Having an established Watch List is critical for investors. It will help a potential investor identify when a company, that they have performed research over and determined that they would one day like to buy at a reduced price, becomes more affordable. Interestingly, even though I know about the importance of a Watch List, I still have not created one to date. This was brought to my attention recently by Henry at Living At Home when he asked me if I had any other stocks on my radar. I couldn’t believe it, but I did not have an answer. Now, it is time for me to put together a list of stocks to monitor going forward. Here are ten stocks I am adding to my July Watch List.
After reviewing my portfolio’s industry allocation (based on 7/11/14 close), I have two industries with allocations of less than 5%: Financial and Tobacco. Both industries have many great dividend growth stocks, so I have an opportunity to add a great DGI stock to my portfolio while addressing a need in my portfolio. I am not planing on performing a full-blown analysis for each company; instead, I am simply accumulating a list of Dividend All-Stars to add to my watch list.
Financial Industry. My only current position in this industry is my very small stake in BAC (~11.5 shares). This purchase is a sentimental one since it was my first ever stock and was a gift from my grandma. However, this position is less than $200, which is not sufficient for a well-balanced portfolio. There are many great financial stocks available that have performed well in a DGI portfolio. I also have many options at my disposal; I can add a traditional bank, insurance company, investment firm, an international bank, a regional US Bank, and so on. You get the idea. While this list will not include every bank, here are the banks I will continue to monitor going forward.
- Aflac (AFL)– Lanny recently performed a great analysis on this company and brought the company to my attention. It has a great history of increasing dividends, a low payout ratio, and a low PE ratio. I can see why Lanny owns a position in the stock. The current yield is around 2.4%.
- Cincinnati Financial Corp (CINF)– Another insurance that is considered a Dividend Aristocrat. The company could not be more different from Aflac in terms of coverage offered to its consumers. Aflac offers mostly supplemental insurance while CINF offers a wide spectrum of insurance to its customers (home, auto, renters, etc.). The dividend increases are not as large as other companies, 4.75% and 3.06% in the past two years, respectively; however, the stock has a current yield of 3.7% which is much higher than others in the industry. The yield has benefitted from two items this year: the stock’s price decrease in 2014, which has fallen 9.03% from 12/31/13, and a much higher payout ratio than others in the industry,~60%. Based on the higher PE of ~17, I will continue to monitor this stock going forward for a further decline.
- Chubb Corporation (CB)– CB is another insurance company on this list that is considered a Dividend Aristocrat. The company has a low PE of 11.19, yield of 2.14%, and a Payout Ratio of 21%. The company’s product offerings are more aligned with CINF than AFL as the company offers a wide variety of insurances to individuals and businesses.
- Prudential plc (PUK)– This company is structured slightly different from the other companies listed above. This is the holding company for Prudential Life insurance and Prudential Investment services, so it is more than just an insurance company. The company boasts a very high PE ratio (~25), a dividend yield of 3.38%, and a payout ratio of 33%. What interests me about this company is the diversification of products and the high ROE, 35%, compared to other players in the insurance and financial industries. I still have a lot more research to perform about this company as I still need to understand the complete business model, dividend policy, etc., but I feel like the company is worthy of an addition to my watch list to see if it will fall down from its premium of a 25 P/E Ratio. I should have a stock analysis on the company in the future, so stay tuned!
- Wells Fargo Bank (WFC)– Can a DGI watch list/portfolio be complete without including Wells Fargo? I don’t think so. The company has traditionally been one of the strongest banks that pays a continuously growing dividend (increases of at least 10% over the last 3 years). The company’s current P/E ratio is at 12.81, which is slightly below JPM and HSBC but higher than C bank. The company has fallen slightly from its recent pricing in the $53 range and now trades at $51.49. Another week of declining could force me to pull the trigger and add the bank to my portfolio.
