Which “Always Buy” Stock is Cheapest?

Breaking News!  The stock market had an insane week last week.  Every day was an exciting new chapter.  On Friday, the thrilling conclusion, the S&P 500 closed down 2.38% and this wasn’t even the lowest point of the day.  Bottom line is that there are many great stocks available at a discount right now and investors have been scooping them up left and right.  Heck, Lanny and I were both active as we both added to our stakes in ADM (See Bert’s purchase summary here and Lanny’s here).   With each subsequent red day in the market I become more motivated to add a rock-solid dividend paying company to my portfolio that I can buy and hold till I reach financial independence.   During times like these, I decided to look no further than my list of 5 “Always Buy” stocks to determine which one of these companies is trading at a price that may be too low to resist.

Watch List

For those of you that do not remember, my “Always Buy” listing stemmed from a lesson learned in a market environment similar to this one.   In August there was a sudden drop in the market and I had no idea where to allocate my funds.  I was like a deer in the headlights watching the price suddenly fall and subsequently rise for nearly every Dividend Aristocrat you can imagine.  The worst part was I missed my opportunity and learned the hard way that I always need to have a watch list prepared.   It sucked, but made me a better investor because of it as I created a list of five quality dividend growth companies that I could purchase at any moment in time without having to perform hours of background research.  If needed, I could take advantage of a flash sale and leave knowing that I scooped up shares in a quality company.  

While we aren’t in the midst of a flash sale, we are seeing an extended downturn in the market that has reduced the price premiums of these five stocks that I highly covet.  I have some extra capital on hand from my recent sale of three mutual funds, approximately $2,450 to be exact, that I would love to use to purchase one of these companies.  It isn’t quite the $3,000 purchase minimum that Lanny was discussing last week, but it is large enough to have the same type of impact and push down the impact of the trading fee.   In this article, I wanted to review the current Price/Earnings multiple for my five “Always Buy” stocks and see if one is trading at a much lower discount than the market and the others.  Comparing multiples among companies on the list isn’t exactly apples to apples since the companies operate in different industries.  However, comparing the P/E ratios to the broader market will help identify if one company is screaming discount or if one actually isn’t a bargain at all.   In this analysis, I will use the price as of Sunday 1/17/16 and the project FY ’16 earnings from TheStreet.com.  Lastly, I will list the payout ratio to see if any of the payout ratios have crept above the 60% mark we use in our stock screener.  Let’s take a look at the stocks below!

DD - 5 buy

Right out of the gate, I can see one of the stocks that I am striking off of my list.  I love you Emerson Electric and I own a lot of you; however, the fact that your payout ratio has crept above 60% while I have four other alternatives with lower payout ratios and the dismal dividend increase you announced last year is enough to place you out of contention for my next purchase.   Pepsi, I’m sorry, I am going to pass on your for the moment as well.  you multiple is the highest P/E ratio of the group and your payout ratio is near 60%.  So for now, I’m going to pass on this soft drink and snack provider.     That leaves three great companies on this list and honestly, I have no clue which direction I am going to lean in the upcoming weeks.  Outside of the metrics listed above, here are some of the factors I am going to be considering as I make my final investing decision.

First, I already own shares in JNJ and MMM.  Investing in Target would represent a new position and industry in my portfolio.  Plus, since Target is a Dividend Aristocrat, it would help me take a step towards achieving one of my 2016 goals…investing in five new Dividend Aristocrats.  This won’t be the final decision maker; however, it will definitely be weighing on my mind.   My second thought is actually the polar opposite.  Currently my cost basis in MMM and JNJ are  ~$2,500 and ~$1,700, respectively.   Wouldn’t it be awesome to continue to build up these positions and receive massive chunks of income from the two of them.  If I invested another $2,450, I could have nearly $5k in MMM and over ~$4,100 in JNJ.  Or I could even split the amount and add to both of my stakes.   Just another option at my disposal.   The last point that will be weighing on my mind over the next few weeks is the fact that JNJ has appeared on nearly every Top 5 list or stock screener Lanny and I have performed on this website.  The most shocking was the last Top 5 list I generated, which was created to identify the Top 5 Dividend Aristocrats with a low debt to equity ratio.  I couldn’t believe JNJ operates with that low of a debt level.  Writing on this website and being a member of this wonderful online community has helped me realize that JNJ is one of the best dividend growth stocks to own.  So why not take advantage of a downturn to add to my position?

