I am getting the itch. Man oh man am I getting the investing itch. Lanny wrote about how it has been at least 30 days since he has purchased a stock… and that article was written over a month ago! Guess what, we still haven’t bought a stock since that article was published. So while the market continues to rise, I have been collecting cash patiently waiting for the right moment to strike. Q1 earnings are starting to be released and there may be a crack in the armor of a couple of low yielding companies I have been following. Let’s see which two low dividend yield stocks I have on my radar.
First, before I dive into the two stocks that I’m watching, I thought it was worth explaining why this article is focused on low yield dividend stocks. One of my 2016 goals was to invest in two companies with a yield below 2% to find a better balance between dividend yield and dividend growth. For years I was focused on accumulating income to get the dividend snowball rolling. Now that dividend growth rates are stalling (and even receding as all KMI and BBL investors know) and I have a solid base of dividend income, I felt the timing was right to include dividend stocks of all shapes and sizes. We have touched on this topic before as we created a Top 5 listing for low dividend yield, high dividend growth rate stocks. So this isn’t a new topic. I just decided that 2016 was the year of action and I would take the strides necessary to find the better balance. I’m sure you are tired of hearing the background and just want me to discuss the stocks. Here are the two I am watching! Did I mention these earnings releases are hot off the press?
Stock #1: Starbucks (SBUX) – Yield: 1.3%, 3 YR DGR: 23.74% – Honestly, I have loved this stock ever since Lanny wrote about his thoughts on investing in the company last year. The culture of the cafes, the brand, and the consumer following stuck with me after reading the article; it was much more intense than I thought or even noticed when I am in the store. Those are the characteristics that help build economic moats and those are company characteristics that I WANT in my portfolio. On Thursday, the company released earnings and disclosed that the company missed expectations despite an increase in revenues this quarter. The company was down in the after-hours market as a result of the miss. Now, I’m always careful and don’t base a decision on what is happening in the after hours market. There is a lot of time for analysts and traders to dissect the information and change their opinion after the markets close that day and before the markets open in the morning. Who knows, after further review SBUX could be trading in the green first thing in the morning? All I know is that the sharp decrease in the after-hours market of anywhere between 4% and 6% caught my attention. Now I will definitely be following SBUX closely in the morning.
Despite the miss, there were several bright spots from the company’s earnings release that has me excited about the future prospects. The company continues to grow, evidenced by a net opening of 350 new stores during the period. Further, based on the press release, the company is reaching more new customers and the enrollment in their membership rewards program increase by a double-digit percentage. The company continues to find a way to expand its footprint and grow its customer base. In addition to the growth in stores and customer based, the revenues and operating margin continue to grow as well in the key geographic locations of the business such as China. While results may have missed analyst expectations, the numbers are still strong and the company continues to generate a growing revenue/income stream.
There was on more nugget from the press release that caught my eye, the share buyback program. “The company repurchased 23 million shares of common stock in Q2 FY16; the company’s Board of Directors has authorized an additional 100 million shares for repurchase under its ongoing share repurchase program. With the additional 100 million shares, the company now has 125 million shares available for repurchase.” In what seems like forever ago, we covered share buyback programs and how they can benefit dividend growth investors by reducing shares, increasing EPS, and decreasing the payout ratio. Hypothetically, if SBUX repurchased all 125 million shares, the company could reduce their shares outstanding by nearly 8%.
Stock #2: Visa (V) – Yield: .7%, 3 YR DGR: 19.2% – My favorite success stories of Lanny. Couldn’t be happier and more jealous of the guy at the same time. He bought into Visa a long time ago before the stock started climbing through the roof. I can’t remember off of the top of my head, but he has a pretty insane Yield On Cost (YOC) on his investment. It has a company I have wanted to own for a long time but haven’t had the right opportunity. It pains me every time I pull my Visa out of my wallet and swipe it at a store. Could this earnings release finally provide me with an opportunity to buy?
The growth in the actual numbers is evident when you read the press release and articles reviewing the results. Net Income, revenues, operating revenue, and transactions all grew during the period. Visa landed a whale last year when Costco announced that they were ditching American Express in favor of Visa. I shop at Costco periodically and trust me, there are a lot of consumers and transactions occurring daily in that store. All positives in my opinion. What’s dragging the company down is the downward revision of total sales as a result of the current global economic environment. As a result, the company was down in the after-hours market.
Similar to SBUX above, I consider Visa one of those companies that has a wide moat. They dominate their industry. Even better, the industry they own is a key part of everyone’s daily life. It is much more common to swipe, earn cash back rewards, and pay the bill when it comes due that it is to hand over cash to the cashier. The after hours markets have not been favorable to V shareholders, but lets wait and see how the stock opens in the morning.
So there we have it. Two low yielding powerhouses in their respective industries. I would love to add both to my portfolio; however, the price has to be right. These companies typically trade at premiums, for obvious reasons, so I am looking for a nice pullback in price before initiating a position. Hopefully the after hours markets are telling of the stock’s performance in the subsequent days and I am given a window of opportunity to strike. There is one thing that is certain though, I will be monitoring the prices on these two stocks very, very closely over the next few weeks.
What are your thoughts on my watch list? Do you own either Starbucks or Visa? Are you watching them as well? Or are there other low yielding dividend stocks that I should be watching instead?