Sunday, November 27, 2011
What Are You Buying?
As we look forward to December, and the holiday season, I'm hoping Santa delivers me some great deals in the stock market. The euro zone crisis has been sending people with short-term outlooks running for the hills and that leaves a lot of deals on the table for a long-term investor like myself. If you're looking for a little risk and excitement, stocks based in Europe are trading at very attractive valuations. I know my foreign holdings in Total S.A. (TOT) (ADR) and Telefonica S.A. (TEF) (ADR) have been hit pretty hard and are pretty dirt cheap. If they weren't already large parts of my portfolio I'd be a buyer at today's prices.
Santa is definitely keeping his elves busy and I see some pretty solid deals in the market. I'll likely have enough capital to make two purchases in December. I receive my commission check from my employer on December 8, so I'll be ready to play on that date or after. Keep in mind, the market may continue to head lower with the weakness and negative headlines coming out of Europe, but as a long-term investor I try to make monthly purchases and average my way into positions. My crystal ball is always cloudy.
The list I'm going to present includes a few stocks that I'm currently interested in adding to the Freedom Fund. This list may change slightly depending on how the market changes over the next couple weeks. As of now, I find all these equities at attractive prices that presents a long-term dividend growth investor solid opportunities to build wealth.
Here's my short watch list:
The Coca-Cola Company (KO)
Coca-Cola is the world's largest manufacturer, distributor, and marketer of nonalcoholic beverage concentrates and syrups. The firm also sells a variety of noncarbonated drinks such as water, juices, and teas. With almost three fourths of the company's revenue generated outside the United States, Coke's footprint extends throughout the world. Coke's core brands include Coca-Cola, Sprite, Dasani, Powerade, and Minute Maid.
Coke is selling below $65 at the time of writing this article. It has trended between $67-$69 for large parts of the year and I consider anything below $65 a pretty decent price to pay for Coke. This one isn't a steal at these prices, but Coke rarely is. You're paying for quality on this one, but I still believe it will provide solid long-term returns with low risk. Coke is a small position for me at this time. Because of that, I'm interested in adding to my KO holdings. It's currently trading for a forward P/E ratio of 15.5 and has a low debt/equity ratio of 0.4. KO sells solid products that people (myself included) are willing to pay a premium for. You can buy store brand cola, but it won't taste like Coca-Cola. There is still a lot of growth potential with this company as it expands into emerging markets. It currently sports an entry yield of 2.90% based on today's price. Again, it's not a steal at today's prices but I'm currently lightly allocated to KO and would like a larger position with this high-quality company. It has 49 years of dividend growth behind it and I don't see that trend abating anytime soon.
General Dynamics Corporation (GD)
Falls Church, Va.-based General Dynamics manufactures ships, armored vehicles, defense-oriented information technology systems, and business jets. The firm gets around 72% of revenue from the Department of Defense and the rest from foreign sales and Gulfstream business jets. In 2010, the firm generated $32.4 billion in sales and $2.6 billion in earnings with the help of 90,000 employees.
I recently initiated a position in GD, and it's currently trading below that price. I believe in averaging down on positions I'm confident in, as long as the fundamentals haven't changed and the market is being irrational. The only thing that has recently changed that affects GD is that the "Debt Supercommittee" failed to get a debt deal done and an automatic $600 million in spending cuts to the DOD budget are set to start early next year. Even if the DOD budget is cut, GD is trading for very cheap prices here with a solid dividend to provide a floor the stock price. In addition, it has diversified away from DOD products with its Gulfstream jet business. It currently has a 3.08% entry yield based on current prices and a low debt/equity ratio of 0.3. It has 20 years of dividend growth behind it and a has a low payout ratio of 26% with provides plenty of opportunity for future dividend growth. It currently sells for a P/E ratio of 8.51.
Visa Inc. (V)
Visa manages a group of global payment card brands, which it licenses to financial institutions that issue cards to their customers. The firm acts as the payment processor by facilitating the authorization, clearing, and settlement of transactions on its proprietary networks. Visa maintains the largest card scheme in the world.
Visa is an interesting choice. It's not particularly cheap and the entry yield of just 1% leaves a lot to be desired. However, there are few businesses on this world that have a better model than Visa's. Credit cards are a dominant payment form throughout the world and are only going to grow stronger as businesses in emerging markets start to accept credit cards as a payment form. I wrote about why Visa makes a good investment here, and Warren Buffett's recent investment with the company seems to back that point. It trades for a P/E ratio of 21.03, but I think an investor is paying for growth potential with Visa. They have grown their dividends since the company went public in 2008 and recently boosted their payout by 47%. This could be a solid dividend growth stock for years to come. It has a payout ratio of just 20.8%, which leaves plenty of room for growth. It has basically no debt and its a cash cow business. Not much to dislike here other than the entry yield. If I initiate a position in this company I'd likely keep it a small position due to the price and yield.
3M Co (MMM)
Based in St. Paul, Minn., 3M manufactures a diversified array of industrial products. Known especially for popular consumer products such as Scotch Tape and Post-It Notes, the company's portfolio also offers liquid crystal display films, health-care technology, heavy-duty adhesives, and more than 40 other technology platforms. 3M is an S&P 500 component and a part of the Dow Jones Industrial Average.
3M is a boring business that keeps humming along, continuing to produce products that individuals and businesses need everyday. They have a wide product base with many patents around those products. They have fallen quite a bit recently, trading for as high as $98 just a few months ago. It currently trades just north of $76 and sports an entry yield of 2.89%. They have a P/E ratio of 12.95 and the dividend is supported by a low payout ratio of 37%. MMM is certainly not an exciting business, but that's exactly why I like them. They aren't likely going to be in any headlines anytime soon. They have grown dividends for 53 years, which is quite a feat. They're scheduled for a dividend raise in early 2012, so the YOC is set to rise quickly from this point.
Whether or not I purchase shares with any of the above companies will largely depend on what the individual prices do over the next couple weeks. If the market weakness continues I will be a very happy shopper indeed. Although all four of the above companies have risen to the top of my watch list, I also have my eye on dividend growth stocks like ITW, T, GE, MDT and EMR among others. The above list is ordered from what I'm most likely to purchase on top.
That's my watch list. What's yours?
Full Disclosure: Long TOT, TEF, KO, GD, MDT
Thanks for reading.