Portfolio: Q1 2021 Review

by The Compound Investor

It really doesn’t feel like three months have passed since the last portfolio update. Domestic stocks largely continued where they left off, with the S&P 500 gaining another 6.2% inclusive of dividends in Q1. That came amid a $1.9t stimulus package and the ramping up of vaccine programs across the world. Speaking of stimulus, the numbers look vast. The proposed American Jobs Plan would add another couple of trillion dollars, around half of which is in the form of infrastructure investment. That means we are talking beyond 20% of GDP, albeit spread over a number of years and with potential tax hikes thrown into the mix too.

Turning back to equities, the S&P 500 Total Return Index is now up around 60% over the past year. That seems almost bizarre given what has occurred in that time. Okay, a big chunk is simply the recovery from the early-2020 sell-off, but even on a pre-COVID basis the index has gained over 20% in the past 14 months. The S&P now trades at a forward earnings yield of around 4.5%, pretty low versus its historical average. Or put another way, that means its price-earnings ratio is now historically high. No wonder that many folks are using the “bubble” word a lot.

At the same time, conditions in terms of interest rates and money supply still remain positive for stocks. Imagine a world in which the S&P 500 traded at its ten-year average earnings yield of circa 6.25%. It would be very attractive given the 10-year Treasury rate stands at around 1.7%. That is not to say that everything is hunky dory. My unscientific study is to keep an eye on what makes the headline news section over on Seeking Alpha, where it feels like there has been an explosion in news pieces devoted to SPACs, IPOs, NFTs, ARK ETFs, cryptocurrencies and so on. That all looks a bit bubbly. Note also that the NASDAQ 100 trades at a forward PE ratio of circa 35-40. Suffice to say that looks pretty darn high too.

Micro Portfolio

As for this site’s portfolios, the first quarter offered up a couple of its own milestones. Firstly, the Micro Portfolio passed the four figure mark on the back of steady contributions. Four of the five positions were actually under performers in Q1. Exxon Mobil, which returned over 35% last quarter, was the standout name as Brent crude gained circa 20% in the period. Coincidentally the Micro Portfolio produced the exact same dividend income last quarter as it did in Q4, albeit via a different route.

Excluding Disney, the Micro Portfolio trades at almost exactly the same valuation as the S&P 500. That means that its share of the annual profit generated from selling Coca-Cola, Lay’s, Big Macs and so on is currently worth around 4.5% of the portfolio’s market value. That does not scream value, but it looks okay versus what else is on offer out there. A portion of that profit will be shared directly – as evidenced by the cumulative dividend cash received to date – with the rest pumped back into their respective businesses in order to drive future growth of earnings and dividends. At the end of Q1, book cost stood at $1,000; the market value of equities at $1,147.66; and untouched net dividend cash at $9.78.

Coffee Can Portfolio

The Coffee Can Portfolio notched up a similar milestone, albeit at an order of magnitude higher. It hit the five figure mark, even without any fresh contributions last quarter. Again that was thanks to the circa 35% return of Exxon Mobil. High yielding telecom dog AT&T held its own this quarter, while global brewer Anheuser-Busch InBev underperformed after a strong Q4 last year. As with the Micro Portfolio, the Coffee Can Portfolio also received the exact same amount of dividend cash this quarter as it did in Q4 2020. More names will of course find their way into the portfolio as the months and years roll by.

In terms of performance, AT&T has been the main drag here so far. The cost basis of the portfolio’s investment in the firm stands at around $29.55 per share, while Dallas-based AT&T has already returned over a dollar per share by way of dividend cash. Its total return in the nine months to March 31 roughly matched its 7% annualized dividend. Obviously that is well below the wider S&P 500 index.

Though somewhat frustrating, returns from the wider market have been driven not just by profit growth, but expanding valuations too. A couple of years ago you could buy the S&P 500 for around 17.5x the annual earnings of its constituents. Today, you have to pay around 22x expected annual profit to own largely the same group of stocks. That is not a trend that can carry on forever, however favorable the macro environment may be for equities. The weighted price-earnings ratio of the Coffee Can Portfolio currently stands at around 16, with a 4.6% underlying dividend yield. Book cost remains at around $9,500, with circa $235 in cumulative dividend cash paid out so far in total.

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