Tollbooth Stocks for a Tollbooth Portfolio

Dividend Earner

Dividend Earner

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6 min read • Affiliate Disclosure

While I am a dividend growth investor, my stock selection process has everything to do with finding the tollbooth stocks or more specifically subscription business model. 

Why is that? Subscription is the easiest model to forecast for businesses and you can build a relationship with the customers more easily which greatly helps improve the products and services offered.

Many winning portfolios will have one or many of those companies as major holdings. The business analysis for those portfolios will follow stringent guidelines to select those companies.

What Is a Tollbooth Stock?

The non-digital way to look at subscriptions is done by using the tollbooth analogy. A tollbooth can also be predictable and profitable. You can increase the fees as your costs go up to maintain the same profit ratio.

The tollbooth stocks and subscription businesses generate recurring revenue with consistency and when managed properly, the businesses can either optimize their costs for a higher profit margin or they can increase the end user price.

Unlike regular businesses where they simply have to get more and more customers, subscription businesses can focus on value add and staying competitive to generate higher profits.

Look at how Netflix operates vs car manufacturers; one is counting the members paying monthly and the other is counting sales. The 2 models have very different impacts in forecasting financials.

In the fall of 2019, I heard Jim Cramer discuss on his Mad Money podcast how car companies are learning that we drive more but buy fewer vehicles. Due to the cars lasting longer, consumers don’t buy new vehicles as often.

As such, the concept of subscription for vehicles is being discussed within the car industry and, as it happens, Porsche is offering a subscription through its Porsche Passport service. The concept goes back to how much one is spending on a car annually when you consider depreciation and all. The data is all there for the car manufacturer to establish an appropriate pricing strategy.

Identifying 7 Business Segments

When you merge the tollbooth concept with the necessity of life, you end up with a really strong business model. The easiest companies to classify are the utilities. The next ones on the list are the Canadian banks and the telecom industry.

As you can see, those have some regulations in place to avoid gauging customers since they have a type of monopoly on the business. They are also referred to as oligopolies when a few businesses share a monopoly.

I have tried to look at businesses differently from the conventional models. The financial industry has classified companies a certain way within a sector and industry to compare more easily and assess trends with similar businesses.

While that is an important classification, revenue and growth forecasting is easier with the first 3 segments outlined below.

Using the segments below requires investors to understand how the business is collecting revenue. No metrics can tell you how it operates, you have to read up on it.

For example, until Disney started Disney+, it was in the consumable-discretionary segment but now with Disney+, it has entered the subscription segment.

Here are the segments I use to categorize each business.

  • Subscription
  • Tollbooth – Regulated
  • Tollbooth – Unregulated
  • Consumable – Necessities
  • Consumable – Discretionary
  • Durable
  • Intermediate

Before we go further, I love tollbooth stocks or subscription business but not all of them provide growth and profit. You still need to do more research.

Take REITs as an example, they are tollbooth stocks but have limited growth and limited income growth. The lack of growth is why I don’t hold REITs.

Sure, you get regular rent but oftentimes, rent increases is controlled or commercial rent is negotiated. Customers also don’t just magically increase like they can for online businesses. Just a word of caution as you read on.

Subscription

To fit into the tollbooth stocks category, an important part of the business must be driven by a subscription model. It has to be a service that users or companies opt-in willingly.

Take cloud computing or software services as an example. Newspapers and magazines would fall in here as well but it’s highly competitive.

The music industry was re-invented with streaming by Spotify and Apple also has a service.

In fact, Apple is re-investing a lot of the old business models into new subscription services such as Apple Music, News+ and TV+. I also now file The Walt Disney Company in this category with Disney+. The streaming service should become their largest revenue contributor over time.

