I will preface by saying I have a few updates to make. I haven’t written here in a few weeks. With that said, I just made three purchases yesterday! In this post I’ll cover why I added more Disney. The others will be in a separate post.
I’ve had an unexpectedly busy month with several buys in July. It all started when I was writing my June portfolio update article. I saw a stock “ESV” in my account that I didn’t recognize.
- I bought shares of W.P. Carey after reading some convincing analysis
- The stock is trading below it’s historical P/AFFO level
- Currently sports a 6.2% dividend yield that may grow substantially in the next few years
W.P. Carey is a triple net lease REIT that I recently added to my portfolio. Per investopedia,
A triple net lease is a lease agreement that designates the lessee, which is the tenant, as being solely responsible for all the costs relating to the asset being leased, in addition to the rent fee applied under the lease. The structure of this type of lease requires the lessee to pay the net amount for three types of costs, including net real estate taxes on the leased asset, net building insurance and net common area maintenance. This type of lease can also be referred to as a net-net-net (NNN) lease.
- I bought shares of J.M. Smucker after liking what I saw with a deeper analysis
- The stock is trading near it’s 52 week low and at a fair value based on adjusted earnings
- The dividend will be increased soon, ballpark may be around 8%
- The dividend has room to grow, a current yield slightly better than the S&P
I like to give the TL;DR (too long, didn’t read) version at the top so you can just skim if you want but of course I encourage you too read on!
I have been working on a series of articles pertaining to the big food companies. I’ve covered Kellogg, General Mills, J.M. Smucker and soon to be Hormel. All four companies have been trading near their 52 week lows, offer a steady business model and pay dividends. This is an intriguing combination and had me wanting to dive deeper to see if they were worth investing in.
- I bought more AT&T after receiving my custom stock alert
- Shares crossed over the 5% yield mark which made them look compelling
- Expecting 7-8% annual total returns from this purchase
- 40 more shares will bring an additional $78.40 of income based on today’s dividend rate
I’m playing a little catch-up with my portfolio changes. On May 2nd I bought more AT&T after receiving a text alert that it crossed over 5% dividend yield.
AT&T, along with other telecoms I typically view as cash cows to be periodically purchased at an appropriate yield. I could talk about the underlying business growth but this will just be a slow steady eddy type stock. I’m not expecting rapid growth so initial purchase price is paramount.
On May 4, 2017, a story came out about Spirit Realty having credit issues with some tenants. Shares for Spirit then proceed to drop 20%. In the wake of that, other triple-net lease players fell hard, including Realty Income. This is a textbook example of Custom Stock Alerts.
Realty Income is one of the most beloved REITs – especially given that it bills itself as “The Monthly Dividend Company”. Shares tend to trade at a premium in the REIT space which in turn helps the company maximize money received by issuing shares.
As an existing shareholder, I am always looking to add to holdings when, in my opinion, they are unfairly beaten down. That’s precisely what happened when an unrelated company reported bad earnings.
Custom Stock Alerts
My site, customstockalerts.com helped me out here. I had existing alerts setup for Realty Income, seen here (this is how it looks after the fact, note the 2 inactive alerts).
I have a multitude of alerts setup for the company, proximity to 52 week high or low, daily price movement, dividend yield above 5% and just a rough ballpark of a price I’d be interested in.
On 12/1 I sold my shares of Helmerich & Payne (HP). This was one of my earliest buys in my 401k as I slowly started dabbling in individual stocks. It did not help that I bought in late 2014, catching the falling oil knife and subsequently seeing red for a very long time. Only as of late has the company roared back – most recently – to news on the OPEC cut agreement. In the end I did book a profit, most notably due to reinvesting the dividends received over the past two years.
When deciding to sell a stock I will go through an analysis to see if that is my best course of action. While in general I do believe the company will ride out this storm, this is one that I would not have purchased today knowing what I have learned over the past two years. Through trial and error, being in the oil patch is not something that I enjoy, at least not from a dividend growth perspective. I would prefer the smoother ride of other stable companies whose earnings are not highly controlled by outside influence, especially from geo-politically unstable regions. With that said, I would like to post some research that I have been reviewing.
