What Are You Buying?

I’ve always been pretty open with my investment moves, for better or worse. I always let you know what I’ve recently purchased, usually within just a few days of buying. Doing so is part of my overall mission with Dividend Mantra, and that is to provide a live journal on the road to early financial independence.

This will be my second time asking my readers about what their near-term purchases might be. In return for that information, I’m going to provide you information on what I’m currently looking at. I’m always looking at quality companies that provide products that people need, growing EPS and revenues, growing dividends with a pretty strong entry yield.

This list will include a few stocks I’m strongly considering for addition to the Freedom Fund. I like to provide this list as there may be some solid values I haven’t considered before, or perhaps it will provide my readers value in ideas.

Here’s my short watch list:

AT&T Inc. (T)

Per Morningstar:

AT&T is the dominant local phone company in 22 states, serving about 41 million local phone lines, 16 million Internet users, and 3 million television customers. The firm also provides phone and data services, such as Web hosting and data transport, to businesses nationwide, notably large corporations. AT&T is also the second-largest U.S. wireless carrier, serving 88 million traditional customers and 11 million “connected devices” such as e-readers.

I’ve written about AT&T ad nausem lately, but it still has my attention. I’m a fairly young investor, and due to such I like to invest in companies that I feel have many years of solid growth ahead of them. At the same time, I like to also invest in companies that provide me a solid dividend with which I can reinvest and grow my portfolio. T will provide the the latter of these two, as it will serve my portfolio a high entry yield and a large amount of current income to provide fuel for future growth into opportunities that arise. It’s trading at a 8.61 P/E ratio, has a solid entry yield of 6.05%, a low payout ratio of 52% and a fairly solid balance sheet. It’s debt/equity ratio is 0.5. It has 27 years of dividend growth behind it, but the dividend growth for the past few years has been fairly low and the future dividend growth will likely be limited to around 2%. With this investment I’d be chasing yield a bit, but I feel the risk is somewhat limited with AT&T. The major cloud around T right now is the lawsuit by the Department of Justice blocking the merger with T-Mobil. I believe that this merger will still go through, but T will have to make concessions to make it work. Additional market share from the acquisition will be nice, but it remains to be seen how well the synergies will work out.

*Morningstar values T at a 4/5 star valuation.
*S&P rates T as a 5-star Strong Buy.

Harris Corporation (HRS)

Per Morningstar:

Harris sells communications products and services to government and commercial customers in more than 150 countries. With recent acquisitions in new end markets, Harris will report results in RF communications (39% of fiscal 2010 sales), government communications (33%), and integrated network solutions (28%). The U.S. government represented 76% of sales in 2010. Based in Melbourne, Fla., Harris has operations worldwide and employs more than 15,800 people.

This one is new to my watch list, thanks to one of my readers. Thanks Joe! It’s a small company, with a market capitalization of just over $4 billion. With the small cap size, there is additional risk. But, on the flip side there is also additional room for growth when you invest with a small company. This company is a quasi-tech company, operating in the defense space. The budget slashing that has been so popular as of late could affect a company like Harris, but their balance sheet looks pretty decent and management has been producing strong results for this company. They should be able to navigate the near-term waters effectively. HRS is trading at a 7.52 P/E ratio, offers a 3.24% entry yield, has a low payout ratio of 24%, and a debt/equity ratio of 0.8. The debt is something to keep an eye on, but is low in comparison to their industry. They have 10 years of dividend growth behind them, with a 5-year dividend growth rate of 27.4%.

*Morningstar values HRS at a 4/5 star valuation
*S&P rates HRS as a 5-star Strong Buy.

Raytheon Company (RTN)

Per Morningstar:

Raytheon is a major United States defense contractor with nearly $25 billion in annual sales that operates through six segments: integrated defense systems, intelligence and information, missile systems, network-centric systems, space and airborne systems, and technical services. Sales to the U.S. government account for more than 88% of the company’s total sales. Waltham, Mass., based Raytheon employs 72,000 people. 

Raytheon has been on my watch list for some time now, but just haven’t pulled the trigger yet. This is another company that operates in the tepid waters of the defense industry. Reduced spending by the U.S. government will have a major impact on Raytheon’s bottom line. This is something to be very watchful of. I think it’s a solid buys at current prices, however. It trades at a favorable 7.65 P/E ratio, has a strong entry yield of 4.2%, a low payout ratio of 32% with a debt/equity ratio of 0.4. This company has obvious risks operating in the space it does, but I feel the valuation makes up for a lot of those risks. The strong entry yield is backed by 7 years of dividend growth with a 5-year dividend growth rate of 10.8%. Another interesting play in the defense space is LMT with a high entry yield of 5.41%, but I feel the debt is a little high, and it’s trading at a high price relative to its book value.

*Morningstar values RTN at a 4/5 star valuation.
*S&P rates RTN as a 3-star Hold.

