hold a large amount of cash on its books? Yes and no. At times Duke holds a large amount of cash but not at all times. Utilities, in general, don't normally hold large amounts of cash being that the Utility industry has regulated steady cash flows built into it. Also, the Utility industry is a capital intensive industry. Duke Energy held total cash on its books of nearly $350 million, as of 2018. This is small relative to its yearly cash flow of $7 billion but good enough for a company like Duke Energy that produces guaranteed steady cash flow year after year after year.
9. Is Duke Energy expanding worldwide? No. This doesn't really apply to Duke Energy since Duke only operates in the U.S. With that said, Duke is continuing to expand throughout the U.S. Duke Energy merged with Progress Energy of Florida in 2012, forming the largest electric Utility in the U.S. Duke Energy acquired Piedmont Natural Gas, which expanded their natural gas services into the Carolinas and Tennessee. Duke Energy serves 7.4 million electric customers and more than 1.5 million natural gas customers, as of 2018.
10. Duke Energy continues to be an industry leader and a great addition to the Industry Leader Portfolio. Duke Energy is trading at an excellent price as of 2018, trading for 7 times cash flow. We recommended readers buy more shares of Duke Energy in each of Building Wealth's monthly newsletters during 2018.
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