Wednesday, July 31, 2013

Eleven Dividend Paying Stocks I Purchased Last Week

In a previous article, I outlined that it is getting more difficult to find quality dividend paying stocks to buy. Most of the usual suspects like Kimberly-Clark (KMB) or Colgate-Palmolive (CL) are very overvalued today, which prevents me from adding to my positions there. Other companies like Chevron (CVX) are attractively valued today, but unfortunately my portfolio is overweight in them. Currently I find the oil sector to be cheap and have some of the lowest P/E ratios in the market. However, I would hate to be concentrated in one sector which is exposed to the fluctuating prices in its commodity products.

In this current environment, I am starting to deviate slightly from my entry criteria on a more consistent basis. I usually avoid paying over 20 times earnings for a company for which I expect earnings and dividend growth, and which I could see holding on for the next 20 years. However, I am willing to bend the rules on consecutive dividend increases or minimum yield requirements. Over the past five years, I have increasingly come to realize that buying a quality company as a long term investment at a reasonable valuation is more important than simply purchasing a company that fits a certain set of quantitative criteria.

Over the past week, I purchased stock in eleven businesses. I have outlined these businesses below. Some of these purchases represented additions to existing positions, although a few represented new positions.

Aflac Incorporated (AFL), through its subsidiary, American Family Life Assurance Company of Columbus, provides supplemental health and life insurance products. Aflac has managed to boost dividends for 30 years in a row, and has a ten year dividend growth rate of 19.30%/annum. The company is really cheap at 9.70 times earnings, but has the capacity to grow profits in the foreseeable future through strategic partnerships in Japan and US markets and increasing number of sales associates. One of the opportunities for growth could be US, which accounts for roughly only a quarter of revenues. It is amazing that a company deriving 70-75% of revenues from Japan could achieve such astounding growth over the past 30 years. Currently, the stock trades at 9.70 times earnings and yields 2.30%. Check my analysis of Aflac.

American Realty Capital Properties, Inc. (ARCP) owns and acquires single tenant, freestanding commercial real estate that is net leased on a medium-term basis, primarily to investment grade credit rated and other creditworthy tenants. I like the fact that management is aggressively purchasing assets, acquiring companies and working towards increasing Funds from Operations for shareholder distributions. I can easily view this REIT becoming the next Realty Income in a few years. The risk of course is that they overpay for acquisitions, and this ends up costing existing shareholders big time. The REIT has raised dividends since going public in 2011. This REIT currently yields 6.20%.

ConocoPhillips (COP) explores for, produces, transports, and markets crude oil, bitumen, natural gas, liquefied natural gas, and natural gas liquids on a worldwide basis. I am attracted to the above average yield on ConocoPhillips, in comparison to Exxon and Chevron. Unfortunately Chevron is already one of my highest weighted positions, which is why ConocoPhillips was the second US oil choice. I am building my position in the stock with this purchase. The company is extremely well run, has a history of disposing out of non-core assets such as Lukoil stock (LUKOY) and Kashagan Project, and sending cash to shareholders in the process. The company has increased dividends for 13 years in a row, and has managed to boost them by 15.10%/year over the past decade. Currently, the stock trades at 10.70 times earnings and yields 4.20%. Check my analysis of ConocoPhillips.

Dr Pepper Snapple Group, Inc. (DPS) operates as a brand owner, manufacturer, and distributor of non-alcoholic beverages in the United States, Canada, Mexico, and the Caribbean. The company has a portfolio of strong brands in North America, and is cheaper than its two larger rivals. The opportunities involved are gaining back international distribution rights to its name and expanding non carbonated products. Even if it doesn't do these things, the company can easily repurchase of stock each year, grow earnings in the low single digits and pay a 3% dividend, for a total return of high single digits or low double digits. Currently, the stock trades at 15.60 times earnings and yields 3.30%.

International Business Machines Corporation (IBM) provides information technology (IT) products and services worldwide. I like this global technology juggernaut, the ability to consistently repurchase shares, raise dividends for 16 years and its vision to earn $20/share by 2015. The company has increased dividends for 18 years in a row, and has managed to boost them by 18.80%/year over the past decade.  Currently, the stock trades at 14 times earnings and yields 1.90%. Check my analysis of IBM.

The Coca-Cola Company (KO), a beverage company, engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide. The company is a global drink giant, responsible for 1.8 billion drink servings to the world every single day. There is a strong brand name, a global distribution network and opportunity for growth in emerging markets. While I really like the company, I had not added to the stock for a while until 2012, which resulted in much lower allocation to this quality company. I am trying to rectify that, and if Coke ever sells at 15 times earnings, I would be a buyer. The company has increased dividends for 51 years in a row, and has managed to boost them by 9.80%/year over the past decade. Currently, the stock trades at 19.40 times 2013 earnings and yields 2.80%. Check my analysis of Coca-Cola.