PepsiCo, Inc. (PEP)

Per Morningstar:

PepsiCo manufactures, markets, and sells a variety of salty, convenient, sweet, and grain-based snacks, as well as carbonated and noncarbonated beverages. The company’s broad portfolio of brands includes Pepsi, Gatorade, Tropicana, Lay’s, Doritos, and Quaker. Pepsi owns most of its bottling infrastructure in North America but distributes direct to stores through independent bottlers in international markets.

PEP also made my last article asking my readers what they were buying. It’s making this list again, because the price hasn’t really moved in the last month. I think it’s a fairly strong buy when it’s hovering the $60 range and I continue to monitor it. It does have a fairly high amount of debt with a debt/equity ratio of  0.9, but comes with a good entry yield of 3.38%, trades at a decent P/E ratio of 15.53 and has a covered dividend with a payout rato of 51%. It has a solid business behind it, and I like the dominance this company has in the snack food industry. It has 39 years of dividend growth behind it with a 5-year DGR of 13.7%. This one, arguably, is the most expensive of the four listed.

*Morningstar values PEP at a 4/5 star valuation.
*S&P rates PEP as a 4-star Buy.

So, the question becomes: what are you buying? I’m highly interested in what my readers are looking at, and what you think of my watch list. I have enough capital to make two buys, so this list will likely include two of my purchases. This list is in order of what I’m most likely to buy at the top.

Full Disclosure: I’m long PEP.

Thanks for reading.

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22 Comments

  1. I have a limit order in to increase my RTN stake and T is on my watchlist for a likely order in the next few weeks (once I find some more cash).

  2. Mantra,

    Personally, I’m more partial to Verizon over AT&T, and Verizon is a part of my long term portfolio. While AT&T has size and current market penetration and the fundamentals are solid, they do have the current embroglio over T-Mobile which to me speaks of a much deeper problem with AT&T…they really are behind in a big way on network when compared to Verizon. T-Mobile is realistically the only way they can catch up, as it will instantly give them LTE coverage over Verizon, without the same kind of capital expense.

    And that’s the huge problem I have with AT&T. They may have size and volume, but I honestly believe the only thing that kept them from getting truly killed by Verizon on the mobility side was iPhone.

    While Verizon has a lower entry yield (5.53%) and a higher P/E, they also have a much more solid investor profile (in my personal opinion). They continue to successfully roll out FIOS, they are no longer second string on devices to AT&T with iPhone, and their underlying corporate structure is, in my estimation, on more solid footing.

    Not that I think AT&T is a bad investment, I think as telecoms go, AT&T and Verizon are solid (compared to, say, Sprint), but I think fundamentally Verizon actually offers more long term growth to investors.

  3. Perrigo and Visa are on my shopping list. Although the yields aren’t high, these companies are consistently increasing the dividend. I really love their business models and initiated positions in both earlier this year. Lately, their price appreciations is up significantly year to date so we’ll see.

  4. Hi DM,

    Just wondering how often you change or add different stocks to your watch/buy list.

    I have about 40ish stocks that I plan on watching/buying and some that you list (i.e. HRS) were never on my radar but sound like they would be a good fit.

    Do you re-evaluate often?

  5. I have my eye on MCD, MO, PM, T, and AFL for additions to positions I already have in those companies. Aside from MCD its all part of a push I’m making in the next few months to bump up my portfolio’s yield a couple more tenths of a point while still keeping a decent dividend growth rate. MCD is a puzzle for me: none of my valuation models seem to be analyzing it properly so instead I’ve looked toward that ridiculously good dividend growth rate as the main reason to buy. Last but not least I’ll be checking out Conoco Phillips, I don’t have any energy in my portfolio and I like the combined yield and growth rate of the dividend.

  6. My next move is going to be adding an mREIT to my roth ira (not sure which one yet), but in a taxable account, I’m considering VOD and AFL.

  7. My latest purchases has been Exxon and PMI. Earlier this year i bought a lot of J&J and Novartis.

    I have been looking at AT before but I think the PE might be a bit optimistic. I like to base that metric on multiple-year basis. PE based on average EPS 2008-2010 is 11. If I understand the income statement correctly AT&T had a taxrate of 33% in 2009 and a negative taxrate of 6% in 2010. Id estimate 2010 underlying EPS to about 2,3 usd (20% taxrate and only continuing operations) which gives a PE of 12. Based on freecashflow since 2008 the PE is 11.

    Ok…..so I see a PE of 11-12. Based on Grahams rule of thumb (motivated PE=2*growth + 8,5) this valuation demands annual growth of about 1,5%. I dont see much margin of safety as revenue has grown 1,5% annualy since 2007. I think there are better options atm.

  8. me myself and I,

    I also maintain a similarly sized watch list, which includes my actual portfolio. I don’t necessarily re-evaluate often, but I’m always on the lookout for good companies to add to the roster. HRS only came to my attention after one of my readers mentioned it a couple times. Seems to be favorably valued with a good balance sheet and strong cash flow.

    Best wishes!

  9. Neu,

    I would consider, as MoneyCone pointed out, VOD over VZ. They have 45% of their wireless business and are less expensive. They also are a lot larger with exposure to many different emerging markets. I’m a fan of VOD, and they are actually going to be receiving a dividend from their VZ joint-venture. I would consider VOD just as strong an investment as T, if not stronger. I’m not sure about Canada, but we have a tax treaty with the UK, so their are no taxes on the ADR shares. A nice bonus.

