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Not Every Week Winds Up a Winner

Monday - 4/22/2013, 6:37pm  ET

Last week, the real-money Inflation-Protected Income Growth portfolio lost a few hundred dollars, essentially giving back the gains of the prior week that had pushed its total returns past 10%. It was a case of "easy come, easy go," as once again, no transactions took place in the portfolio.

Still, it was an active week for many of the companies held by that portfolio, as we're well into the quarterly confessional cycle known as earnings season. Ultimately, earnings are what drive a company's ability to pay and increase its dividend. Those dividends are the key drivers of the iPIG portfolio's strategy of seeking an income stream that grows at least as fast as inflation, so it's important to watch the earnings that support them.

Which way did they go?
Perhaps the biggest disappointment of the week came from fast-food titan McDonald's , which announced flat earnings and negative same-store sales, while also warning on sales for April. The company blamed penny-pinching consumers and intense competition. Perhaps even more ominously, McDonald's CFO's comments could be interpreted to suggest that the company might be willing to enter a price war in order to gain share.

While aggressive competition is good for consumers and great for building the type of efficient execution that made McDonald's the industry giant it is today, it's also expensive. The short run may be rocky for this fast-food behemoth, but its shares still look reasonably priced, its balance sheet still looks solid, and its dividend is still well covered. As a result, the stock still looks like it's worth holding by the iPIG portfolio.

Fellow iPIG portfolio pick Genuine Parts also reported fairly lackluster results for the quarter. Its overall revenues barely budged, and its earnings dropped about 1%, though earnings per diluted share held steady. Additionally, the company's debt load increased by over $400 million in order to pay for its acquisition of Australia's Exego.

Acquisitions are notoriously tough to integrate successfully, and it remains to be seen whether Exego is worth the price Genuine Parts paid for it. But the fact that Genuine Parts had already held a 30% stake in the business prior to the acquisition suggests it knew what it was getting into, giving the combined company a fighting chance at success. As with McDonald's, a combination of a still reasonably healthy balance sheet, covered dividend, and decently valued stock keeps Genuine Parts in the "hold" column.

The iPIG portfolio's two-for-one railroad special of CSX  and Union Pacific  also reported earnings in the last week. The news there was decidedly positive, as both companies showed growth overall, in spite of continued weakness in coal, a key commodity moved around by the railroad industry. Boding well for the iPIG's strategy of looking for dividend growth possibilities, CSX also increased its dividend by a penny, to $0.15 per quarter.

Importantly, both railroads saw substantial increases in intermodal transit, where products are moved partway by train and partway by truck. That's a key growth opportunity for the railroads, as stubbornly high diesel prices and new and emerging regulatory burdens on trucks make moving freight on rails a more cost-effective option. Fueled by the growth in their businesses and continued growth potential overall, in spite of still-slumping coal, both railroads look as though they continue to be worth holding.

And finally, there was Microsoft , whose strong earnings and substantial across-the-board revenue improvements exceeded my low expectations. Still, in spite of those surprise gains, Microsoft's operating cash flow barely budged, and its lackluster Windows 8 is being blamed for the severe slowdown in PC sales. That combination casts a pall over what would otherwise look like great news for this high-tech titan.

Nevertheless, with such low expectations priced into its stock, Microsoft still looks like it's worth continuing to hold.

What comes next?
Overall, in spite of mixed reviews from this round of quarterly earnings reports and a slight drop in value for the week, the iPIG portfolio continues to perform decently well. Dividends are coming in as expected, and many of the portfolio's holdings have continued their trends of increasing those payments, as hoped. As the old saying goes, "A journey of a thousand miles begins with a single step," and we've barely taken our first steps with this real-money portfolio.

What's next for Microsoft?
It's been a frustrating path for Microsoft investors, who've watched the company fail to capitalize on the incredible growth in mobile over the past decade. However, with the release of its own tablet, along with the widely anticipated Windows 8 operating system, the company is looking to make a splash in this booming market. In this premium report on Microsoft, our analyst explains that while the opportunity is huge, the challenges are many. He's also providing regular updates as key events occur, so make sure to claim a copy of this report now by clicking here.

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