Man….this is a tough decision.  There is not a clear-cut answer and I don’t think I could go wrong investing in either TGT, MMM, or JNJ.   I’m happy that I created this list because it always gives me great stocks to turn to in times like this.   If I am lucky, maybe the market will help me make my decision and allow one of these stock prices to fall over the next few weeks.   Wouldn’t that be nice if my hand was forced?

What are your thoughts on my analysis?  Which of the three stocks would you select? Are you also watching TGT, MMM, or JNJ?  Should I broaden my horizons and watch any other stocks?  If so, where should I focus my attention?  Please, I would love your advice!  As you can tell my mind is far from made up.  I have heard enough about ADM though over the last few weeks, so I am tabling that stock for a little!



10 thoughts on “Which “Always Buy” Stock is Cheapest?

  1. I’m always looking for opportunities to add to my JNJ position…I’m closing in on 100 shares, which isn’t huge but for me it’s a big deal. I like it at current prices. I’m also thinking of adding another chunk of XOM shares soon. I know XOM wasn’t on your list, and maybe the volatility of oil turns you off, but I would take a look.

    I’m also considering opening up a position in MMM this year. They’ve been on my wish list for a while now.

    Have fun making your decision!

  2. Hey Bert. Thanks for sharing bud. That’s a great list and idea to turn to when the markets head south. All great companies and it’s nice to have capital to invest. I’d say split that money into 2 and make 2 purchases to ease the decision. Even though you’ll pay a 2 commission fees than 1, at least you get 2 companies. Besides, dividend income coming in left and right helps soften most expenses so enjoy it 🙂
    As always, take care and keep up the great work.

  3. I tried to go through a similar exercise recently in terms of having a really top quality list ready in advance of volatility. Not sure I would ever pin myself down to an “always buy” label, but I dig what you mean. I guess I like making watch lists too much to ever leave it at just one.

    Funny…all three of these popped up on this month’s list, but TGT was the only one that passed all of my quantitative tests.

    If you’ve got it narrowed down to those three, I would go with TGT. 3 primary reasons:
    1) Cash Flow Situation + Dividend Growth Potential
    They all have similar payout ratios in terms of earnings, but I like to look at payout ratio in terms of FCF too, and Target has the lowest of the three by far (30%). JNJ has slowed down its DGR recently with relatively lower 1 and 3 year rates. TGT and MMM both have double digit DGR over the last 1, 3, 5 and 10 year periods. BUT looking at the safety of the dividend in terms of current cash flow and current cash/debt position, TGT is better positioned than MMM to maintain the fast growth pace. TGT’s debt situation (in terms of debt/equity) at first glance looks like the one strike against it compared to other two. I would argue debt/equity isn’t really useful as a standalone ratio. The really important question is if the company can maintain capex spending, increase dividends and still pay off its debt (dividend “cushion”). In this respect, Target is actually the strongest of the three because of that cash flow situation.
    2) Price relative to 5 year history:
    TGT’s current P/E is substantially below their 5 year average while MMM and JNJ are just at theirs or slightly above. It also sports the largest delta between current yield and 5 year average. Not much advantage for any of the three in terms of PB, PS and they’re all at a discount in terms of PCF.
    3) Diversification – I don’t see any stocks similar to TGT in your portfolio. Do you have any retail stocks? You could probably use some exposure to the American consumer. They spend a lot of money at Target.

    Just my $0.02…

  4. I’ve already has some exposure to MMM, I bought it back in September, so the stock hasn’t gone down that much. I have no exposure to TGT and JNJ. JNJ at <$100 is a great buy. between TGT and WMT, I'd rather choose walmart, and I already gotten 150 shares. 😛

    I've been buying PRU, and dollar cost average on some other stocks. Haven't had time to write a full write up yet.

  5. Of course, all look great at these levels but some look even “greater.” My vote is EMR. I nkow you aren’t keen on the payout ratio but that dividend is still quite safe with room to grow based on current cash flow. JNJ under $100 is always interesting too but was much lower just a few short months ago. The name I do not like on the list is TGT. Thanks for sharing.

  6. Hi Bert, nice article.

    My immediate answer to the question you pose is choose JNJ. I think they have the most defensive business and the one most likely to last the longest into the future. Also, if you do invest in JNJ, having around $4,000 in one of your absolute favourite options isn’t much at all (compared to the size of your portfolio).

    Good luck with whatever you choose,

Leave a Reply

Your email address will not be published. Required fields are marked *