    Thanks for stopping by.

  10. Henry,

    Interesting choices. The yields are much too low for me to consider, but I wish you the best with those investments. I don’t think you can go wrong with Visa, and if the yield was higher I’d definitely consider it. Great business model!

  11. Dividends For The Long Run,

    I’m long all you listed except T. I go back and forth on T. Solid yield, but I feel very limited future growth. T is likely not going anywhere anytime soon, but I do like bigger growth when I can get it. MCD is interesting. I love the business and wish I had a larger stake, but it’s a little pricey right now. But, you’re paying for quality with that one. Nothing wrong with that, imo.

    Best of luck with you additions!

  12. BigJ,

    Good moves. I like AFL and it’s been a steal at recent prices. VOD is interesting, and getting in now means you’re going to get that fat special dividend from VZ.

    Thanks for checking in!

  13. defensiven,

    I agree with you to a point. I think T should be bought with the realization that growth will likely be very limited, but you’re buying it for the fat dividend with is sustainable and will likely grow at very small percentages (~2%) for the future. I’m a young investor, so I do like to invest for a solid entry yield, along with growth of it from a solid business structure with growing EPS and revenues. T doesn’t totally fit that model, and that’s why I haven’t pulled the trigger yet. I like overseas telecoms better in general, and that’s why I invested in TEF. VOD also looks interesting with much more potential for growth.

    I like some of your picks. PM is one of my larger holdings and XOM is one of my original buys. JNJ is my largest holding and NVS has been on my watch list. I know Dividend Monk is a big fan of NVS, and I am too.

    Nice selections!

  14. MoneyCone,

    Thanks for stopping by and adding to the discussion. I remember you saying you are long both T and VOD. Which are you more bullish on going forward? If you could only buy one, which would it be and why?

    Thanks so much!

  15. DM,

    I am so, so honored to be mentioned in this most excellent blog, a part of this wonderful dividend investing community. It feels great. We are all just growing and teaching each other. A wonderful thing.

    The HRS is slightly on the more hopeful/speculative side but I think they are really trying to hone in on their specialization. Their acquisitions this year looked really good to me. I also really like how they are involved in civilian projects as well. The only dark spot to me is their CEO retiring, but hey, the board looks like they really know what they are doing and I don’t begrudge Lance some retirement, he spent 10 years building the company.

    You mentioned T earlier as well as here. I’ll be honest with you, I really don’t own any telecoms. I just never have. I completely agree with having high yield (and perhaps lower growth) in the portfolio. I guess the closest equity I have to T would be UHT at a 6-7% yield with a 2-3% growth rate. It’s tough for me though. I really like higher div growth rates. I sold my ED because the raises were too low. Anyway, the tech part of T scares me. I’ve always just stayed away from telecoms, sorry I can’t be more helpful there:) Maybe I’m scared of a disruptive technology stealing the marketshare or something.

    Joe

  16. Joe,

    It’s my pleasure to mention you. You definitely put HRS in my sights, as I had never thought of it before. It’s nice to have a smaller company in my portfolio now that HGIC is gone. It seems the new CEO William Brown will do a fantastic job coming from UTX. I’m excited about the future for HRS.

    I understand what you’re saying on T. I’m definitely mixed on it. I’m young, so growth will serve me better in the future..but when you chart high yield it takes quite a while for a low yield/high growth stock catch up to a high yield/low growth stock. Sometimes it’s a decade or longer.

    We’ll see.

    Best wishes!

  17. RTN makes up approx 6.2% of my portfolio net worth and 4.2% of my dividend income. I have a 30-day limit order in at the 4.25% forward yield price (yes, I put that order in the day after it hit that price going up and it hasn’t come back down) to almost double my RTN holdings. Not sure what the market is going to do over the next couple months. If that order doesn’t get filled I’ll re-evaluate.

  18. Ben,

    Thanks so much for adding that comment. RTN doesn’t get a lot of press, and that’s ok with me. I think the industrial sector is littered with some pretty decent buys and RTN is one of the stronger ones available, in my opinion. I’m usually pretty decisive, but it was my hopscotching between buying PEP or RTN that allowed both to pop up quite a bit and become slightly out of my range. That angers me, as I’m usually quick to buy.

    What do you think of RTN at current prices? I’ve been looking at it as well as GD, UTX and LMT in this sector. LMT is the least attractive due to the debt and high P/B, in my opinion. GD appears strong here, as well as RTN.

    Would you initiate a position in RTN or GD at current prices?

    Best wishes!

  19. WMT, MSFT, and XOM are all pretty high on my buy radar right now. I want to put more money into NVS as well, and this is true for most of my current holdings.

  20. Monk,

    Great picks. I agree with everything on your radar right now. NVS seems particularly strong, and I’ve looked at it a few times now. It’s definitely on my watch list.

    Thanks for stopping by!

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