The first note I am looking at is the price to cash flow chart from Fast Graphs. As you may have noted I use Fast Graphs a lot in my analysis. I see a bumpy and unstable ride. Cash flow spiked in 2015 at over $13 a share to then fall nearly 50% by year end 2016 to less than $7. This year looks to fall another 50% from last years figure as more of their oil rigs go unused. That said, analysts are currently projecting 26% growth in cash flow for next year. You can note the recent price uptick noted by the black line, which on this time horizon looks nearly vertical. The blue line represents the “typical” price to cash flow ratio the market will pay for the stock and it is now above the line, suggesting overvaluation.
Simply Safe Dividends
Simply Safe Dividends is another one of my research points. I like to look at the free cash flow payout ratio for any company I am researching. Earnings can be lumpy and can be massaged. As dividends are paid out of cash, in my mind, this is the only ratio to look at. You can’t fake cash. Again, this is a very bumpy picture to me. The negative numbers represent they lost money on the year, in addition to having to pay out the dividends. That isn’t always the case but the past two years the payout ratio has spiked to either being greater than free cash flow or thereabout. This means the company is issuing debt or shares in order to cover the dividend.
The scorecard for the company shows the overall picture in relation to the universe of stocks covered by Simply Safe. The safety score of 45 does not paint a picture I am terribly comfortable with. The price of oil is the biggest risk and outside of their control. That will dictate how many rigs their customers are looking to use. Unsurprisingly, the growth score is also quite low currently given the fact they are just holding on in this low oil price environment.
I’ll wrap here with a Fast Graph. This shows their historical PE ratio and the valuation the market typically assigns. When looking at earnings figures alone, this will be the bumpiest of all the rides. The company has now booked negative earnings for just about 2 years in a row and the current stock price, in my mind, is still quite decoupled with operating results. I feel the market has already priced in an oil recovery with the level the stock is trading. It will be a while before oil prices are sustained. Customers then need to rent rigs and for the company to book revenue and ultimately report it. I decided this was a good opportunity to close out the position and look for smoother and more predictable sailing.
Medtronic had been a company on my watchlist for a while now. My concern was around valuation, they traded at 19-20x full years earnings a few months ago. After the earnings release on 11/22 the stock promptly dropped close to 10% the next day and I started a position at $73 a share. At that price, it puts the valuation at 15-16x earnings which is much more up my alley. Additionally, this is a dividend champion – they have not only paid – but have raised their dividend for 39 years! Incredibly impressive and to get shares at a level matching the historical value of the market I will take that any day of the week.
As you can see in the Fast Graph, the company had a long stint of being out of favor with the market even though earnings kept growing throughout the entire Great Recession! Had I known what I know now back then, I would have bought a lot of stock back then. In any event, the company is still expecting good earnings growth, 6% this year, 12% next year. As I’ve mentioned in the past I am hesitant with accepting growth rates as fact as they would be predicting the future, so I will take them with a grain of salt. My starting position gives me a yield of 2.35%, which is a little better than the S&P as a whole.
Simply Safe Dividends
The company historically maintains a low payout ratio, it recently jumped up due to the acquisition of Covidien. The company sports a 5 year dividend growth history of 9.8%. Imagine getting a nearly 10% raise every year, I know I don’t get that! They’ve also paid their current dividend for 2 quarters so by the July payment it should be the new, higher dividend.
Lastly to point out, using Simple Safe Dividend’s scorecard, the company rates quite highly in both safety and growth. Additionally, this score in the middle of the pack for yield – which as I pointed out is quite OK! I will trade some current yield for what should be market beating dividend growth – and quite possibly – total return.
One neat aside, the company has approval for the world’s first artificial pancreas!
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!
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.
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.
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.
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.
Just a quick update, I bought more shares of Ameriprise Financial (AMP) and started a position in Williams-Sonoma (WSM). Brief teaser:
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.