TickerKey Ticker Company Sector Industry Score Quote Market Cap P/E FPE EPS Yield Raw PayoutRatio Payments Dividend Chowder GrowthRating IncomeRating Tollbooth Ambassador Achiever Aristocrat King Country Graph SectorID IndustryID Grade MarketCapGroup
NASDAQ:MSFT MSFT Microsoft Technology Software - Infrastructure 63.38 477.40 3,548.30 36.89 36.89 12.94 0.7000 24.3000 4 3.32 10.9200 9 6 Subscription YES YES NO NO USA 1 11 91 B Mega Cap
NASDAQ:AAPL AAPL Apple Technology Consumer Electronics 56.22 201.00 3,002.10 31.31 31.31 6.42 0.5200 15.7400 4 1.04 5.1200 6 5 Subscription NO NO NO NO USA 1 11 31 B Mega Cap
NYSE:ORCL ORCL Oracle Corporation Technology Software - Infrastructure 60.96 205.17 576.29 47.27 47.27 4.34 0.9700 38.1200 4 2.00 11.0400 9 6 Subscription YES NO NO NO USA 1 11 91 B Mega Cap
NASDAQ:COST COST Costco Consumer Defensive Discount Stores 69.67 980.29 434.74 55.60 55.60 17.63 0.5300 19.6900 4 5.20 12.8300 10 6 Subscription YES YES NO NO USA 1 4 34 A Mega Cap
NYSE:IBM IBM International Business Machines Corp. Technology Information Technology Services 39.56 280.97 261.13 48.36 48.36 5.81 2.3900 112.8100 4 6.72 3.0000 4 4 Subscription NO YES NO NO USA 1 11 53 D Mega Cap

Tollbooth – Regulated

Consumers are generally required to use the service and pay a monthly fee. However, as a necessary service, fee increases are regulated and usually require approval by a governing body. This segment usually represents the utilities for your home.

TickerKey Ticker Company Sector Industry Score Quote Market Cap P/E FPE EPS Yield Raw PayoutRatio Payments Dividend Chowder GrowthRating IncomeRating Tollbooth Ambassador Achiever Aristocrat King Country Graph SectorID IndustryID Grade MarketCapGroup
TSE:T T Telus Communication Services Telecommunication Services 63.85 21.98 33.28 27.82 27.82 0.79 7.5800 135.2100 4 1.67 14.2600 8 1 Tollbooth - Regulated NO YES YES NO Canada 1 2 99 B Large Cap
TSE:FTS FTS Fortis Utilities Utilities - Regulated Electric 69.53 64.62 32.41 19.52 19.52 3.31 3.8100 48.4000 4 2.46 8.9800 6 6 Tollbooth - Regulated NO YES YES NO Canada 1 12 106 A Large Cap
TSE:H H Hydro One Utilities Utilities - Regulated Electric 57.54 48.63 29.17 23.84 23.84 2.04 2.7400 61.6700 4 1.33 8.1000 4 5 Tollbooth - Regulated NO NO YES NO Canada 1 12 106 B Large Cap
TSE:BCE BCE BCE Communication Services Telecommunication Services 44.13 29.83 27.50 71.02 71.02 0.42 5.8700 620.4900 4 1.75 10.3300 3 7 Tollbooth - Regulated NO NO YES NO Canada 1 2 99 C Large Cap
TSE:BIP.UN BIP.UN Brookfield Infrastructure Partners Utilities Utilities - Diversified 45.02 44.76 20.79 0.00 0.00 -0.02 4.9700 506.1200 4 1.62 14.7100 4 5 Tollbooth - Regulated NO NO NO NO Canada 1 12 104 C Large Cap

Tollbooth – Unregulated

Banks are a tollbooth but they are somewhat unregulated. The account fees or any other fees are set competitively but since they have an oligopoly, they don’t tend to undercut each other much.

While telecoms are semi-regulated, I would say the complete suite of offerings puts them in the unregulated space. Oligopoly businesses, such as the railway or credit card companies, will have a business that can look like a tollbooth.

TickerKey Ticker Company Sector Industry Score Quote Market Cap P/E FPE EPS Yield Raw PayoutRatio Payments Dividend Chowder GrowthRating IncomeRating Tollbooth Ambassador Achiever Aristocrat King Country Graph SectorID IndustryID Grade MarketCapGroup
NYSE:JPM JPM JP Morgan Chase Financial Services Banks - Diversified 73.09 275.00 764.25 13.50 13.50 20.37 2.0400 25.3200 4 5.60 8.9000 9 7 Tollbooth - Unregulated YES NO NO NO USA 1 7 21 A Mega Cap
NYSE:V V Visa Financial Services Credit Services 69.16 338.57 661.40 34.03 34.03 9.95 0.7000 22.2800 4 2.36 16.1100 10 5 Tollbooth - Unregulated YES YES NO NO USA 1 7 32 A Mega Cap
NYSE:XOM XOM Exxon Mobile Corp Energy Oil & Gas Integrated 54.89 114.70 494.32 15.21 15.21 7.54 3.4500 51.9400 4 3.96 5.7400 6 6 Tollbooth - Unregulated NO YES YES NO USA 1 5 70 B Mega Cap
NYSE:MA MA Master Card Financial Services Credit Services 69.14 532.97 483.98 37.38 37.38 14.26 0.5700 19.2200 4 3.04 15.0400 10 5 Tollbooth - Unregulated YES NO NO NO USA 1 7 32 A Mega Cap
NYSE:BAC BAC Bank of America Financial Services Banks - Diversified 70.28 45.50 342.70 13.54 13.54 3.36 2.2900 34.2400 4 1.04 10.9200 8 6 Tollbooth - Unregulated YES NO NO NO USA 1 7 21 A Mega Cap

