The market has continued to soar in December. The impressive rally has helped everyone’s portfolios continue to soar to record heights. I must admit, it is a lot of fun watching your portfolio’s market value continue to climb. Unfortunately, there is one con to a booming stock market. There are not a lot of stocks trading at a value! But even with record prices, a few companies have caught my attention and earned a place on my January dividend stock watch list.
Finding stocks is a very fun exercise for us. In our quest to find undervalued dividend growth stocks, we use the 3 metrics of our Dividend Stock Screener to quickly identify stocks that are worth investigating further. We are constantly screening for stocks and telling each other about the results. After all, once you find a great undervalued dividend growth stock, it is your obligation to share it with your friends and the community!
Unfortunately though, with the run-up in stock prices, it has made finding value very difficult. In fact, there really are not a lot of companies I could include on my watch list this month. Their valuation was either too high or their yields were just to low for my current portfolio. I know yield isn’t everything, but it would take a very special low-yield stock for me to consider investing in it. The combination of dividend yield + dividend growth rate would have to knock my socks off!
Dividend Stock #1: J.M Smuckers (SJM)
It shouldn’t surprise anyone that Smuckers is on my dividend stock watch list. After all, I disclosed in my last stock purchase article that I have been quickly building a position in the consumer staples company. I started building my position at $105 per share and have added as the price has slowly trended downward. As of 12/26/19 close, the company’s stock price was $102.65 per share.
In my purchase article, I demonstrated how the company passed all three metrics of the stock screener. Their P/E Ratio was below 13X and their dividend payout ratio was below 45%. Further, the company continues to build on their dividend increase streak.
With such a strong performance in our stock screener, a strong consumer brand portfolio, and a falling stock price, Smuckers will stay on my watch list for the foreseeable future. It will take a run-up in the stock price or me amassing a large position to stop watching anytime soon. Fortunately for me, their next ex-dividend date will not be until the middle of February, so I have plenty of time to build my position and capture the next dividend.
Dividend Stock #2 – Cardinal Health (CAH)
Cardinal Health is a company that is slowly sliding back onto my radar. Typically, a company that is up nearly 15% year-to-date is not on my watch list; however, in this environment, crazier things have happened. Cardinal Health has not had the best month of December, as the stock price has fallen nearly 9%.
The fall caught my attention, so I decided to run the company through our stock screener. I started to like what I was seeing. Using a 12/26/19 closing price of $51.17 per share and EPS of $4.85 per share (the low end of management’s FY2020 guidance range), I calculated a P/E ratio of 10.5X and a dividend payout ratio of 39.6%. Both metrics look great. The one potential downside in our screener is that the company’s dividend growth rate has not been strong recently (4.67% avg. DGR).
Before I get too excited about Cardinal Health, I must mention the company’s debt levels. Because that is what is currently holding me back from buying shares today. The company’s debt-to-equity ratio is over 8X. That is a very high multiple. We have seen the impact debt can have on a company’s financials and dividends, especially when things turn south. Luckily for CAH, the company has a strong current ratio that is over 1X. So the company will not have any difficulty covering their short-term liabilities.
Honorable Mention – Fedex Corporation (FDX)
We all know the headlines here. Fedex did not have the best quarter. In fact, all the naysayers are coming out of the woodwork to let everyone know that Amazon is going to cause the company’s price to continue to plummet. While I am not going to go that far and say the end is near.
I must admit, their last earnings release was not great. Fedex cut their earnings guidance significantly and the company reported lower margins. The most interesting piece was that the company’s attempt to capitalize on increased residential delivery has actually added significant costs to the company that have weighed on the operating units gross margin. There were plenty of other negative facts in this earnings release.
With the negative news, the company’s stock price tumbled. Fedex is now trading near 5 year lows and it looks like the price could continue to fall lower. The company’s current dividend yield is too low for me at the current price, especially since I doubt the company will have a large dividend increase up their sleeve this year. But if their yield soars above 2%, I will move this company from the “Honorable Mention” section of this article to the “Watch List” section. That may take another month or two of significant losses.
Interestingly, outside of the metrics, this story reminds me of Target several years ago. If you recall, there was a time when Target’s results were poor and Amazon/Walmart were firing on all cylinders. Many analysts and pundits said the end was near for Target. Instead, Target invested heavily in their company and has fought back. It took several years, but look at Target now. How many people wish they had doubled down on their position during this time period? I’m sure as heck happy that I added to my position. It is now one of my strongest performing positions.
The point of this story isn’t to call Fedex the next Target. Target executed on their turnaround strategy flawlessly. Fedex has the same opportunity to execute as well, now that they are facing the Amazon beast head on as well. They have the resources and the industry expertise to do so. It may just come down to execution.
Honestly, I wish I had a more exciting watch list for the community. But with the current market, finding value has not been the easiest task. So I will instead return to the well of purchasing stocks that I already own. Out of the two companies, Smuckers is the clear #1 option for me based on their metrics.
Maybe, if prices continue to climb, rather than invest in equities, I will look to invest a little more in my Fundrise portfolio. In my last review article, I wrote about how I will invest at least $250 per quarter in the crowdfunding platform and build my real estate portfolio. I have already made my $250 investment for Q4 2019; but if the equity market is not showing any value, maybe I will add another couple hundred of dollars there. If not, I can always allocate additional capital towards paying down my mortgage. There are plenty of options here!
What are your thoughts about my watch list? Do you like either Smuckers or Cardinal Health? What are you thoughts about Fedex? Is the Target comparison reckless? Or are you staying away from this company until more information is available?