Hey everyone! It’s been a fun and exciting day for the Diplomats. While Lanny has been actively taking advantage of the stock markets decline, Bert has been quiet and has sat on the sideline watching Lanny have all of the fun. Today, both Diplomats pulled the trigger and had stock purchases! Let’s see which companies we bought today!
Bert’s Stock Purchase
Last week Lanny and I put together a watch list of stocks we are keeping a close eye on. In the article I discussed how I scraped together $450 to re-up a position in a stock that I already own. As it turns out, I already had a $100 in my Sharebuilder portfolio, so my new total investment today would be ~$540! After combing through my portfolio while compiling the Watch List, I focused on three stocks that were begging me to buy additional shares: Aflac, McDonalds, and Philip Morris. All three had entry-level positions in my portfolio (positions below my current minimum purchase price of $1,500), are great dividend growth stocks, and are staples in many dividend investors portfolio. Now the big question is, which stock did I pull the trigger and buy today?
After a lot of deliberation, I purchased an additional 9.2663 shares of Aflac for $540. This purchase will add an additional $13.71 of annual dividend income going forward. Why Aflac? Fundamentally, the company has a strong record of dividend paying, increasing their dividend, a very low P/E ratio compared to others in the industry (9.19), and a low payout ratio (22.90). Another item that pushed me towards Aflac is that the company is expected to announce a dividend increase at the end of the month. So buying the stock a week or so before the announcement will allow me to initiate a position before Wall Street has time to react to the earnings news and dividend increase.
Lastly, I selected Aflac over the heavy favorite McDonalds was because of my low portfolio weight in the financial industry. If you have followed this blog from the beginning, you should know by now that I essentially ignored the financial industry this year. As late as August, I only owned ~12 shares of BAC. I finally addressed this by initiating an entry-level position of $1,239 in Aflac. I made the purchase with the intention of increasing my position at a later date. The last couple of weeks presented a perfect opportunity to do so since the stock dipped several dollars from my initial purchase price. Now, with this re-upped position in Aflac, my portfolio has a 4.39% weight in the financial sector. This is still a little lower than I would like; however, it is no longer the glaring hole in my portfolio. I don’t think this purchase could have worked out any better for me and my portfolio. Now, let’s hope Aflac delivers us all a strong dividend increase in a couple of weeks!
Now that I am done rambling on about my purchase, what’s see what stock Lanny purchased today!
Lanny’s Stock Purchase
Well contrary to Bert and his belief in the stock that he bought (joking Bert, Aflac is a powerhouse dividend stock! Congratulations on the additional investment to the insurance company, which we expect a nice dividend increase to be announced very soon) – I thought – Damn the market went up on Monday after our posted watch list, I don’t think I want these stocks at the prices they increased to. I also felt the momentum would push them higher on Tuesday. Shock factor – all stocks on my watch list increased from Monday to Tuesday, except McDonalds, but they closed at $91.01 vs. $91.04 from last Friday – not enough movement to entice me to buy. I, like Bert, had a free trade to make that was to expire soon and wanted to add $500 to something.
Thank you Mr. Market for an early Christmas present! I am not sure if everyone saw, but International Business Machines Corp. or IBM for short, tanked from their earnings announcement. They missed estimates by $0.64 and reported $3.68 in EPS for the quarter (which sill can lead to the extreme conservative approach of $14.72/year). Further, IBM is discontinuing an operation and selling their chip manufacturing division to Globaloundries, while also paying them $1.5B to take it over. I feel that this took a smack to earnings but is also a forward looking item to IBM, as they will remove a lower-margin business and place a better focus on their higher margin business lines. Also – their continued focus is on cloud computing and cloud servicing, which I know is the place a technology company needs to be heading. It was reported they earned $3.1B for the quarter vs. $2.8B last comparable quarter, or a 10.7% increase. Small, but still growing and with further focus, should continue to improve. Additionally, what makes me laugh in a way, is that Warren Buffet, I believe, initiated a $10.9B investment into IBM at approximately $170/share. This makes me smile because I picked up a small investment at $162.095/share. Therefore, the reasons why I purchased IBM are as follows:
- Continue to be lean – they divested a chip business, took the hit this quarter and are more focused on Cloud computer, re-structuring their staff, over $1.4B left in their share buy back plan and are a technology powerhouse, at over $160B in market capitalization. Also – Warren Buffet owns over $10B of their stock.
- With EPS for the year, based on the conservative estimate above at $14.72, their price to earnings ratio at the time of my purchase = 162.095/14.72 = 11. That is fairly cheap and cheap to its competitors. Further, the payout ratio based on their dividend of $4.40 per year would be 29.89% = extremely low, with much room for continued growth in their dividend. Yes, their dividend is rock solid, proceed to… Number 3!
- IBM’s Dividend. Where do I begin. They yield a 2.71% on my purchase price. They have increased dividends for 19+ years. Further, their 3 year dividend growth rate is 13.63% and their 5 year gets even better at a 14.89% clip. This company passes all of our dividend stock screening metrics, hands down.
To add fuel to the fire, the 52 week high for this stock was $199.21. Therefore, the purchase price at $162.095, equates out to an 18.63% decline right there. I was very lucky and fortunate. I was going to and would have bought them on Monday’s end price, but the way our free trade works is that it is a market trade and invests when the time was right – and wow, did it pick a great time, as the stock actually closed at $163.23. But who cares about market prices and valuations when this is what happened. I bought a company that was valuable at an 18.63% discounted price today. I was so lucky to do this, even if it was a mere $500. This $500 added $13.57 to my dividend income projected total as I purchased 3.0894 shares and inches me closer to another big milestone for my forward-looking dividend income. I feel strong about IBM. How do you feel about this purchase? Would you have stayed away from IBM? Do you own IBM or do you stay away from technology all together? Any thoughts on cloud computing and the direction its going? Thanks everyone, another purchase by a diplomat has been completed!
Thanks everyone for stopping by, would love comments and feedback!
-The Dividend Diplomats