This is an update about my recent transactions over the period of the past two months. Due to lack of time, I wasn’t able to do the summary until today. To make a long story short, I’m still in the process of increasing the share in defensive businesses. The goal is to bring it up to 50%. So all my recent transactions have been done in the context to meet this goal. In particular, I was looking to add to utilities, as this sector has been heavily underrepresented so far. Furthermore, I have decided to sell two cyclical stocks and put the proceeds in defensive investments. These are the transactions that I have made recently.
1) Sell Bank of America (BAC) – Buy Duke Energy (DUK)
I’m a big fan of the financial industry. Over the course of past years, I have been consistently growing this sector by investing in banks, credit card companies, asset management firms and insurers. At the end of September 2019, its share reached almost 20% of the total portfolio value. Finally, I have decided to reduce the exposure in this industry and put more focus on defense (Staples, Healthcare, Utilities).
With JPM and BAC, I had two similar American Banks in my portfolio. Both are mature and well-run financial institutions. However, I wanted to keep only one of them going forward. And as I slightly favor JPM over BAC, I kept JPM and sold out my BAC position at the end of September. Using the proceeds, I then have initiated a position in Duke Energy (DUK) acquiring 16 shares for a total investment of €1,413 ($1,555). This transaction has simultaneously increased my cash flow, as DUK offers a higher yield compared to BAC.
2) Sell Fuchs Petrolub (FUPEF) – Buy Coca-Cola (KO)
The second cyclical stock that I have decided to sell in order to boost the defensive stake is Fuchs Petrolub (FUPEF). Although FUPEF is one of the few German dividend contenders (17 consecutive years of dividend increases), I got less comfortable with its exposure to the automotive industry. It is the weak demand by this industry that continues to cause trouble for FUPEF. Admittedly, the Q3 results were better than expected. However, the figures are far away from being impressive. A brief overview: EBIT down by 17% YTD (EBIT outlook for 2019: -30% to – 20%), Free Cash Flow down by 37% YTD. Taking into account that FUPEF has been an underweight position in this portfolio, I decided to push the sell button in October.
The proceeds from this disposal were invested in Coca-Cola (KO). Why Coca-Cola? In October, KO came out with some solid Q3 figures – reporting organic growth of 5%. Finally, this beverage giant is showing us some organic growth. Fantastic! This was a good reason for me to add more shares and bring KO to a full position in this portfolio. I have executed a buy order acquiring 17 shares for a total investment of €830 ($918).
3) Recent Buy – Xcel Energy (XEL)
As mentioned, I’m still on a mission towards expanding the share of utilities. With Dominion Energy (D) and the recent purchase of Duke Energy (DUK), I’ve set a good foundation already. However, the building process isn’t finished yet. There are many reasons that justify my appetite for this sector. First, nearly all U.S. utilities have good three-year growth prospects. Second, they offer secure dividends and sound balance sheets. And last but not least, utilities have been outstripping the US equity market in recent years (see graph below). Sure, the valuation looks expensive based on historical levels. However, If interest rates keep heading toward 0%, utilities could keep rallying. There is no rule that states it has to stop.
When looking for utilities to add, I was particularly interested in those candidates with strong exposure to renewable energy. The reason: utilities with large renewable energy investment plans are expected to benefit from higher renewable energy growth forecasts. Xcel Energy (XEL) does meet these criteria very well. It is one of the largest renewable energy providers in the U.S. with about one quarter of its energy sales coming from renewable energy. On October 25, I have purchased 18 shares of Xcel Energy (XEL) for a total investment of €1,053 ($1,166).
4) Recent Buy – NextEra Energy (NEE)
You can’t speak about renewable energy without mentioning NextEra Energy (NEE). This company is a textbook example of success in this sector. Shares have doubled in four years, outperforming virtually every other stock in the industry. As a result, NEE became the world’s first utility with a market capitalization of more than $100 billion. Above all, NEE’s success is largely based on its clean-power business. According to Morningstar, NEE gives investors the best of both worlds: a secure dividend and industry-leading growth potential. If I can have a safe dividend AND strong growth potential at the same time, you won’t see me hesitating to open the door and step in. On November 6, I have purchased 5 shares of NextEra Energy (NEE) for a total investment of €1,037 ($1,146).
I focus on what I want to own, what I want to add, and just do it. Month after month after month, regardless of market conditions. It’s a slow process because I don’t have a lot of cash to work with. However, I simply keep buying and over time this is how you build a portfolio of size. A portfolio that is centered around strong defensive companies. Consumer staples, Healthcare, and Utilities. I want them to represent 50% of my portfolio. Once this is in place, I move on and set a new goal. This is a simple but yet effective way of building an equity portfolio. You don’t need to have a PhD in finance to succeed. Instead, be dumb enough to be smart enough by keeping things simple.