More Portfolio Changes!

Introduction

To start, I was not expecting to be this busy in back to back days.  I made more portfolio changes this month.  I highlighted the changes I made on the 27th – adding more Ameriprise and starting a position in Williams-Sonoma.  On Friday the 28th, much of the healthcare sector was in an uproar after McKesson (MCK) reported much lower profits than expected.

So after reading their quarterly and seeing they took a large goodwill writedown (in the range of $1.20/share), their quarter would have been OK otherwise.  This was now an opportunity!

Added More Cardinal Health

I already owned Cardinal Health (CAH) which is already a dividend contender (20 year growth streak).  The stock was down about 10% on the day so I added another 25 shares @ 66.74.  Here’s how Cardinal Health ranks on SimplySafeDividends, better than 98/99% of companies in terms of safety and growth, I’ll take it!

cah_ssd

Bought Amgen

Amgen (AMGN) was another name that was down about 10% after their quarterly report was not viewed positively.  The biggest thing they highlighted was not being able to keep raising prices on their major drug Embrel.  Being in it for the long haul this seemed like another reasonable opportunity to add.  The company’s dividend history is only 6 years but it is well covered.  I added another 10 shares to my existing 10.  Amgen has very similar ranks to Cardinal Health, better in terms of safety and growth than nearly every other company which offering a modest yield.

amgn_ssd

Sold Occidental

Finally, I decided to sell my entire stake in Occidental Petroleum (OXY).  I have not been a fan of the oil sector and it was a mistake getting into it.  I had purchased many names as the falling knife of oil prices was still falling.  I’ll have to sit and figure out my exact gain/loss, I expect it to be a small loss overall, I had some reinvested shares help me out but at this point I fully expect they will have to cut their dividend.  At that point I expect the stock price to crater as the market generally seems to be propping up shares.

oxy_ssd

The company fares poorly in their dividend safety metric.  This in turn makes it in the worst percentile for dividend growth.  I think the high yield score is a red herring that will vanish as they are forced to cut the dividend.  They are expanding their balance sheet in order to pay it which can only happen for so long.  One metric to look at is free cash flow, well they lost over $2.50 a share in 2015 as low oil prices crushed the business.  This is before they paid out an additional $2.97 in dividends per share.

oxy_fcf

In this case, being able to sell at roughly break even or a small loss is a decent trade off.  Doing so, I can apply the capital to companies that are more financially sound and less dependent on commodity prices.

Huge Early Drop For Generic Healthcare Companies

Quick Look At Earnings

There was a huge early drop for generic healthcare companies.  It took down McKesson (MCK), Cardinal Health (CAH) and AmerisourceBergen (ABC).

Losers: OPXA -68%. STON -44%. SNMX -43%. CEMP -20%. MCK -17%. NVO -14%. ABC -13%. CAH -11%. GT -9%. TDOC -6%. ABBV -6%. AMZN-5%.

I will keep an eye on this, I own Cardinal Health and they are due to report on Monday.  All three rank very highly on Simple Safe Dividends, here are Cardinal’s stats:

cardinal_health

Top notch safety and growth, the dividend is a very small portion of free cash flow.

cah_10282016

The stock was already undervalued per Fast Graphs, this doesn’t even capture what today’s drop will due to the multiple.  Looks like a solid opportunity for holders of any of the three companies.

Quick Portfolio Update

Portfolio Update

Just a quick update, I bought more shares of Ameriprise Financial (AMP) and started a position in Williams-Sonoma (WSM).  Brief teaser:

portfolio on simply safe dividends

Both came up on my screener from SimplySafeDividends.  Looking for stocks with a safety >80 score, growth and yield >60 and having a 10+ year dividend growth history.  I have been watching WSM for a long time now and decided to finally start a position.  Both dividends which yield >3% are also incredibly covered by free cash flow.

Check out my updated portfolio here.

Corning – Strong Quarter Continues A Strong Year

Q3 Earnings

A strong quarter for Corning continues a strong year!  Corning reported their Q3 earnings yesterday (Oct-25-2016).  Some highlights (from seekingalpha, here and here)

Corning (NYSE:GLW): Q3 EPS of $0.42 beats by $0.04.

Revenue of $2.55B (+4.1% Y/Y) beats by $30M.

Results – revenue $2.55B (+4.1% Y/Y, $30M above consensus), EPS $0.42 (+24% Y/Y, +14% Q/Q; $0.04 above consensus)

Segment revenues breakdown – Core Sales for Display Technologies grew 7% Q/Q, 1% Y/Y to $943M, Core Earnings grew 14% Q/Q, 5% Y/Y to $270M. For Optical Communications, Core Earnings were up 14% sequentially and 38% on the year to $98M. Core Earnings for Environmental Technologies declined 5% on the quarter and 8% on the year to $35M. Specialty Materials Core Earnings down 8% Q/Q to $44M, Life Sciences’ unchanged at $21M.