- A Canadian Bank– Oy vey, how does anyone tell one of these banks apart? All jokes aside, I began looking into the prospects of investing in a Canadian Bank based on the community’s ownership and discussions with Lanny. What’s funny about these banks are that they all have very similar metrics: a yield between 3.5% and 4.25%, payout ratios between 45% and 50%, and P/E ratios between 12.5 and 14.5. I still have additional research to do, but I would like to invest in one of the major players (TD, RY, CM, BNS, or BMO). The ratios are much in line with many of the other American banks and the companies pay a higher dividend. Of the group, my current leader is the Royal Bank of Canada, RY. The company has the highest ROE (tied with CM), highest profit margin of the group, and the largest annual dividend increase of the group. RY is middle of the pack in the yield/payout/PE ranges I identified above. However, before deciding I really want to dive into the June financials before making a final decision. I might as well start brewing the pot of coffee for that fun endeavor.
- Fifth Third Bancorp (FITB)- This will be my final addition for banks. The Queen City bank has a current P/E Ratio of 11.10, which is much lower than its mid-western competitors Key, US Bank, PNC Bank and Huntington, while sporting a higher dividend yield than the four. In addition, the company has been raising its dividend by $.01 each year (Which may not seem like a lot until you realize the bank’s dividend is only $.13 per share). The one dis-advantage of the company compared to its competitors is the expected EPS growth over the next five years. A lot can change over five years, so I am not too concerned about this metric. It was just the one glaring difference among its competitors. Based on the majority of the metrics, the bank appears to be trading at a discount among its peers. For that reason, I will choose to follow FITB as opposed to USB. I’m not saying USB is a bad company. In fact, the company is one of the strongest banks in the nation. It has just been taking off like a rocket-ship over the last couple of years.
Tobacco Industry. Currently I only own one cigarette company, ~$1k in PM. It is kind of shocking considering the yields that tobacco companies offer and the nature of the industry. My major issue with buying a tobacco stock is that I do not want to own a company that exclusively sells cigarettes in the United States. The headwinds are strong in the United States and the total cigarette market is declining because of new regulations, a smaller total market, or an increasing negative sentiment about cigarettes. For that reason, I will continue to monitor companies that have a strong international presence. I don’t mind if the company sells cigarettes in the United States, I just don’t want to invest in a company the exclusively sells in the US. With that being said, here are three tobacco companies I will be keeping my eye on going forward.
- Philip Morris International (PM)– This would be the easiest of the group to invest in. I already own about $1k of PM and could choose to increase my position in the company. PM has the lowest P/E ratio of the group of large tobacco companies and a dividend yield of 4.4%. The two worrisome thing about PM has been the lagging financial performance and the payout ratio of 71%. Still, the company is one of the largest international tobacco brands and has positioned itself well in the non-western countries.
- British American International plc (BTI)- BTI has the largest Market Cap of all the tobacco companies and has a very nice dividend available to shareholders (slightly over 5%). Similar to PM, the company is heavily invested in emerging markets and should continue to grow as the smokers market grows in those countries. BTI also has a much lower payout ratio, 33.4%, which allows the company plenty of room to grow their dividend, engage in buybacks, or use the excess capital to grow their business. BTI is currently in talks to with the other tobacco giants to purchase/sell divisions of Reynolds American of LO (Source here), so the acquisition may create an attractive drop in price. I purchased T right after their acquisition announcement, so this may present a nice opportunity to purchase a strong tobacco company. I will keep a very close eye on any new developments this week as it is currently my favorite of the three on my Watch List.
- Imperial Tobacco Group plc (ITYBY)- The last tobacco stock on my watch list is Imperial Tobacco (ITYBY). This stock is a little less known because the stock is traded on the OTC markets; however, the stock hits many investing points for me. First, the stock is very well diversified internationally. After reading the investor relations page, the company focuses on growing in international markets and maintaining their current market share in the more developed European markets. Second, the company has an attractive yield of about 4%. While I like the company’s market footprint and yield, there are some issues I like with their current valuation. The P/E is very high, 38.5, and the payout rate appears unsustainable (exceeding 100%) at the moment. Neither of which would stand up well when run through our Dividend Stock Screener. However, with that being said, I still want to watch the performance of the company to see if any of the ratios become more attractive. The stock is worth monitoring on a regular basis, but it still has a lot of room to fall before I will consider purchasing it.
Are any of these companies on your watch list? If not, why are you excluding them? Has anyone purchased the companies recently? I know the list does not include every stock in the industry and there are still many great financial and tobacco companies out there. So if there is a company you think I should add, please let me know! All feedback is welcomed.
Bert, One of the Dividend Diplomats