The Tollbooth Portfolio

While I am a dividend growth investor, my stock selection process has everything to do with the tollbooth or 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 help improve the products and services offered. The non-digital way to look at subscription 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 and subscription businesses generate recurring revenue with consistency and when managed properly, the businesses can either optimized 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, the 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 impact 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 less vehicles. Due to the cars lasting longer, consumers don’t buy new vehicles as often. As such, the concept of subscription for vehicle 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.

Business Segmentation Process

When you merge the tollbooth concept with 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 in order to avoid gauging customers since they have a type of monopoly on the business. They are also referred to as oligopolies when a few business 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 in order to compare more easily and assess trends with similar businesses. While that’s 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 or subscription stocks but not all of them provide growth and profit. You still need to do more research. Take REITs as an example, they are a tollbooth stock but have limited growth and limited distribution growth. Sure, you get regular rent but often times, 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 be considered a subscription stock, 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. Newspaper and magazine 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.

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
NASDAQ:AAPLAAPLAppleTechnologyConsumer Electronics0.50106.841,852.3232.4832.483.290.00770.770.249240.820.113865SubscriptionNONONONOUSA1
NASDAQ:MSFTMSFTMicrosoftTechnologySoftware - Infrastructure0.71200.391,516.4834.7734.775.760.01121.120.388942.240.109297SubscriptionYESYESNONOUSA1
NYSE:DISDISThe Walt Disney CompanyCommunication ServicesEntertainment0.32128.63232.440.000.00-0.620.00000.000.000020.000.057160SubscriptionNONONONOUSA1
NYSE:ORCLORCLOracle CorporationTechnologySoftware - Infrastructure0.4759.75179.6818.7418.743.190.01611.610.300940.960.121345SubscriptionNONONONOUSA1
NYSE:ACNACNAccenture plcTechnologyInformation Technology Services0.63236.18150.2630.7730.777.680.01351.350.416743.200.094886SubscriptionYESYESNONOUSA1

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.

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
TSE:BCEBCEBCECommunication ServicesTelecommunication Services0.6855.5037.9220.4220.422.720.06006.001.224343.330.111168Tollbooth - RegulatedNOYESYESNOCanada1
TSE:FTSFTSFortisUtilitiesUtilities - Regulated Electric0.6652.1924.2519.5719.572.670.03663.660.715441.910.094667Tollbooth - RegulatedNOYESYESNOCanada1
TSE:TTTelusCommunication ServicesTelecommunication Services0.6923.5222.9220.1020.101.170.04954.950.995741.170.119377Tollbooth - RegulatedNOYESYESNOCanada1
TSE:BIP.UNBIP.UNBrookfield Infrastructure PartnersUtilitiesUtilities - Diversified0.6763.9120.1179.7979.790.800.04444.443.548542.150.136586Tollbooth - RegulatedYESYESNONOCanada1
TSE:RCI.BRCI.BRogersCommunication ServicesTelecommunication Services0.4751.8320.0815.6115.613.320.03863.860.602442.000.052325Tollbooth - RegulatedNONONONOCanada1

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 put 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.

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
NYSE:VVVisaFinancial ServicesCredit Services0.60202.61431.1338.5338.535.260.00590.590.228141.200.2188105Tollbooth - UnregulatedYESYESNONOUSA1
NYSE:MAMAMaster CardFinancial ServicesCredit Services0.56335.26335.6246.3946.397.230.00480.480.221341.600.227794Tollbooth - UnregulatedNONONONOUSA1
NYSE:JPMJPMJP Morgan ChaseFinancial ServicesBanks - Diversified0.7798.35299.7313.2513.257.420.03663.660.485243.600.202286Tollbooth - UnregulatedNONONONOUSA1
NYSE:UNHUNHUnitedHealth Group IncorporatedHealthcareHealthcare Plans0.73308.02292.7217.3217.3217.780.01621.620.281245.000.2197106Tollbooth - UnregulatedYESNONONOUSA1
NYSE:VZVZVerizon Communications Inc.Communication ServicesTelecom Services0.5660.35249.7313.0513.054.620.04164.160.543342.510.065657Tollbooth - UnregulatedNOYESNONOUSA1