Previously disclosed $2B share repurchase launched during the quarter.

Corning (NYSE:GLW) CEO Wendell P. Weeks: “Corning’s strong third-quarter results reflect the increasing momentum that we expected in the second half of this year. Sales and gross margins increased in every business segment year over year. We also grew the company’s sales, core earnings and core EPS both sequentially and year over year. Our operating results and progress on key growth initiatives continue to reinforce our confidence in Corning’s strategy.”

My Take

 I actually wrote about Corning just over a year ago in one of my first articles on Seeking Alpha. (Article here)

Stock performance has been very lumpy the past few years but I stand by what I saw in the company.  I saw a company with very strong financials, a diverse product base and at that point, a willingness to start return more money to shareholders which they have.  The company had announced another share buyback program and an increased dividend.  Since my original call the stock is up nicely, roughly 26%.

 glw_10252016

Based on where the market has previously assigned a multiple to the company the stock is potentially overvalued.  I want that story line to play out a little bit more after lumpy multiples being assigned over the past twelve years.

 glw_ycharts

Looking at a 10 year Y-Chart, shares outstanding have fallen from 1.7B to just 1B.  Additionally, margins are rich at 25%, free cash flow is generous even having dipped to “only” 933M the past 12 months.  Dividend cover is easy as the total dividends paid has been 653M this past year.

 Finally, at a quick glance using Simple Safe Dividends, I can see how Corning ranks compared to the universe of dividend stocks covered.

glw_ssd

The high safety score of 88 gives me confidence that the company faces no immediate issues paying the dividend as they in aggregate rank higher than 88% of the companies covered.  The growth figure is well above average and comes in the 67th percentile.  Finally, the overall yield ranks right at the mid-way point.

In conclusion Corning has kept doing what it needs to do and stands poised to richly reward shareholders.

Let me know your thoughts in the comments section.

United Technologies – Another Solid Quarter For This Steady Eddy

Earnings Time

Earnings time is always exciting, this is when we get the see how our companies have performed over the past 3 months and get a sense for where they are headed for the next 3 months.  I’m looking at United Technologies today (UTX) today as they reported before the market open today.  If you aren’t familiar with the company they are a diversified industrial in the aerospace, defense and building industries.  Some of their product lines are Otis Elevators, Pratt & Whitney Engines, Carrier HVAC equipment.  Visit their site for more information.

At a glance (from seekingalpha):

United Technologies (NYSE:UTX): Q3 EPS of $1.76 beats by $0.10.

Revenue of $14.35B (+4.1% Y/Y) beats by $80M.

They beat on both the top and bottom lines, nice!

So looking to FAST Graphs, this company has been a steady eddy over the years as well as a market beater over the long run.  This first image shows their historical performance back to the start of 2003.  A few highlights from this, growth was higher during the early periods but the past few years have still seen high single digit earnings growth.  This is good, earnings is what will ultimately drive dividend increases and stock price increases.  Additionally, your personal yield on cost (dividends received divided by your investment) would have grown from a starting 1.8% to 8.3%.  This is compounding at it’s finest!

Dividend Machine

Since we are trying to build our own compounding machine, companies like this have fit the bill.  This is why we shouldn’t be worried even with a slightly higher starting yield today, because the compounding effect has caused the stock price to rise in correlation with the earnings growth and subsequent dividend growth.  By the way, UTX currently has a 23 year dividend growth history, 2 years short of becoming a dividend champion.

utx_returns

utx_10252016

FAST Graphs

We can see visually in this second graph the fact that the company has been a steady grower over time.  Earnings are represented by the orange line.  The blue line represents the average multiple (PE ratio) the market has paid for said earnings.  What we like to see is a steady upward trajectory of the orange line.  The black line is the month end stock price and you can see it meander around the blue line.  Generally speaking, when it’s above the blue line the stock is overpriced, under it is undervalued.  The distance at any given time from the blue line represents the premium or discount the market is paying for the company’s earnings.

The Great Recession is but a small blip in their earnings growth history (time period highlighted in gray).  After having taken a step back in earnings last year, full year 2016 and 2017 look to return to their steady growth ways.  The stock still looks appealing today, trading at about 15x earnings which is very slightly undervalued based on the companies own historical performance.  It’s also trading right at about the market’s as a whole historical multiple.

