You have probably read the news that Amazon is going to acquire Whole Foods Market (WFM) in cash for $42/share. This will increase competitive pressures in the grocery business, which has sent shares in companies like Target (TGT) and Wal-Mart (WMT) lower. Even retailers such as Ross Stores (ROST) and TJX Companies (TJX) are taking a beating. This decline could provide an opportunity to acquire quality merchandise at lower prices.
However, the issue I am going to discuss briefly deals with valuation. If you look at the chart of Whole-Foods over the past five years, you can see that the share price routinely sold above $42/share.
Whole Foods earned $1.26/share in 2012, and roughly $1.50/share every year through 2016. Therefore, anyone paying more than $30/share was likely overpaying for the stock. The company is worth $42/share in a going private transaction. However, if the buyout hadn't materialized, a discount to that price would have been warranted.
Most investors who bought Whole-Foods between 2012 and 2015, are going to lose money on their investment (even if you account for stock dividends). They overpaid massively for their shares, possibly due to hopes of brighter futures.
The lesson here is not to overpay for shares. Even the best company in the world is not worth overpaying for. You need to have a margin of safety. This was one of the reasons for the lost decade in stocks in the early 2000s when companies like Coca-Cola and Wal-Mart grew earnings and dividends, but share prices went nowhere due to steep overvaluation in 1999 - 2000.
The other reason investors in Whole Foods lost money in the buyout is because they are robbed of the future growth potential in the business. I never owned Whole Foods though, since it didn't meet my entry requirements. Unlike others, I would have been unhappy when a company I own is about to be acquired.
As dividend growth investors, we make money when we identify a company that grows earnings, dividends and intrinsic values over time, and we purchase it at an attractive valuation. Our job is then to hold on patiently to our investments for the long-term.
Full Disclosure: Long TGT, WMT, TJX, ROST
Relevant Articles:
- The Real Risk With Dividend Growth Investing
- How to value dividend stocks
- Should you celebrate when your dividend paying company is about to be acquired?
- Dividend Stocks make great acquisitions
Popular Posts
-
Dollar cost averaging is a process, where the same amount of funds is allocated to preset investment/s at regular intervals of time. It is ...
-
Warren Buffett’s Berkshire Hathaway just received a dividend check for $194 million dollars from Coca-Cola. Berkshire Hathaway owns 400 mil...
-
I review the list of dividend increases every week, as part of my monitoring process. This exercise helps in monitoring existing positions a...
-
As an investor, I am aware that I have a lot of blind spots. Someone with a glass half full outlook on life might say that I have a lot of r...
-
I review the list of dividend increases every week, as part of my monitoring process. This exercise helps in monitoring existing positions a...
-
The Procter & Gamble Company (PG) provides branded consumer packaged goods worldwide. It operates through five segments: Beauty; Groomi...
-
The goal of this website is to inspire readers to identify their goals and objectives, and then create a process to achieve them. I shared t...
-
One of my favorite charts shows a listing of eleven consumer goods companies, and the brands that they own. It reinforces my belief that str...
-
As dividend growth investors , our goal is to buy shares in a company that will shower us with cash for decades to come. One of the importan...
-
I review the list of dividend increases as part of my monitoring process. This exercise helps me monitor existing holdings. It also helps me...