Wow! We are halfway through November already. I can’t believe it; 2015 is quickly approaching. Each month we have been putting a watch list together to help us and the readers find that next investment. Sometimes the list leads to a purchase and sometimes the stock appreciates so quickly it flies off of our watch list. So which companies are we watching over the next few weeks? Let’s find out!
Bert’s November Watch List
Last month I had a very focused watch list. I had $500 of capital to deploy and I want to “re-up” a position in one of three holdings (MCD, PM, or AFL). Several of my positions were purchased with initial positions of between $1,000 and $1,250 when I was in the beginning stages of investing and I wanted to increase my position in the companies. After all, I was choosing between three solid dividend growth companies. After all the dust settled, I ultimately selected to re-up my position in Aflac; adding $13.71 of projected dividend income to my portfolio. Enough about last month! What is my mindset for my next purchase? I have $500 once again to invest and I would like to add a position in my Roth IRA. So you guessed it, I would like this purchase to have a higher yield to maximize the tax-free benefits that come along with the Roth. The one difference between this month’s watch list and last month’s watch list is that I do not want to commit to using the funds just to “re-up” a position. One of the things I learned from watching Lanny’s multiple purchases of IBM in the month is that your initial purchase does not have to be the only purchase of the stock. Lanny initiated a position in IBM of only $500 to start, which I know for a fact is below is usual purchase. As he performed more research and watched the stock price fall, he significantly re-upped his position and now his holdings are much more in line with others in his portfolio. So this month, I will consider both new and current holdings for my portfolio. With that being said, which companies are on my November Watch List?
- International Business Machines (IBM) – Is anybody really surprised this stock is on my Watch List? So this month Lanny has been all about IBM and I think I caught the fever. In his stock analysis of the company, he mentioned the following stats about the company: Low P/E ratio (Below 11), 19 years increasing their dividend, dividend growth of 14% over the last 5 years, a low payout ratio of 27%, and a current yield (2.71%) above the S&P 500. In addition to Lanny’s analysis, IBM would also fill a hole in my portfolio since I do not own any technology/service companies. Therefore, it rightfully deserves a spot on my watch list and is a no brainer stock to watch over the next month.
- Chevron (CVX)- CVX is a new addition to the watch list. As I have watched and read the news recently, I have noticed the oil market has declined over the last month or so and I have been trying to figure out how I want to play this downturn. Why wouldn’t I consider another oil company? Because I already have several large holdings in oil companies. I am currently a proud shareholder of Shell (MV: $1,400), BP (MV: $2,232) and while KMI (MC: $2,200) is not technically oil, I still consider it under the larger gas and oil industry. So I already own a lot of oil. In addition, I have several mutual funds and while I do not have exact oil allocations, I am sure the industry is well represented in their holdings. After all, I selected blue-chip dividend focused mutual funds! So why am I considering CVX? I spent time this week looking at the current metrics of the company, to conclude – I
likelove what I am seeing. As of 11/14/14’s closing price, the company had a P/E ratio of 10.71, current yield of 3.68%, payout ratio of 37.80%, and an average annual dividend growth rate since 2010 is 10.36%. While their current yield is lower than BP, RDS, TOT, and other companies in the industry, CVX has the lowest payout ratio of the group (TOT, BP and RDS have ratios of 59.5%, 78%, and 73%, respectively). They have the earnings, cash, and room to continue to grow their dividend at a double-digit pace. As the metrics appear strong, it made me think that it would be okay if my allocation in oil increased. After all, as I continue to purchase stocks in other industries the weight of oil in my portfolio would decline. So why not take what the market is giving me?
- GlaxoSmithKline (GSK)- GSK is a perfect candidate for re-upping a position in my Roth IRA. For one, GSK currently has a high yield (5.8% using my personal calculation) and a low P/E ratio (16.82) due to its performance year to date. 2014 has not been the best year for the large drug manufacturer as the stock has declined 9.7% YTD. I like owning one of the major companies in the drug manufacturing/pharm industry because of the high barriers to entry, (requires a lot of capital to absorb the high R&D costs and intense regulation, to name a few) that help build a sustainable long-term moat. This may be a perfect opportunity to take advantage of short-term struggles for a company that is a major player in a long-term game. The one thing about GSK that has always bothered me is the lag-time between the ex-dividend date and the payment date, which is almost two months apart. While it is nice to know the dividend early, I hate having to wait and it can make planning an investment very difficult. Let’s take this month for example, the ex-dividend date was November 5th for a dividend payable January 8th. If I invest this week, I will not be eligible to receive a dividend from GSK until the next dividend, which is in APRIL! In that time span, there are plenty of other companies that will pay one or two quarterly dividends. I know it is not a big deal once I am invested, it is just one of those aggravating things about deciding when to invest in GSK.
I know IBM has been a popular company in the dividend growth community over the last few months due to the recent drop in price. I am leaning towards either IBM or CVX at the moment, but we will see what the next couple of weeks will give us. I just missed both companies’ ex-dividend dates, so I am not facing a looming deadline to pull the trigger on the investment. Regardless of the timing or which company I eventually select, I am exciting to purchase stock in a strong company!