Cash Flow Statement

Finally I want to just highlight a couple data points from the cash flow statement.  The purple bars represent free cash flow which is the ultimate indicator of a successful company.  This is the actual cash leftover for a company to spend after everything is said and done.  It can be used for dividends, share repurchases, paying down debt or growing the company.  The blue-ish looking bar represents the dividends per share paid out by UTX over the years.  A measure of dividend safety is to verify that the blue bar is lower than the purple and also the sheer percent of cash flow it takes up.  That figure can give us a general guideline of how quick the dividend may grow in the future.

utx_cash_flowIn terms of cash flow, the dividend took up about 23% of in 2000.  At year ending 2015 (which saw an earnings decline), the dividend represented 51%.  So the free cash payout ratio has increased over the years though it is still a very safe dividend.  By comparison, 2014 was a better year in terms of generating cash and the dividend was still under 40%.  We’ll have to see what the year end free cash flow numbers look like.

In conclusion, United Technologies reported another good quarter and they are on pace for a solid 2016.  The company has been a steady performer and has rewarded shareholders greatly over the years, including market beating total returns.  Even at today’s price it looks attractively priced for starting or adding to a position.

Let me know your thoughts in the comments.

V.F. Corporation – Close To Getting Interesting

Q3 Earnings

V.C. Corporation just reported their Q3 earnings before the market open on October 24, 2016.  The results of $1.19 beat expectations by $0.04.  Also of note, the company announced it’s yearly dividend raise (43 years!) of 14% to $0.42 a quarter.  The forward looking yield is roughly in the 3.2% range.

Shares are currently down in pre-market and I’ve been waiting for the stock to fall back to a reasonably valuation before considering purchasing.  Upon further research however, I am going to hold off for further multiple contraction.

Fast Graphs

vfc_10242016

One of the things that I love about Fast Graphs is the ability to see how a company’s historical valuation.  I think this is a much better measurement than trying to compare a company or industry against the market as a whole.  There is a long trend in VFC’s history to trade around 15x earnings which is also, historically speaking, the multiple of the market.  It’s only been in the past few years we have seen exception multiple expansion as the market rewarding growing earnings with even higher stock prices.

Now that earnings have slowed significantly since year end 2014, the stock, after surpassing any sense of reasonable valuation, those peaks are about 25x earnings, the stock has been pulled dramatically back towards it’s historical average.  This phenomenon is known as mean reversion and there are countless examples of it.

Waiting For The Right Time

I am interested in owning the company, but I’m not crazy about the valuation.  The recently raised dividend has my interest piqued but I will wait for the price to decline.  Depending on if you are using TTM or full year earning expectations, paying a 15x multiple roughly puts my target price between $46-$50 a share.

Why don’t I just buy it you say?  Although my aim is to hold the company long term – as I am a part owner in this business – I still am careful about how much I am willing to pay for future earnings growth and my cut – through dividends – of the company’s earnings.  Paying too much will leave you as a bag holder and the initial purchase price is an enormous driving factor in future returns.

Lower Return Scenario

Let’s look at two scenarios and how your future returns would have played out.  To start with, so you can see I am not cherry picking a time, here is how the graph looked back in 2007/2008.

v.f. corporation share price 2007

The multiple the market paid for VFC was actually even lower during this time period, roughly at 13x earnings.  So when the stock peaked through 2007, it was clearly overpriced at that point.  I am using that as the setup for my next graphics.

v.f. corporation hypothetical return

In this example, let’s pretend we bought it in 2007.  We’ll assume were caught up in the hype of a rising stock and plunked down our money to buy shares.  We held them for many years and ultimately sold them in 2013 at the historical multiple of 15x earnings.  We can see our annual rate of return, highlighted in yellow, is about 10% per year.  Pretty great right?  No doubt it is, especially as the country went through the Great Recession.  We could have done substantially better just by buying when the market was not paying a great premium for the company’s earnings.

Higher Return Scenario

v.f. corporation higher return

Had we bought when the company was trading at even under it’s lower 13x multiple (under 12x earnings).  Again, if we sold at the same period we would have seen an annual return over 16%.  This easily beat the market over the same time period.

Conclusion

I don’t get the fascination with high stock prices, high prices only benefit stock sellers.  Like Warren Buffett wrote in his 2008 letter to shareholders:

“Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”

By paying less at the time of purchase, especially during a time of undervaluation, we are able to buy more shares.  This in turn let’s us collect more dividends with a larger margin of safety.  Ultimately if we decide to, can benefit from periods of exuberance by selling at unreasonable or unwarranted valuations.