Tollbooth Stocks for a Tollbooth Portfolio

Eric

Eric

Updated on

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 62.88 498.84 3,707.65 38.55 38.55 12.94 0.6700 24.3000 4 3.32 10.8900 9 6 Subscription YES YES NO NO USA 1 11 91 B Mega Cap
NASDAQ:AAPL AAPL Apple Technology Consumer Electronics 52.64 213.55 3,189.55 33.26 33.26 6.42 0.4900 15.7400 4 1.04 5.0900 6 5 Subscription NO NO NO NO USA 1 11 31 B Mega Cap
NYSE:ORCL ORCL Oracle Corporation Technology Software - Infrastructure 58.72 237.32 666.59 54.68 54.68 4.34 0.8400 38.1200 4 2.00 10.9100 9 5 Subscription YES NO NO NO USA 1 11 91 B Mega Cap
NASDAQ:COST COST Costco Consumer Defensive Discount Stores 68.77 987.02 437.72 55.99 55.99 17.63 0.5300 19.6900 4 5.20 12.8200 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 34.62 291.97 271.36 50.25 50.25 5.81 2.3000 112.8100 4 6.72 2.9100 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 64.15 22.03 33.36 27.89 27.89 0.79 7.5600 135.2100 4 1.67 14.2500 8 1 Tollbooth - Regulated NO YES YES NO Canada 1 2 99 B Large Cap
TSE:FTS FTS Fortis Utilities Utilities - Regulated Electric 69.38 64.30 32.25 19.43 19.43 3.31 3.8300 48.4000 4 2.46 9.0000 6 6 Tollbooth - Regulated NO YES YES NO Canada 1 12 106 A Large Cap
TSE:H H Hydro One Utilities Utilities - Regulated Electric 56.33 48.86 29.30 23.95 23.95 2.04 2.7300 61.6700 4 1.33 8.0800 4 5 Tollbooth - Regulated NO NO YES NO Canada 1 12 106 B Large Cap
TSE:BCE BCE BCE Communication Services Telecommunication Services 41.52 30.84 28.43 73.43 73.43 0.42 5.6700 620.4900 4 1.75 10.1400 3 7 Tollbooth - Regulated NO NO YES NO Canada 1 2 99 C Large Cap
TSE:RCI.B RCI.B Rogers Communication Services Telecommunication Services 53.29 44.04 23.70 13.63 13.63 3.23 4.5400 41.7500 4 2.00 4.5400 3 7 Tollbooth - Regulated NO NO NO NO Canada 1 2 99 B 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 71.37 296.00 822.61 14.53 14.53 20.37 1.8900 25.3200 4 5.60 8.7600 9 7 Tollbooth - Unregulated YES NO NO NO USA 1 7 21 A Mega Cap
NYSE:V V Visa Financial Services Credit Services 63.91 358.86 701.03 36.07 36.07 9.95 0.6600 22.2800 4 2.36 16.0700 10 5 Tollbooth - Unregulated YES YES NO NO USA 1 7 32 B Mega Cap
NYSE:MA MA Master Card Financial Services Credit Services 63.72 569.24 516.92 39.92 39.92 14.26 0.5300 19.2200 4 3.04 15.0100 10 5 Tollbooth - Unregulated YES NO NO NO USA 1 7 32 B Mega Cap
NYSE:XOM XOM Exxon Mobile Corp Energy Oil & Gas Integrated 57.18 112.20 483.54 14.88 14.88 7.54 3.5300 51.9400 4 3.96 5.8100 6 6 Tollbooth - Unregulated NO YES YES NO USA 1 5 70 B Mega Cap
NYSE:BAC BAC Bank of America Financial Services Banks - Diversified 66.61 48.93 368.53 14.56 14.56 3.36 2.1300 34.2400 4 1.04 10.7600 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 66.45 780.67 700.84 63.52 63.52 12.29 0.7700 43.7400 4 6.00 11.0200 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 60.13 160.83 377.07 25.53 25.53 6.30 2.6300 63.0400 4 4.23 7.2000 6 6 Consumable - Necessities NO YES YES YES USA 1 4 51 B Mega Cap
