This week, two of the portfolio holdings ranked in the Top 10: MMM and QCOM.
| Ticker | Account Value |
| MMM | 2,650.75 |
| QCOM | 2,668.00 |
The lowest amount belongs to MMM. In order to invest a minimum of $250 in MMM, I would need to purchase 3 shares this Monday.
However, doing so would create an exposure violation.
This is how the portfolio weights would look if prices remained unchanged from Friday’s close and three more shares of MMM were acquired.
And here are the exposure risk checks:
Purchasing three more shares of MMM would push the collective weight of MMM, QCOM, and TDS above the maximum allowed weight of 50.2% of any three stocks. Likewise, with LEG as the fourth most heavily weighted stock, the four most heavily weighted stocks would create a violation as well. A violation would also occur in the check for sector exposure.
Of course, a similar violation would occur with a $250 investment in QCOM.
Thus, for the first time since the Portfolio for the Ages reached what I considered to be a complete portfolio of 11 positions, we have the opportunity to add a new position. The highest ranked stock in the Top 10 ranking for the week, not already in the portfolio is VF Corp [VFC]. However, it is in the Consumer Discretionary sector, the same sector to which LEG belongs. Thus, investing in VFC would create a sector exposure violation; there would be excessive exposure to the subset of the Consumer Discretionary, Communication Services, Industrials, and Information Technology sectors.
The next candidate would be Lowe’s Companies Inc [LOW]. However, it too belongs to the Consumer Discretionary sector and so would create a similar violation.
The next candidate is Nacco Industries Inc. [NC] and because they do business in the Energy sector, an investment in NC will not cause an exposure violation. A $1,000 stake in NC requires the purchase of 27 shares.
Here are the exposure risk checks assuming the purchase of 27 shares of NC at $37.32.
Such an investment in NC does not create an exposure risk violation from either a stock or sector perspective. However, adding a 12th position does lower the maximum allowable stock1 weights.
And now that you know which company I will be acquiring, perhaps a better understanding of who they are is in order.
Nacco Industries Inc
Nacco Industries Inc [NC] went through a rebranding over a year ago and that is presumably why there is a disconnect between the legal name associated with their stock and the logo. I got over that inconsistency rather quickly. However, I did toil over two problems presented by this week’s Top 10 ranking. The first was that NC is rated as a ‘Sell’ in the last Sure Dividend report written on November 7, 2022, just after Nacco’s third quarter earnings announcement. If I were to add their ‘Buy’, ‘Hold’, or ‘Sell’ status to my filter, and rule out a ‘Sell’ as a candidate for investment, then the next eligible company would have been near-Dividend King, Wallgreens Boots Alliance [WBA]. The second problem was deciding whether or not to initiate a position in NC with a purchase of $1,000 worth of shares. This would be consistent with the first 11 additions to the portfolio, but inconsistent with the ‘at least $250’ approach of the past few months. Having read the above, you know where I landed. My reasons follow.
When Sure Dividend last reviewed NC, it was trading at $55. It has dropped 26% from that point and makes the company much more attractive from an entry perspective. I feel that unless the next earnings announcement is a disappointment, NC will be labeled a ‘Hold’ if not a ‘Buy’ in the next Sure Dividend report.
I chose to enter into this position in the same way as I did the first 11 positions, with a $1,000 stake. I will stick with the $250 installments whenever we’re adding to an existing position. I am contemplating skipping the next three weeks in order to re-establish the $250+ per week average. You’ll just have to wait and see what happens this coming weekend . . .
Here is the profile from Yahoo! Finance:
NACCO Industries, Inc., together with its subsidiaries, engages in the natural resources business. The company operates through three segments: Coal Mining, North American Mining, and Minerals Management. The Coal Mining segment operates surface coal mines under long-term contracts for power generation companies and an activated carbon producer in North Dakota, Texas, Mississippi, and Louisiana in the United States, as well as Navajo Nation in New Mexico. The North American Mining segment provides value-added contract mining and other services for producers of aggregates, lithium, and other minerals; and contract mining services for independently owned mines and quarries in Florida, Texas, Arkansas, and Indiana. The Minerals Management segment is involved in the leasing of its royalty and mineral interests to third-party exploration and production companies, and other mining companies, which grants them the rights to explore, develop, mine, produce, market, and sell gas, oil, and coal. The company was founded in 1913 and is headquartered in Cleveland, Ohio.
The Details
Data as of 2023-01-29
| Name | Nacco Industries Inc |
| Ticker | NC |
| Website | Investor Relations |
| Sector | Energy |
| Dividend Streak | 37 years |
| Last Price | $37.32 |
| Div Amt (quarterly) | $0.2075 |
| Ann Dividend | $0.83 |
| Last Ann Div Inc | 4.5% |
| Dividend Yield | 2.2% |
| Payout Ratio (ttm) | 8.8% |
| Beta (5-yr, mon) | 0.82 |
| P/E Ratio (ttm) | 4.00 |
| Margin of Safety | 47.4% |
Reasons to Invest
From my discussion above, one could argue that Nacco Industries just happened to be in the right place at the right time and really had not planets aligned, it would not become a member of the portfolio. Certainly VFC, LOW, and even WBA are much larger, well-known companies with longer dividend increase streaks (the first two being Dividend Kings). Those companies all seem like better fits. However, there are some good reasons for adding NC.
- The 71 companies in the Empire are no slouches. Nacco is one of the Top 10 coal producers in the US and the largest lignite coal producer.
- Energy has been our worst performing sector because NFG, the sole exposure in the sector, is down 22.5% since it was first acquired. While NFG does not have the level of future expected returns that would place it in the weekly Top 10, NC does.
- A P/E of 4.00 reflects the fact that Wall Street hates the volatility in earnings. But for a company that will be around $9 per share in earnings, that is insanely cheap. The average P/E of the S&P 500 right now is 21.48.
- Because of the low P/E Ratio, the margin of safety is high. I’ve placed a fair value at $55, but really it is not difficult to see NC trading at $65 in a couple of years.
- With a 5-year beta of 0.82, the volatility of earnings hasn’t exactly translated to volatility of share price.
- Yes, NC is a coal mining company. However, coal is not going anywhere. And Nacco has 110 years of coal mining experience.
I’ll end on this note. Nacco does the dirty work of providing homes with energy. It may not be renewable energy but it is reliable energy. There is only one Dividend King in the Energy sector, National Fuel Gas Co [NFG] with 52 consecutive years of annual dividend increases. The next four companies (to round out the Energy sector offerings in the Royal Dividends Empire) are:
- Exxon Mobil Corp [XOM] with 40 years
- Nacco Industries Inc with 37 years
- Chevron Corp [CVX] with 36 years
- Enbridge Inc [ENB] with 28 years
Nacco is the least known company of the bunch, but what great company2 they’re in. I will be purchasing 27 shares of NC on Monday morning.
1The maximum allowable weights from a sector perspective will never change, unless of course, a new sector is created.
2This pun was intended.