McDonald’s Corporation (MCD) franchises and operates McDonald's restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, and Latin America. The golden arches is another stock, which is priced attractively here today, and which can deliver plenty of value over the next 20 years. It is a globally recognized brand, has pricing power, and has continually managed to reinvent itself. With its “Plan to Win” strategy, the company targets 3-5% growth in annual sales and 6-7% growth in operating earnings. Add in a 3% yield, and a 2% reduction in stock through share repurchases, and you can easily expect very good results over time. The company has increased dividends for 36 years in a row, and has managed to boost them by 28.40%/year over the past decade. Currently, the stock trades at 18.20 times earnings and yields 3.10%. Check my analysis of McDonald’s.

Realty Income Corporation (O) is a publicly traded real estate investment trust. It invests in the real estate markets of the United States. I slightly overpayed for this REIT, since I locked in an entry yield below 5%. However, I believe that the company is well managed, and like the distributions which are paid monthly, and regularly increased. Existing management has a strong track record of acquiring quality assets, looks at developing expertise in areas where not many competitors are looking, and tries to increase profits for shareholders. The company has increased dividends for 19 years in a row, and has managed to boost them by 4.20%/year over the past decade. Currently, the REIT yields 4.90%. Check my analysis of Realty Income.

Target Corporation (TGT) operates general merchandise stores in the United States. I like the perceived quality of Target relative to Wal-Mart. The stores look more upscale than the Wal-Marts of the world, and target customers with higher incomes. In addition, the company is much smaller, and just starting to expand internationally. I view this as an opportunity. Management is trying to earn $8/share by 2017, which would make shares purchased today even cheaper. The company has increased dividends for 46 years in a row, and has managed to boost them by 18.60%/year over the past decade. Currently, the stock trades at 16.80 times earnings and yields 2.40%. Check my analysis of Target.

Wells Fargo & Company (WFC) provides retail, commercial, and corporate banking services. The bank cut dividends in 2009, after receiving $25 billion from US Treasury. Since 2011 however, it has started increasing distributions, which are slightly less than the highs reached in 2008. When I last analyzed Wells-Fargo in May, I was not very happy about the company, because of near term weakness. However, I came to realize a few weeks later that I was deviating from my mantra of investing for the next 20 years, rather than for the next one. I sold some naked puts, and last week I initiated a small position in the bank. Currently, the stock trades at 11.80 times earnings and yields 2.80%. Check my analysis of Wells Fargo.

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. This is the largest retailer in the world, which has a tremendous scale of operations and immense pricing power. The company’s bright spot include its international operations, which could easily reach domestic ones in 10 – 15 years. I like the low valuation, which is pricing very low growth in earnings per share over the next decade. The company has increased dividends for 39 years in a row, and has managed to boost them by 18.10%/year over the past decade. Currently, the stock trades at 15.40 times earnings and yields 2.40%. Check my analysis of Wal-Mart.

These shares are not purchased at the low valuations I took for granted up until the days of early 2013. However, most of the companies listed above are having some of the lowest valuations that you can find today. The positions in American Realty Capital Properties  Dr Pepper Snapple Group and Wells Fargo have not raised dividends for at least ten years in a row, however I believe these franchises offer compelling long-term potential to achieve that. IBM does not yield much to fit my entry criteria, but has a low P/E, excellent growth and a consistent history of share repurchases.

Full Disclosure: Long AFL, ARCP, COP, DPS,  IBM, KO,  MCD, O, TGT, WFC, WMT, KMB, CL ,CVX

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15 comments:

  1. Wow, you've been busy!

    Over the last month or so, I've purchased more WMT, WFC, and COP.

    If the P/Es continue to stay low on COP and WFC, under 12, I will buy more.

    Mark

    ReplyDelete
  2. My Own Advisor,

    Thanks for stopping by! I just had an opportunity to buy some dividend quality stocks, which I took. I would likely not be able to make another purchase for about 2 months or so. I think I might have purchased at the top, but hopefully these companies will keep delivering higher earnings and dividends for the next 20 years. But then, who knows ;-)

    Best Regards,

    Dividend Growth Investor

    ReplyDelete
  3. I like all of these picks, and have plans to initiate buys into them if I can and if they remain a strong value.

    ReplyDelete
  4. seems fitting:
    "I would sooner buy a great business at a fair price than a fair business at a great price."

    Buffett

    ReplyDelete
  5. O has about the *highest* valuation of any of the big REITs out there. Other REITs with similar, or longer, records of increasing dividends and selling at lower prices on a P/FFO basis include HCP and WPC.

    Because the P/FFO basis of these companies is lower, they can (and do!) offer a similar dividend yield with a lower payout ratio (dividends as a percentage of FFO).

    Not that there's anything wrong with O. But it's OK to look just a teensy bit beyond this one REIT.

