Monthly update: August 2013

The month has passed and it's my favorite time, giving an update of my dividend portflio. This month I've initiated two new positions, Unilever and Coca Cola. Generally markets have been down a bit although that's not a big problem since I am not selling shares anyway.

Unilever: the Dutch P&G

Unilever is a Anglo-Dutch company, which supplies fast moving consumer goods. The two parent companies, NV and Unilever PLC (PLC), together with their group companies, operate as the Unilever Group (Unilever). The Company’s four product areas are Personal Care, Foods, Refreshment and Home Care. They have 14 brands with sales of more than €1 billion a year. The company is quite diversified, both in their products as well as their geographical markets. It's the Dutch version of Procter & Gamble.

Investing approach - Dividend Growth Investing

There are two ways to getting paid while investing – capital gains and dividends. A stock’s capital gain is significantly impacted by what the broader market does in a given period. Of course certain stocks have more risk than others, but the price of a stock is the result of short-term supply and demand and may – at times – be illogical, chunky or erratic.

On the other hand, dividends are usually paid whether the broad market is up or down. In his book ‘The Little Book of Big Dividends’ the author Charles B. Carlson mentioned that roughly 40 percent of the stock market’s long-run total return comes from dividends. Companies like Coca Cola or Procter & Gamble are making profits every quarter and returning them to their shareholders. Should we suppose to be worried if the stock price declines on broader market news? Or possibly some “earnings miss” by analysts at banks or brokers who earn their money if people speculate with their money, instead of investing with it?

Monthly update: July 2013

It's been a busy month! Earlier I've written about my start as a Dividend Growth Investor. Since the start of the month I initiated 7 new positions. The last two additions (BBL/DE) are a little riskier than other stocks, so I want to purchase my next two block of shares in low-risk companies like KO, MCD, PG or something similar.

Weyco Group Inc scores a 6 on Piotroski's method

Piotroski chose nine fundamental signals to measure three areas of the firm's financial condition: profitability, financial leverage/liquidity, and operating efficiency. In this article I will show how this method works out for Weyco Group Inc, a dividend champion which paid dividends for over 30 years. This stock came up in one of my screeners and I was curious to see how the fundamentals look.

New additions to the Dividend Growth Portfolio!

In the last week I've initiated three new positions. I wanted to blog about this earlier but everytime I started, something came up. Now without further ado, my purchases are:

• 63 shares of Intel (INTC) for $23.88 each
• 43 shares of Textainer Group Holdings (TGH) for $34.34 each 
• 28 shares of BHP Billiton (BBL) for $54.70 each

Intel

Intel yields 3.7% at current valuations and has increased dividend for 9 consecutive years. The last 5 years dividend has grown by 14% yearly compounded. Although the technology sector is quite volatile, Intel is a stock I feel comfortable purchasing. I am sure the future holds great things for our society but one of the key ingredients for further growth is technological advancement.  Intel is one of the leading companies on this front. 

Textainer buys and leases sea containers. Textainer offers a nice fat dividend of 5.4%, but is also one of the fastest dividend growers. It has raised dividends for the last 7 years and in the last 5 years it has grown dividends over 50% yearly compounded. Current payout-ratio is 45% so that means there is room to grow. Downside of this company is it's debt/equity-ratio of 2.3x. It uses debt to finance growth, however it's interest ratio is a healthy 3x. Definately one of the more riskier stocks in this portfolio but also a potential gem!

Finally, BHP Billiton. A big exploration and mining corporation. It yields over 4% and I think it was fairly cheap, because it traded near 52week lows. BBL's been raising dividends for 10 years, with yearly increases between 10-20%. As well as Textainer, BLL is a bit more risky than average. This doesn't have to be a problem but I'll try to pick less risky stocks for my next purchase.

These stocks added $200 to my yearly forward dividend which stands at $363. I plan to deposit some more money after my vacation to finalize my first part of the portfolio. After these purchases I will deposit monthly and together with dividend income will initiate new positions or add to existing ones.

Thanks for reading!

What do you think will be good additions to this portfolio? The usual suspects like KO, MCD, PG, JNJ or another company? Let me know!

New Purchase: Philip Morris International (PM)

Philip Morris International (PM) is the largest publicly traded manufacturer and marketer of tobacco products. In 2008 it spun off from Altria and got it’s own stock notation. PM produces and distributes well known brands like Marlboro, L&M, Chesterfield and Philip Morris. Markets are global and diverse; it sells almost everywhere except the USA. The USA-market is controlled by Altria. This provides a big advantage for PM as the tobacco market in USA is slowly declining, whereas there are more opportunities for new markets worldwide.

Dividend policy

PM is not a dividend challenger, contender or champion as defined by David Fish (see here) but this is only because it started in 2008. Since 2008 dividend has grown 13% compounded per year. Payout ratio was 62% in 2012 which is reasonable. It also has a share buy-back program. Until the end of 2012 PM spent $27.9 billion to repurchase shares (about 23.2% of shares outstanding). For the next 3 years a new program has begun (about $18 billion) to repurchase shares and this roughly equates to another 12% of the shares outstanding (based on $90 per share on a float of 1.63B). To finalize this section; the current yield is 3.90% which is lower than the 5-year average yield of 4.40%.

Risks

Obviously there are risks with a stock like PM. Government policies can and will be stricter in the future. Think of non-smoking areas in bars, public places, etc, but also the new packages in some countries. New products like e-cigarettes could provide new markets to companies like PM. But there are at least two arguments why cigarettes are here to stay: 1) it’s addicting properties makes sure people are coming back and 2) governments “earn” a lot of money through taxes and duties. A lot has to happen for both people and governments to quit smoking or prohibit it at all.

Valuation

In this section I’ll use a few methods to value PM.

Average PE-valuation of current year

Current PE-ratio is around 16.8x. At the 52-week low price it was 15.8x and at the 52-week high price it was 18.6x. The average price of both numbers lead to $90.

Average PE-valuation of last 5 year

Current PE-ratio is around 16.8x. Historical 5-year PE-ratio is 15.5x which gives a valuation of $80.

Average yield of last 5 year

Current yield is 3.9%. Historical 5-year yield is 4.4% which gives a valuation of $80.

Discounted Cash Flow-valuation

Using the following assumptions I arrive at a fair price of about $104.

• Dividend growth rate of 12% per year for 5 years, and a perpetual DGR of 5% thereafter.
• Earnings growth of 11% for the next 5 years (source: Yahoo Finance) and 6% perpetual growth thereafter.
• Discount rate of 10%.

The average price valuation of these 4 methods is $88-89 so it seems at the current price of $87.5 PM is fairly valued.

Conclusion

PM is a so-called sin-stock. From the perspective of a share-holder however, it certainly is not! It’s dividend policy is share-holder friendly and it’s a relatively stable business. People keep smoking, whether times are good or bad. This week I bought a block of shares PM at $87.5 with a yield of 3.90%. This purchase adds almost $60 to my forward yearly dividend which stands at $163 after this purchase.