Income Builder Model Portfolio

Monthly Portfolio Review: March 2024

Publication date: April 3, 2024

Current portfolio holdings

FOR SUBSCRIBER USE ONLY. DO NOT FORWARD OR SHARE.

Executive summary

Energy and commodity stocks led the way in March, as a dovish Fed meeting led the market to reward inflation-sensitive names. Cyclicals generally outperformed growth.
Our top performing position was oil and gas producer Permian Resources (PR), which benefited from firmer energy prices.
Our worst performing position was communications tower operator Crown Castle (CCI), an interest rate sensitive name which declined modestly.
The weighted average dividend yield for the Income Builder Portfolio as of the end of March was 4.3%, versus approximately 1.3% for the S&P 500.
A strong performer for the portfolio this month was Williams (WMB), which owns and operates a major portion of America’s natural gas infrastructure. We discuss a recent analyst event that offered some compelling arguments supporting its long-term growth prospects.
At the end of this report, we as usual provide our updated Company Snapshots, which contain valuation, performance and earnings expectations for each stock in the portfolio.
Our Model Portfolio subscribers are our most valued customers. Please feel free to reach out to us at any time with questions or ideas: trish_and_rob@76research.com.

Performance review

With our monthly portfolio reviews, we take a look at the total portfolio as well as our individual positions in the context of the broader market. We find it useful to make reference to the S&P 500 Index, as reflected in the performance of SPY, one of the leading S&P 500 Index ETFs. The large majority of our recommended investments will typically be S&P 500 constituents, making it the most relevant benchmark.

Additionally, we make reference to the various sector ETFs that are managed as part of the SPDR family of ETFs. S&P breaks the entire S&P 500 down into 11 different industry sectors, which we can use to get better visibility into what is moving the market as a whole.

In any given period, there are often significant performance differences based on industry sector. Typically, especially in shorter time frames, the movement in individual stocks can be explained by these sector moves to a large extent.

It is important to emphasize that we do not like to measure investment success or failure on the basis of single month performance. Our purpose in examining monthly returns is really more from an analytical perspective.

We want to keep close track of what is causing our stocks to go up and down. In particular, it is helpful to understand if performance is driven by broader market trends or something very specific to the stock. (Professional investors refer to this as “attribution analysis".)

The Income Builder Model Portfolio returned just over 4% for the month, slightly ahead of the S&P 500 Index, which returned approximately 3%. Within the portfolio, individual position returns ranged from -2% for Crown Castle (CCI) to +15% for Permian Resources (PR).

While the market as a whole performed well, particularly in the second half of the month after the dovish Fed meeting, industry sectors usually associated with “value” led the way over “growth.” Energy in particular was a big winner, up about 10% during the month.

Inflation-sensitive businesses performed well in the aftermath of the Fed meeting, which, as we discussed in the most recent 76report, was criticized by many as signaling a lack of vigilance in managing the inflation problem. Investors bid up stocks in the Energy and Commodity sectors along with other pro-cyclical sectors like Financials and Industrials.

The stocks held within the Income Builder portfolio generally followed these sector patterns in March. Energy sector holdings performed quite well. In addition to PR, Diamondback Energy (FANG) advanced 10% and our pipeline operators Williams (WMB) and Kinder Morgan (KMI) returned 10% and 5% respectively.

Our infrastructure REITs Crown Castle (CCI) and Digital Realty Trust (DLR) are less levered to inflation and more sensitive to long-term interest rate movements, which largely explains why they lagged the other names this month. The same can be said for our regulated utilities, Sempra (SRE) and WEC Energy (WEC), although we saw some positive momentum in that group as investors are starting to recognize they too will benefit from the electrification theme (see below).

Portfolio highlights

News flow on our stocks was fairly limited during the month, as many of these companies are in what is referred to as their “quiet period,” prior to scheduled first quarter earnings releases in April. Because the financial results are largely known to management at this point, companies avoid public statements and appearances.

While the strong performance of WMB during the month was generally in line with energy peers, it is worth drawing attention to an interesting Analyst Day that Williams organized in mid-February. The shares have performed well since that meeting, which was well-received by the investment community.

Perhaps the most interesting takeaway from the event was the emphasis placed on the company’s expectations for structural growth in electricity demand in the United States.

It may be surprising to hear that since the early 2000s—despite population growth, economic growth and technological trends—electricity consumption in the United States has been generally flat. The reason is efficiency improvements. The U.S. has been flatlining at under 4 trillion kilowatthours of electricity consumption for many years.

While we have created new uses for electrical power, we have also made steady improvement in the energy efficiency of traditional applications, such as air conditioning, refrigeration, manufacturing and lighting.

Innovation-driven efficiency improvements will persist, but we now appear to be at an inflection point and returning to the trajectory of growing electricity demand that we saw throughout the second half of the 20th century.

Echoing the theme of “electrification” that we discussed in 76report #2 in the context of Freeport McMoRan (FCX), management at WMB is anticipating a nearly 25% increase in total electricity consumption over the next 20 years. The main drivers of this growth will be electric heating, electric transportation and AI (data centers).

Source: Williams Companies

WMB is a key natural gas infrastructure owner and operator. Among its most important assets is the Transco pipeline that delivers natural gas up from the gulf states through the eastern seaboard.

While we intend to provide a fuller discussion of WMB in the future, the relevance of this anticipated growth in electricity consumption to WMB is that it translates into greater demand for natural gas in order to generate all this electricity. This in turn translates into greater demand for WMB’s existing pipelines and more opportunities for WMB to invest in extensions to its pipeline network with high returns.

Notwithstanding the strong performance in March, we remain very positive on the long-term outlook for WMB, which is supported by a range of structural factors including:

Long-term growth in demand for electricity in the United States.
Increasing reliance on intermittent renewable power generation (which creates the need for reliable baseload power generation that natural gas plants provide).
Aggressive coal plant retirements and limitations on nuclear power growth.
Growth in LNG (Liquefied Natural Gas) exports as the rest of the world experiences the same trends.

WMB offers a rare combination of high income (5% dividend yield), long-term organic growth and a pipeline of value-creating expansion opportunities. Being an essential infrastructure provider with cash flows that are largely protected by long-term contracts, the business also offers a nice degree of downside risk protection.

Finding great long-term dividend stocks is one of our passions at 76research. We hope you caught our recent video discussion on this topic as well as our write-up about that presentation, which we included in 76report Issue #3. We are adding the video below for convenience and future reference.

Key metrics

Valuation detail

Performance detail

The 76research Income Builder Model Portfolio is intended for income-oriented investors and is managed to generate an overall yield that is materially higher than broad equity indices. The portfolio primarily includes stocks with above average dividend yields from a cross section of industries and may also include ETFs that offer exposure to fixed income instruments. While investments are screened for their income and income growth characteristics, specific holdings are chosen based on valuation and general business quality, growth and risk considerations.