Alley Company Dividend Portfolio
2022 Q1 Letter
April 18, 2022
At Alley Company, we have written quarterly letters religiously since 1998 with the objective of
producing a meaningful essay that addresses the issues relevant to the current economic
landscape in the context of investment concepts that give it "shelf life" for investors with a
longer-term time horizon.
One of the challenges in the quarterly writing exercise is addressing a world that is always
fraught with problems: economic, social, geopolitical, regulatory, etc., etc. These problems,
however, are in the context of a U.S. stock market that has appreciated 10.3% per year over the
past 96 years. Herein lies a paradox - despite persistent global and domestic challenges,
economic and corporate fundamental performance has pushed higher in a meaningful way that
has rewarded long-term investors.
Domestic/Global Events and Market Returns: 1999-2021
Currently, Russia's unprovoked military invasion of Ukraine has caused unimaginable human
suffering for a country trapped geographically and philosophically between the West and the
East. The courage and resolve of the Ukrainian people has been remarkable and should remind
us all that "democracy" should not be taken for granted. Putin's "unforced error" has
strengthened NATO's resolve, and the swift action of the private sector along with crippling
sanctions has likely set the Russian economy back many years. The global economic impact
thus far has been to cause commodity prices - energy in particular - to skyrocket and put more
upward pressure on inflation.
On the domestic front, unwelcomed inflation trends continue. The Consumer Price Index (CPI)
rose 7.9% in February continuing a trend of persistently high inflation for the past twelve
months. The stop/start dynamics of COVID coupled with substantial monetary and fiscal
stimulus and now rising energy prices from the Ukrainian conflict have caused inflation readings
to hit levels not seen since the early 1980s. As a result, Federal Reserve (Fed) policy is now
shifting from extremely accommodative (zero percent interest rates and quantitative easing) to
tightening mode in an effort to thwart inflationary pressures.
While the word "tightening" has an ominous tone, the change in Fed policy to a more normal
interest rate stance can be viewed in a positive light. For the past ten years, the yield on the ten-
year U.S. Treasury bond has hovered between 1.0% and 2.5%, slightly moving out of those
boundaries for relatively short periods of time. Meanwhile, inflation, which plays an important
role in the pricing of bonds, has hovered in the same range. This relationship is important to note
because the investment objective for bonds is to earn a rate of return that outstrips inflation.
For income-oriented investors, we have long been advocates of investing in dividend paying
equities that provide both an attractive upfront current yield as well as strong dividend growth.
Simply put, a dividend equity portfolio that provides a competitive upfront current yield with a
dividend income stream that can grow at a high single digit annual rate, is a powerful
combination in today's interest rate environment. Further, the dividend income growth
component can provide a valuable hedge against inflation.
Historically, there has always been a steady stream of domestic and global challenges, and yet in
that context, the returns that have accrued to the long-term equity investor have been remarkable.
The best explanation for this paradox is that the American experiment has served to unleash
human potential in a way that no other economic or political model has before. Every day
people keep putting one foot in front of the other in an attempt to move forward and improve
their circumstances. As a result, the economy keeps growing and corporate earnings follow.
That said, the economy doesn't grow in linear fashion and neither do earnings given the natural
ebb and flow of dealing with the aforementioned array of problems, but the direction is positive.
Quarterly Performance Update
During the first quarter of 2022, the Alley Company Dividend Portfolio modestly
underperformed the Russell 1000 Value Index.
From an individual holdings perspective, top contributors to and detractors from performance in
the portfolio during the first quarter were:
Top Contributors Top Detractors
Chevron (CVX) Home Depot (HD)
Lockheed Martin (LMT) Starbucks (SBUX)
AbbVie (ABBV) Accenture (ACN)
Top and bottom performing sectors in the marketplace during the quarter are displayed in the
Top Performing Sectors Bottom Performing Sectors
Energy (+/-) Communications (-)
Utilities (-) Consumer Discretionary (+)
Consumer Staples (+) Technology (+)
(+) indicates that the portfolio is overweight this sector and (-) indicates that the portfolio is underweight this sector relative to the benchmark.
During the quarter, Amgen (AMGN) was added to the portfolio, while RPM International (RPM)
AMGN has built an impressive track record of developing novel medicines and delivering solid
corporate performance. Current and pipeline products should support attractive top/bottom line
growth and allow the company to continue its strong track record of dividend growth. While
RPM has executed well on their cost and organizational restructuring program in recent years,
the current inflationary environment for raw materials has provided a headwind and we opted to
exit the position.
In addition, the weighting in Honeywell International (HON) was increased during the quarter,
while weightings in Accenture (ACN), Arthur J. Gallagher (AJG), Apple (AAPL), and Microsoft
(MSFT) were decreased.
How to build a dividend portfolio? These are the most common: Consistent income Potential for increased distributions over time Appreciation of underlying assets Tax benefits
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