Lanny’s November Watch List
This month, my target yield is 2.50%+, strong fundamentals going forward with dividend growth rates of 7% or more, which changed from last month’s watch list metrics of an entry yield of 3% and growth rates of 5% over a 5 year average. Bert – I like those that you have listed – particularly IBM and CVX. You know why I love IBM for obvious reasons as I performed a stock analysis on them, as well as made an additional purchase and even through another $2K on them after that to bring my total invested to $3K. My watch list will have strong dividend players with average yields but above average dividend growth rates. Given the market has been increasing steadily throughout the end of October and into November, this limits the stocks that I am looking at, as opportunities are becoming more and more difficult to find, but as us investors know – with diligent research – stock opportunities can be found.
- John Deere (DE). I bought $2K approximately worth of them back in August and I’ve been monitoring the heck out of them lately. They are up over $3 per share since I have purchased them but I think there is still value here, based on the following metrics:
- Dividend Yield 2.74%: The yield is above 2.50% and is very comparable to Caterpillars (CAT) yield at 2.76%. However, the next metric also paints a very nice picture for why I like them.
- Price to Earnings Ratio at 10.47: This P/E at 10.47 is based on EPS projections of $8.36 for the year and is relatively more conservative, given Google Finance shows the P/E at 9.97; concluding this is undervalued in comparison to CAT, as their P/E is above 16. Therefore, they are more attractive than the biggest player as well as the market as a whole. Projected EPS for FY 15, due to the cyclical nature, shows a forward P/E of 13.40 based on a lower EPS figure ($6.53), but with that even being said – still shows undervalue in this current market place and the payout ratios of 29% and 37% based on those 2 disclosed EPS figures. Which leads into number 3…
- Dividend Growth: Dividend growth for John Deere has been absolutely incredible with an average over the last 3 years of ~14% – cannot complain at all about that! With the payout ratio being low as disclosed in #2 above, this will allow John Deere to continue to pump their dividend year after year.
- Additionally, John Deere purchased $1.6B of stock through 9 months this year (7/31/14). From the 10Q filing “At the end of the third quarter of 2014, $7,330 million of common stock remain to be purchased under this plan.” Based on the share price close on Friday of $87.52, this entails 83.7M of shares to be repurchased under the plan. There were 358,420,496 shares outstanding at 7/31/14, therefore, 83.7M share reduction represents 23% of shares outstanding. Therefore, John Deere’s EPS growth can be entailed from stock repurchases. This is similar to what I discussed with IBM, as well as what Bert showed with DOW. This is unlocking shareholder value, no doubt.
2. & 3. What hurts me right now, is that I have added so much capital this year. After purchasing more IBM & Mattel last week, to which I actually ended up purchasing $3.5K more in stock at the end of the week ($2K more to IBM and $1.5K more to AFL that I have posted about) – my positions are looking very well-rounded. This is all thanks to my push to save 60% of my income, to which I was able to achieve last month of October! I do like Bert’s take on CVX as I compared it to XOM and RDS (Shell) and will conclude I do like CVX better at the moment – better yield, better payout ratio, better dividend growth rate when paired with current yield. I am going to make this extremely difficult and say – I am going to have IBM & CVX on my November watch list as well. Go ahead and make fun of me Bert & readers! Further reasons to include these two on my November watch list: From Chevron’s latest 10Q “During the first nine months of 2014 and 2013, the company purchased 30.6 million and 31.3 million common shares under its ongoing share repurchase program, respectively, for $3.7 billion in each corresponding period…..Common Share Repurchase Program In July 2010, the Board of Directors approved an ongoing share repurchase program with no set term or monetary limits. The company expects to repurchase between $500 million and $2 billion of its common shares per quarter, through open market purchases or in negotiated transactions at prevailing prices, as permitted by securities laws and other legal requirements and subject to market conditions and other factors. During third quarter 2014, the company purchased 9.8 million common shares for $1.25 billion. From the inception of the program through third quarter 2014, the company has purchased 169.9 million shares for $18.8 billion.” I love the buy back, as you can see from above, as it’s an additional incentive for common shareholders, as they have a good balanced approach between repurchases and dividend increases. If oil continues their decline, I will consider purchases (as my other holdings are taking a hit, which opens up my weight in that area to have a further infusion). I would prefer CVX in the lower $100’s, but we shall see what Mr. Market wants to do over the next coming weeks. I currently have an exposure when including Kinder Morgan of approx 15% and normally I see this around 20% of my portfolio. Further, I will be considering further purchases of IBM if it dips into the $150-$157 range, as I think there is further shareholder value to be unlocked for years to come with IBM.
What are your thoughts on the Dividend Diplomats November Watch List. Are you also considering the same stocks? If not, which stocks will you be watching the rest of the month? Thoughts on Lanny’s portfolio roundings? What are your percentages of your portfolio that holds oil? Let us know your thoughts about our selections!
~The Dividend Diplomats