    ReplyDelete
  6. Scott and Q,

    Thanks for stopping by and leaving a comment. I like these companies, and think they could do well over time, and the prices were not too outrageous. I was also going to buy APD, but it went from undervalued to slightly overvalued territory

    Anonymous,

    I need to look at WPC and HCP. But O looks like a better value than the companies you mentioned. In addition, did you see about the addition to another REIT -ARCP? What's your take on that REIT?

    ReplyDelete
  7. DGI,

    Love the buys! Great list here.

    I'm a big fan of most on here. I hadn't heard of ARCP until you stopped by my blog the other day and mentioned it. I've since had a few readers talk about it and I'm intrigued. Really nice acquisitions recently and the FFO growth could explode from here, fueling larger dividend payouts. I don't like the portfolio/tenant concentration as it stands now, but that is rapidly changing.

    DPS is interesting. The only thing I really don't like about the company is the lack of true international exposure, as they lack their rights. I've heard of talk for a while now for this to change, but nothing yet. That could be a big game changer for that company, but as you point out they don't necessarily need it to fuel strong shareholder returns. Owning KO, PEP and DPS pretty much buys you an entire aisle in the grocery store! :)

    I like the Canadian banks here, specifically BNS and TD. Both are trading near or below my cost basis.

    DLR is also very high on my watch list. I know you're long, and today's price is attractive.

    Best wishes!

    ReplyDelete
  8. Been doing a lot of buying myself; RAI, DPS, HP, TIS, CRBL, DRI and SWY.

    Going to be buying more today - probably a chunk of TUP.

    ReplyDelete
  9. Dividend Mantra,

    Thanks for stopping by DGI sute!

    ARCP is not as established as O or NNN or WPC, which explains the extra premium attached to it. I do like their expansion, and I do think it is accretive to FFO/share. So therefore, you end up getting a higher yield + possibility for higher distributions growth.

    I missed out on adding to the Canadian Banks earlier this month. It is tricky, because in the short run they could be under pressure especially if the Canadian housing market deflates. However, in the long-run, the big 5 Canadian Banks are there to stay, as long as there is Canada ;-)

    I have not added to DLR since June. I might look into adding there. It surely is a high dividend/high growth company, which is very unloved.

    On the other hand, I might also need to replenish cash positions, which are at zero. My emergency funds are close to zero as well, which is why I might refrain from further purchases for a couple months ( this is what I have been saying since April however ;-) )

    ReplyDelete
  10. Anonymous,

    I have not looked into DRI, TIS, SWY and RAI. I guess something to look into on my end.

    Thanks for stopping by!

    DGI

    ReplyDelete
  11. Hi DGI,

    Since you mentioned in Dividend Mantra blog, I've been trying to understand the figures behind the dividends ARCP, having been a bit astonished about the financial statements, maybe due my lack of skills, both in English and US GAAP.

    ARCP seems to be an externaly managed company that losses money in their operations, according to latest 10-K.

    In my view, it seems ARCP funded the year 2012 dividends with debt. According to cash-flow statement in 2012 10-K, "Net cash provided by operating activities" was 6.068.000 usd and the "Distributions paid" (without non-controlling interest) were 8.396.0000 usd, so one may think that roughly 2.3 million usd of dividends, were paid thanks to debt/new stocks issuance.

    I mean, if one thinks separately about investing activities and finance activities excluding the shareholder remuneration, it seems not sustainable paying dividends with any cash different from operating activities.

    The game in year 2011 would be the same.

    Hope to be a misthinking due my limitations, but it appears to be like the spanish company TELEFONICA, who, until the dividend cut, funded its dividends with debt and thanks to non-cash profits.

    As a check test, the same figures for O, are truly sound, in addition its net income, and obviously FFO, are positive.

    Please, DGI, Mantra, fellow commenters, any toughts?

    Very truly,
    Manefla

    ReplyDelete
  12. Manefla,

    When investing in REITs, you have to take into account FFO - funds from operations.

    Also, because ARCP has done so many acquisitions in the past year, the prior financials are not telling the whole story.

    Prospective numbers do show that the company will be able to cover distributions on a forward basis. That's what ultimately matters.

    You might also want to review the following article on REITs asa starting point in your research:

    http://www.dividendgrowthinvestor.com/2013/04/five-things-to-look-for-in-real-estate.html

    Best Regards,

    DGI

    ReplyDelete
  13. What do you think of NCV - a 10% payer with monthly dividends? how come I hardly see write ups about it?

    ReplyDelete
  14. I don't have an opinion on NCV. As a rule, I ignore high yielding companies that pay a decreasing distribution over time.

    ReplyDelete
  15. I am glad you are listing Realty Income. I think it is a great dividend paying stock and I own it and I am planning on adding more shares to my portfolio, so it is nice to see other investors adding this stock too. It's been beaten down recently and I think it didn't deserve it, so a great opportunity for addition.

    ReplyDelete

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