Tollbooth Stocks for a Tollbooth Portfolio

What Is a Tollbooth Stock?

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 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 stocks 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.

Identifying 7 Business Segments

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 stocks 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 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. 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 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
NASDAQ:AAPL AAPL Apple Technology Consumer Electronics 50.68 151.12 2,464.65 29.57 29.57 5.11 0.5800 16.5000 4 0.88 10.6500 6 6 Subscription NO NO NO NO USA 1
NASDAQ:MSFT MSFT Microsoft Technology Software - Infrastructure 67.54 294.60 2,200.74 36.96 36.96 7.97 0.7600 27.5000 4 2.24 9.9200 10 6 Subscription YES YES NO NO USA 1
NYSE:DIS DIS The Walt Disney Company Communication Services Entertainment 23.92 179.09 329.01 104.73 104.73 1.71 0.0000 0.0000 2 0.00 -18.4100 4 0 Subscription NO NO NO NO USA 1
NYSE:ORCL ORCL Oracle Corporation Technology Software - Infrastructure 61.32 90.82 252.34 19.36 19.36 4.69 1.4100 22.3000 4 1.28 14.8900 7 6 Subscription NO NO NO NO USA 1
NYSE:ACN ACN Accenture plc Technology Information Technology Services 59.52 328.25 215.56 38.85 38.85 8.45 1.0700 37.8000 4 3.52 9.0800 8 6 Subscription YES YES NO NO USA 1

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
TSE:BCE BCE BCE Communication Services Telecommunication Services 49.27 64.44 57.95 20.05 20.05 3.21 5.4300 113.4000 4 3.50 10.5100 5 7 Tollbooth - Regulated NO YES YES NO Canada 1
TSE:T T Telus Communication Services Telecommunication Services 56.58 28.74 36.51 30.58 30.58 1.03 4.4000 130.5000 4 1.27 10.9100 7 6 Tollbooth - Regulated NO YES YES NO Canada 1
TSE:RCI.B RCI.B Rogers Communication Services Telecommunication Services 40.75 63.37 32.26 19.74 19.74 3.60 3.1600 62.2000 4 2.00 3.9800 1 4 Tollbooth - Regulated NO NO NO NO Canada 1
TSE:BIP.UN BIP.UN Brookfield Infrastructure Partners Utilities Utilities - Diversified 34.34 71.59 29.55 0.00 0.00 1.68 3.5900 126.1000 4 2.04 7.2800 4 2 Tollbooth - Regulated NO NO NO NO Canada 1
TSE:FTS FTS Fortis Utilities Utilities - Regulated Electric 57.55 58.79 27.43 22.33 22.33 2.66 3.4400 75.5000 4 2.02 9.0800 5 7 Tollbooth - Regulated NO YES YES NO Canada 1

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.

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
NYSE:V V Visa Financial Services Credit Services 67.10 235.36 494.80 43.50 43.50 5.41 0.5400 26.2000 4 1.28 20.6600 10 5 Tollbooth - Unregulated YES YES NO NO USA 1
NYSE:JPM JPM JP Morgan Chase Financial Services Banks - Diversified 73.73 158.93 478.05 10.54 10.54 15.08 2.2700 24.0000 4 3.60 18.1800 9 7 Tollbooth - Unregulated YES NO NO NO USA 1
NYSE:UNH UNH UnitedHealth Group Incorporated Healthcare Healthcare Plans 66.52 417.21 386.28 26.01 26.01 16.04 1.3900 33.9000 4 5.80 20.2700 9 5 Tollbooth - Unregulated YES NO NO NO USA 1
NYSE:MA MA Master Card Financial Services Credit Services 55.44 363.56 357.95 52.46 52.46 6.93 0.4800 23.7000 4 1.76 26.5800 7 2 Tollbooth - Unregulated NO NO NO NO USA 1
NYSE:BAC BAC Bank of America Financial Services Banks - Diversified 59.10 41.29 350.31 14.96 14.96 2.76 2.0300 23.9000 4 0.84 24.7100 7 5 Tollbooth - Unregulated NO NO NO NO USA 1

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.