Consumable – Necessities

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

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
NYSE:JNJJNJJohnson & JohnsonHealthcareDrug Manufacturers - General0.65149.18392.7626.2326.235.690.02712.710.710044.040.086978Consumable - NecessitiesNOYESYESYESUSA1
NYSE:PGPGProcter & GambleConsumer DefensiveHousehold & Personal Products0.52137.37342.0027.6927.694.960.02302.300.637743.160.052557Consumable - NecessitiesNOYESYESYESUSA1
NYSE:MRKMRKMerck & Co., Inc.HealthcareDrug Manufacturers - General0.6285.81217.0320.8920.894.110.02842.840.593742.440.066157Consumable - NecessitiesNONONONOUSA1
NYSE:PFEPFEPfizer Inc.HealthcareDrug Manufacturers - General0.6136.63203.5514.5614.562.520.04154.150.603241.520.102067Consumable - NecessitiesNONONONOUSA1
NYSE:ABBVABBVAbbVie IncHealthcareDrug Manufacturers - General0.5190.11159.0319.8219.824.550.05245.241.037444.720.061955Consumable - NecessitiesNONOYESNOUSA1

Consumable – Discretionary

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

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
NYSE:WMTWMTWalmartConsumer DefensiveDiscount Stores0.61135.29383.3821.5721.576.270.01601.600.344542.160.040377Consumable - DiscretionaryNOYESYESNOUSA1
NYSE:HDHDHome Depot Inc.Consumer CyclicalHome Improvement Retail0.75275.19296.2325.2025.2010.920.02182.180.549546.000.2206106Consumable - DiscretionaryYESNONONOUSA1
NYSE:KOKOCoca-ColaConsumer DefensiveBeverages - Non-Alcoholic0.6450.45216.7023.7323.732.130.03253.250.770041.640.078068Consumable - DiscretionaryNOYESYESYESUSA1
NASDAQ:PEPPEPPepsi CoConsumer DefensiveBeverages - Non-Alcoholic0.66131.47182.0426.8626.864.900.03113.110.834744.090.109976Consumable - DiscretionaryNOYESYESNOUSA1
NYSE:MCDMCDMcDonaldConsumer CyclicalRestaurants0.58220.27163.9034.9234.926.310.02272.270.792445.000.098766Consumable - DiscretionaryNOYESYESNOUSA1

Durable

Growth from this classification comes from economic growth in my opinion. Most consumptions is needed to require increase 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.

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
NASDAQ:NVDANVDANVIDIA CorporationTechnologySemiconductors0.37487.57301.1889.4089.405.450.00130.130.117440.640.094443DurableNONONONOUSA1
NASDAQ:INTCINTCIntel CorporationTechnologySemiconductors0.7449.89212.189.189.185.440.02652.650.242641.320.092566DurableNONONONOUSA1
NYSE:ABTABTAbbott LaboratoriesHealthcareMedical Devices0.37106.86189.2061.2661.261.740.01351.350.827641.44-0.005636DurableNOYESYESNOUSA1
NASDAQ:CSCOCSCOCisco Systems Inc.TechnologyCommunication Equipment0.6039.81168.5315.1015.102.640.03623.620.545541.440.167247DurableNONONONOUSA1
NASDAQ:AVGOAVGOBroadcom Inc.TechnologySemiconductors0.44359.73145.5167.4767.475.330.03613.612.4390413.000.618264DurableNONONONOUSA1

Intermediate

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

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
NYSE:TMOTMOThermo Fisher Scientific IncHealthcareDiagnostics & Research0.32429.05169.7346.4246.429.240.00210.210.095240.880.050543IntermediateNONONONOUSA1
NYSE:DHRDHRDanaher CorporationHealthcareDiagnostics & Research0.40206.31146.3644.1144.114.680.00350.350.153840.720.064153IntermediateNONONONOUSA1
NYSE:LINLINLinde Praxair Inc.Basic MaterialsSpecialty Chemicals0.58246.10129.2958.1458.144.230.01571.570.910643.850.068485IntermediateNOYESYESNOUSA1
NYSE:HONHONHoneywell International Inc.IndustrialsSpecialty Industrial Machinery0.66168.70118.3920.7620.768.130.02132.130.442843.600.128976IntermediateNONONONOUSA1
NYSE:APDAPDAir Products & ChemicalsBasic MaterialsChemicals0.59295.8165.3434.5534.558.560.01811.810.626245.360.105076IntermediateNOYESYESNOUSA1

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 categorization above.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
Join 8,400+ Investors & Build a Winning Portfolio