NYSE:JNJ JNJ Johnson & Johnson Healthcare Drug Manufacturers - General 67.02 156.01 375.37 17.35 17.35 8.99 3.3300 54.7600 4 5.20 8.7600 6 7 Consumable - Necessities NO YES YES YES USA 1 8 35 A Mega Cap
NYSE:ABBV ABBV AbbVie Inc Healthcare Drug Manufacturers - General 62.81 189.28 334.34 80.54 80.54 2.35 3.4700 266.4600 4 6.56 9.5000 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 77.63 80.93 203.22 11.78 11.78 6.87 4.0000 45.5400 4 3.24 9.7300 7 8 Consumable - Necessities NO NO NO NO USA 1 8 35 A Mega 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 47.01 98.36 784.95 42.03 42.03 2.34 0.9600 36.6500 4 0.94 3.5900 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 75.85 371.68 369.79 25.22 25.22 14.74 2.4800 61.3800 4 9.20 12.5100 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 62.41 71.35 307.11 28.54 28.54 2.50 2.8600 77.4200 4 2.04 6.7900 7 7 Consumable - Discretionary NO YES YES YES USA 1 4 23 B Mega Cap
NYSE:PM PM Philip Morris International Inc. Consumer Defensive Tobacco 53.31 178.88 278.43 36.88 36.88 4.85 3.0200 108.9100 4 5.40 5.6700 7 5 Consumable - Discretionary NO NO NO NO USA 1 4 100 B Mega Cap
NYSE:MCD MCD McDonald Consumer Cyclical Restaurants 73.94 294.08 210.28 25.96 25.96 11.33 2.4100 60.4100 4 7.08 9.8700 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 51.70 159.34 3,885.91 51.40 51.40 3.10 0.0300 1.2800 4 0.04 14.8900 8 3 Durable NO NO NO NO USA 1 11 88 B Mega Cap
NASDAQ:AVGO AVGO Broadcom Inc. Technology Semiconductors 64.28 275.18 1,294.30 103.06 103.06 2.67 0.8600 81.2500 4 2.36 14.2100 10 6 Durable YES NO NO NO USA 1 11 88 B Mega Cap
NASDAQ:CSCO CSCO Cisco Systems Inc. Technology Communication Equipment 50.06 69.37 274.71 28.31 28.31 2.45 2.3600 65.5400 4 1.64 5.0100 6 6 Durable NO NO NO NO USA 1 11 27 B Mega Cap
NYSE:ABT ABT Abbott Laboratories Healthcare Medical Devices 68.71 134.44 233.90 17.44 17.44 7.71 1.7600 28.9200 4 2.36 8.6700 7 7 Durable NO YES YES NO USA 1 8 63 A Mega Cap
NASDAQ:TXN TXN Texas Instrument Technology Semiconductors 55.75 216.02 196.25 40.99 40.99 5.27 2.5200 99.5300 4 5.44 10.2200 7 6 Durable YES YES NO NO USA 1 11 88 B 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 24.06 246.88 263.27 38.40 38.40 6.43 0.5800 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 61.88 475.58 223.87 34.54 34.54 13.77 1.2600 40.7500 4 6.00 9.1600 7 6 Intermediate NO YES YES NO USA 1 1 93 B Mega Cap
NYSE:TMO TMO Thermo Fisher Scientific Inc Healthcare Diagnostics & Research 54.50 429.33 162.07 25.18 25.18 17.05 0.4000 9.1600 4 1.72 10.4300 7 4 Intermediate NO NO NO NO USA 1 8 33 B Large Cap
NYSE:HON HON Honeywell International Inc. Industrials Specialty Industrial Machinery 57.23 240.40 154.64 27.63 27.63 8.70 1.8800 51.5000 4 4.52 6.9300 7 6 Intermediate NO NO NO NO USA 1 9 94 B Large Cap
NYSE:DHR DHR Danaher Corporation Healthcare Diagnostics & Research 49.00 203.20 145.42 39.46 39.46 5.15 0.6300 20.8500 4 1.28 9.3700 6 4 Intermediate NO NO NO NO USA 1 8 33 C 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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