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
NYSE:JNJ JNJ Johnson & Johnson Healthcare Drug Manufacturers - General 57.24 177.84 463.97 19.48 19.48 9.13 2.3800 60.6000 4 4.24 8.5600 6 7 Consumable - Necessities NO YES YES YES USA 1
NYSE:PG PG Procter & Gamble Consumer Defensive Household & Personal Products 56.79 144.64 348.68 25.55 25.55 5.66 2.4100 57.1000 4 3.48 5.5600 5 7 Consumable - Necessities NO YES YES YES USA 1
NYSE:PFE PFE Pfizer Inc. Healthcare Drug Manufacturers - General 59.32 48.91 271.38 15.58 15.58 3.14 3.1900 70.5000 4 1.56 9.0900 6 7 Consumable - Necessities NO NO NO NO USA 1
NYSE:LLY LLY Lilly Healthcare Drug Manufacturers - General 37.93 269.94 252.74 33.62 33.62 8.03 1.2600 49.2000 4 3.40 5.4700 4 5 Consumable - Necessities NO NO NO NO USA 1
NYSE:ABBV ABBV AbbVie Inc Healthcare Drug Manufacturers - General 51.10 118.41 205.84 10.04 10.04 11.79 4.3900 137.2000 4 5.20 5.0900 5 5 Consumable - Necessities NO NO YES NO USA 1

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).

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
NYSE:WMT WMT Walmart Consumer Defensive Discount Stores 55.81 150.75 419.00 24.92 24.92 6.05 1.4600 50.0000 4 2.20 3.8400 7 6 Consumable - Discretionary NO YES YES NO USA 1
NYSE:HD HD Home Depot Inc. Consumer Cyclical Home Improvement Retail 77.31 335.05 352.28 24.44 24.44 13.71 1.9700 44.8000 4 6.60 19.4600 10 6 Consumable - Discretionary YES NO NO NO USA 1
NYSE:NKE NKE NIKE, Inc. Consumer Cyclical Footwear & Accessories 63.05 172.36 271.80 48.42 48.42 3.56 0.6400 29.6000 4 1.10 9.7000 10 6 Consumable - Discretionary YES YES NO NO USA 1
NYSE:KO KO Coca-Cola Consumer Defensive Beverages - Non-Alcoholic 58.81 57.48 247.04 25.55 25.55 2.25 2.9200 88.5000 4 1.68 6.4000 5 8 Consumable - Discretionary NO YES YES YES USA 1
NASDAQ:PEP PEP Pepsi Co Consumer Defensive Beverages - Non-Alcoholic 66.89 158.05 216.33 26.08 26.08 6.06 2.7200 70.0000 4 4.30 10.5100 8 7 Consumable - Discretionary NO YES YES NO USA 1

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.

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
NASDAQ:NVDA NVDA NVIDIA Corporation Technology Semiconductors 33.34 199.50 503.08 67.34 67.34 2.96 0.3200 7.4000 4 0.64 4.2600 3 3 Durable NO NO NO NO USA 1
NASDAQ:CSCO CSCO Cisco Systems Inc. Technology Communication Equipment 59.22 56.28 237.98 17.70 17.70 3.18 2.6300 58.9000 4 1.48 11.5100 5 7 Durable NO NO NO NO USA 1
NYSE:ABT ABT Abbott Laboratories Healthcare Medical Devices 42.48 124.66 218.16 25.34 25.34 4.92 1.4400 47.6000 4 1.80 -0.5400 4 6 Durable NO YES YES NO USA 1
NASDAQ:INTC INTC Intel Corporation Technology Semiconductors 72.05 53.47 217.01 10.09 10.09 5.30 2.6000 30.1000 4 1.39 9.1800 6 6 Durable NO NO NO NO USA 1
NASDAQ:AVGO AVGO Broadcom Inc. Technology Semiconductors 52.75 488.14 199.45 19.54 19.54 24.98 2.9500 100.0000 4 14.40 50.1000 6 4 Durable NO NO NO NO USA 1

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.

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
NYSE:DHR DHR Danaher Corporation Healthcare Diagnostics & Research 43.61 318.80 225.06 36.31 36.31 8.78 0.2600 10.4000 4 0.84 6.1900 6 4 Intermediate NO NO NO NO USA 1
NYSE:TMO TMO Thermo Fisher Scientific Inc Healthcare Diagnostics & Research 39.27 554.46 214.27 21.72 21.72 25.53 0.1900 4.4000 4 1.04 8.1500 5 4 Intermediate NO NO NO NO USA 1
NYSE:HON HON Honeywell International Inc. Industrials Specialty Industrial Machinery 63.28 233.74 160.01 30.88 30.88 7.57 1.5900 52.0000 4 3.72 11.4200 7 6 Intermediate YES NO NO NO USA 1
NYSE:LIN LIN Linde Praxair Inc. Basic Materials Specialty Chemicals 62.28 311.35 159.78 32.30 32.30 9.64 1.3600 64.3000 4 4.24 7.4900 8 6 Intermediate NO YES YES NO USA 1
NYSE:GE GE General Electric Industrials Specialty Industrial Machinery 10.18 103.35 115.17 58.72 58.72 1.76 0.0400 119.1000 4 0.04 -63.7200 0 0 Intermediate NO NO NO NO USA 1

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 categorization above.

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

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.