Consumable – Necessities

This segment represents medicine, toilet necessities, and cleaning products to name a few. Food also falls in this category as we need it to survive and stay healthy.

TickerKey Ticker Company Sector Industry Score Quote Market Cap P/E FPE EPS Yield Raw PayoutRatio Payments Dividend Chowder GrowthRating IncomeRating Tollbooth Ambassador Achiever Aristocrat King Country Graph SectorID IndustryID Grade MarketCapGroup
NYSE:LLY LLY Lilly Healthcare Drug Manufacturers - General 67.40 762.73 684.73 62.06 62.06 12.29 0.7900 43.7400 4 6.00 11.0400 9 6 Consumable - Necessities YES NO NO NO USA 1 8 35 A Mega Cap
NYSE:PG PG Procter & Gamble Consumer Defensive Household & Personal Products 61.56 159.08 372.97 25.25 25.25 6.30 2.6600 63.0400 4 4.23 7.2300 6 6 Consumable - Necessities NO YES YES YES USA 1 4 51 B Mega Cap
NYSE:JNJ JNJ Johnson & Johnson Healthcare Drug Manufacturers - General 71.13 149.79 360.41 16.66 16.66 8.99 3.4700 54.7600 4 5.20 8.9000 6 7 Consumable - Necessities NO YES YES YES USA 1 8 35 A Mega Cap
NYSE:ABBV ABBV AbbVie Inc Healthcare Drug Manufacturers - General 64.60 185.30 327.31 78.85 78.85 2.35 3.5400 266.4600 4 6.56 9.5800 8 5 Consumable - Necessities YES NO YES NO USA 1 8 35 B Mega Cap
NYSE:MRK MRK Merck & Co., Inc. Healthcare Drug Manufacturers - General 78.78 79.06 198.52 11.51 11.51 6.87 4.1000 45.5400 4 3.24 9.8200 7 8 Consumable - Necessities NO NO NO NO USA 1 8 35 A Large Cap

Consumable – Discretionary

This segment represents the businesses that provide products that we consume such as clothes or any other items that are consumed by consumers (not businesses).

TickerKey Ticker Company Sector Industry Score Quote Market Cap P/E FPE EPS Yield Raw PayoutRatio Payments Dividend Chowder GrowthRating IncomeRating Tollbooth Ambassador Achiever Aristocrat King Country Graph SectorID IndustryID Grade MarketCapGroup
NYSE:WMT WMT Walmart Consumer Defensive Discount Stores 49.35 96.12 767.08 41.08 41.08 2.34 0.9800 36.6500 4 0.94 3.6100 5 6 Consumable - Discretionary NO YES YES NO USA 1 4 34 C Mega Cap
NYSE:HD HD Home Depot Inc. Industrials Home Improvement Retail 80.36 349.62 347.85 23.72 23.72 14.74 2.6300 61.3800 4 9.20 12.6600 9 6 Consumable - Discretionary YES NO NO NO USA 1 9 50 A+ Mega Cap
NYSE:KO KO Coca-Cola Consumer Defensive Beverages - Non-Alcoholic 66.83 68.84 296.31 27.54 27.54 2.50 2.9600 77.4200 4 2.04 6.8900 7 7 Consumable - Discretionary NO YES YES YES USA 1 4 23 A Mega Cap
NYSE:PM PM Philip Morris International Inc. Consumer Defensive Tobacco 49.33 183.29 285.29 37.79 37.79 4.85 2.9500 108.9100 4 5.40 5.6000 7 5 Consumable - Discretionary NO NO NO NO USA 1 4 100 C Mega Cap
NYSE:MCD MCD McDonald Consumer Cyclical Restaurants 75.42 287.46 205.54 25.37 25.37 11.33 2.4600 60.4100 4 7.08 9.9300 8 6 Consumable - Discretionary NO YES YES NO USA 1 3 87 A Mega Cap

Durable

Growth from this classification comes from economic growth in my opinion. Most consumptions are needed to require increased production which drives growth for durables products and factories generating those products.

