Sunday, December 10, 2017

Justifying BBT for the 2017 Dividend Machine Portfolio

  • Interest rate increases should benefit banks

  • Inflation remains tame.

  • BB&T has the fundamentals needed to be a stock in the 2017 Portfolio


One of the old rules investors follow is that a progressive interest rate curve where longer rates are higher than shorter rates favors banks.  The reason is because a bank can lend money and receive higher income on that loan than they pay to the saver who deposited the money.   The spread is the bank's profit.



Image result for 2017 yield curve



















Inflation conundrum 


While we are told that the Federal Reserve will continue to gradually raise rates, we are also told there is basically no inflation.  

Most ordinary investors find this counter intuitive.  When interest rates go up we expect inflation.   But inflation has a lot of moving parts.  Going back to old adages, simply stated, inflation is defined as too much money chasing too few goods. 

United States Inflation Rate
 
The answer to the question of why inflation is technically hard to find is because of globalization. We do not have too few goods.  We have lots of goods and lots of money. Yet, interest rates are still going to be raised by the Fed.  and the upcoming raises should benefit banks.

BBT Dividend Machine Fundamentals



Therefore, I move onto the fundamentals of BB&T bank (symbol BBT) to support why I am adding this stock to my 2017 Dividend Machine Portfolio.

To review, I require a stock to deliver more income than I can get from a 2 year U.S. Treasury.  After all, stock investing is riskier than U.S. Treasuries, so you must demand more income.  BBT meets that goal, not by a lot but it does.  Currently the 2 year U.S. Treasury is paying about 2.3%.

Earnings per share (EPS) must be greater than dividend paid out.  Some investors like to use free cash flow and I encourage all investors to gather as much information as possible when they pick a stock investment.  I use EPS because I write for the ordinary investor and EPS is an easy value to find and understand.

Dividend and revenue growth are very important.  With or without formal measures of inflation, readers of this blog know that I concentrate on my future cash flow needs and I know my expenses will go up.  Therefore, a solid history of dividend growth is critical.

Like dividend growth, revenue growth is very important.  I looked at a lot of bank stocks and one of the main reasons I picked BBT is their revenue growth.

Finally, a good balance sheet lets me sleep at night.  It is not fail safe (just ask the owners of G.E.) but it is helpful.  I like a D/E ratio of 1 or less or within industry standard. MSN pegs industry standard D/E at .87.


 


Notice that BBT meets all the criteria.  It is not a growth or momentum stock and therefore I would not expect covered call options.  However, I have owned BBT for a while and I have sold a few calls over time.

I am long BBT and I added on Friday.  I still need to invest about $14,000 to complete my goal of investing $100,000 in Dividend Machines in 2017 and time is running short.  As with all my portfolios, I will track this performance and report on it periodically.   You can follow this portfolio by clicking on the Portfolio pages for 2017.

M* Money Madam

Disclosure:  Long BBT