Without growth, no new towers are needed and no new bridges. Infrastructure can reuse what exists instead of creating new roads or buses.

TickerKey Ticker Company Sector Industry Score Quote Market Cap P/E FPE EPS Yield Raw PayoutRatio Payments Dividend Chowder GrowthRating IncomeRating Tollbooth Ambassador Achiever Aristocrat King Country Graph SectorID IndustryID Grade MarketCapGroup
NASDAQ:NVDA NVDA NVIDIA Corporation Technology Semiconductors 55.52 143.85 3,508.15 46.40 46.40 3.10 0.0300 1.2800 4 0.04 14.9000 8 3 Durable NO NO NO NO USA 1 11 88 B Mega Cap
NASDAQ:AVGO AVGO Broadcom Inc. Technology Semiconductors 66.60 249.99 1,175.82 93.63 93.63 2.67 0.9400 81.2500 4 2.36 14.2900 10 6 Durable YES NO NO NO USA 1 11 88 A Mega Cap
NASDAQ:CSCO CSCO Cisco Systems Inc. Technology Communication Equipment 56.68 66.32 262.63 27.07 27.07 2.45 2.4700 65.5400 4 1.64 5.1200 6 6 Durable NO NO NO NO USA 1 11 27 B Mega Cap
NYSE:ABT ABT Abbott Laboratories Healthcare Medical Devices 69.49 132.99 231.38 17.25 17.25 7.71 1.7700 28.9200 4 2.36 8.6900 7 7 Durable NO YES YES NO USA 1 8 63 A Mega Cap
NASDAQ:TXN TXN Texas Instrument Technology Semiconductors 67.15 198.20 180.06 37.61 37.61 5.27 2.7400 99.5300 4 5.44 10.4500 7 6 Durable YES YES NO NO USA 1 11 88 A Large Cap

Intermediate

This is a catch-all for many basic materials and energy companies. It represents a company that doesn’t reach consumers directly and is instead consumed by another business before it reaches the consumer.

TickerKey Ticker Company Sector Industry Score Quote Market Cap P/E FPE EPS Yield Raw PayoutRatio Payments Dividend Chowder GrowthRating IncomeRating Tollbooth Ambassador Achiever Aristocrat King Country Graph SectorID IndustryID Grade MarketCapGroup
NYSE:GE GE General Electric Industrials Specialty Industrial Machinery 24.61 239.37 255.26 37.23 37.23 6.43 0.6000 17.5000 4 1.44 0.0000 0 3 Intermediate NO NO NO NO USA 1 9 94 D Mega Cap
NYSE:LIN LIN Linde Praxair Inc. Basic Materials Specialty Chemicals 66.28 455.86 214.58 33.11 33.11 13.77 1.3200 40.7500 4 6.00 9.2100 7 6 Intermediate NO YES YES NO USA 1 1 93 A Mega Cap
NYSE:TMO TMO Thermo Fisher Scientific Inc Healthcare Diagnostics & Research 58.49 397.88 150.20 23.34 23.34 17.05 0.4300 9.1600 4 1.72 10.4600 7 4 Intermediate NO NO NO NO USA 1 8 33 B Large Cap
NYSE:HON HON Honeywell International Inc. Industrials Specialty Industrial Machinery 63.81 221.80 142.67 25.49 25.49 8.70 2.0400 51.5000 4 4.52 7.0800 7 6 Intermediate NO NO NO NO USA 1 9 94 B Large Cap
NYSE:DHR DHR Danaher Corporation Healthcare Diagnostics & Research 50.62 196.39 140.55 38.13 38.13 5.15 0.6500 20.8500 4 1.28 9.3900 6 4 Intermediate NO NO NO NO USA 1 8 33 B Large Cap

Building a Tollbooth Portfolio

In the end, tollbooth and subscription businesses mean repeat customers. Back to the car business, a manufacturer would love to lock in customers with their brand, instead every time they roll over new models, they risk losing customers to another brand. Subscription implies loyalty and repeat spending which is very profitable for a business.

While the sector or industry classification could match a segment, it’s not always a 100% match. I strive to invest in companies that fit the first 3 categories above.

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