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)

Per Morningstar:

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)

Per Morningstar:

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)

Per Morningstar:

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)

Per Morningstar:

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.

Comments

  1. says

    DM,

    I enjoyed your article, and will have to check out MMM and EMR, I usually don’t watch those.

    I recently bought ITW and UNS, and am currently paying close attention to JNJ, MDT, KO, PG, ADP, APD, and ITW (might buy more).

    I look for companies with a yield of 2.75%+, which rules out V for me. I much prefer 3% yield. TEF is at it’s 52 week low, but I am not crazy about the withholding tax, also I want my holdings to pay quarterly or monthly. I look to Canada and the UK for foreign holdings, but that’s just me and I might miss some steals.

    Happy investing.

  2. says

    Stuart,

    MMM and EMR are both pretty solid and good values here.

    ITW is definitely on my watch list as well and if the above stocks shoot up I may have to look elsewhere. We’ll see what the market presents me. ADP and APD are both solid picks as well, but I haven’t been following them as closely as others. PG and JNJ are getting attractive as they close in on $60. I already have larger holdings with both of them, however. Great values there though.

    V might be an interesting play. It’s an absolutely solid business, but the yield leaves a lot to be desired. The nice thing for me is that I’m young and have a little time to build up that YOC.

    TEF only pays semi-annually so that is a drawback. However, if you hold it in a taxable account you get the withheld portion of your dividend credited back to you when you do your taxes. The drawback of that is that you have to wait for it until February or so. I am considering selling TEF for a capital loss to offset some earlier gains and perhaps initiating a position after the 30-day wash sale period. We’ll see. I rarely sell anything.

    Canada and UK have great picks as well, and I’m long VOD (based in the UK).

    Best wishes!

  3. says

    I’m digging your watch list DM. See, I told you black Friday in the stock market was going to happen haha. It might have came a bit late thought.

    I like KO, SYK, MSFT, OCRL, QCOM, PG, JNJ, PEP, GD, EMR, ITW, UTX, MDT, BDX, DE, and XOM at these levels.

    Ahhhhh… so many quality stocks, so little capital.

    I also like V below $90, but it’s already a hefty part of my portfolio.

  4. says

    Henry,

    You were right. We definitely had our share of black Friday deals! Unfortunately, my capital supply is all dried up right now and I’ll have to wait until early December to buy again.

    I like your list there. BDX and MDT are both attractive in the health care space here. PG and JNJ are attractive near $60. Those are two of my bigger holdings.

    I agree, and that’s something I say quite often….so many equities, so little capital!

    V popped 5% today. What value I seen in it is gone after a pop like that. I think the markets will come back down before I have to buy so I’ll continue to circle the waters around V.

    Let me know what you buy in December. Looking forward to sharing ideas!

    Take care.

  5. says

    Money Cone,

    GD is a solid company, in my opinion. And that’s with or without DOD budget cuts. Buffett likes it and I like it. I think the long-term prospects are good here and the price offers a solid value.

    Thanks for stopping by! Best wishes!

  6. Anonymous says

    Mantra,

    I am going for Novartis. This is a company with an annual dividend and I rather get it a couple of months before the XDate rather than wait an entire year for a dividend after purchase.

    Ken

  7. says

    Ken,

    Good move there. I know my fellow dividend blogger Dividend Monk is bullish on NVS and owns it in his personal portfolio. It seems like a solid pick to me, with the one glaring disadvantage (in my opinion) being the annual dividend. Seems like one of the most solid health care plays.

    Best of luck with that investment!

    Take care.

  8. says

    KOs valuation has normalised somewhat but its still overpriced IMO. P/E and P/FCF are 22 based on average 2009-2011.

    I like these ones
    PE3 PFCF3
    Exxon 11 13
    J&J 14 14
    Novartis 12 13
    PM 15 18

  9. says

    All great picks here Mantra! What can I say?

    Have fun bottom-feeding :) I won’t be invesitng any new capital unfortunately, an RRSP Loan to pay down (like ur 401K), and I’m dollar cost averaging into my index funds (sorry I guess that’s a bad word around these parts :)And I’m also going to be setting up some DRIPs in January!

    Keep up the good work Mantra!

    Cheers

  10. says

    defensiven,

    Thanks for stopping by.

    I agree. KO is certainly not a steal here, and probably not even a bargain by most standards. It’s trading at a fair value for a quality company. Although, since I posted this article it has bounced up quite a bit and trended out of what little value territory it was in. If it doesn’t trend back down toward the $65 area I’ll probably hold on this one.

    I agree with some of your other picks and I’m long JNJ, PM, XOM personally. JNJ and PM are my two largest holdings. NVS looks interesting and I know Dividend Monk has holdings with that company. My only issue is the annual dividend payment. I much prefer quarterly and even semi-annually when possible, but it seems like an attractive valuation at these prices from what I know of it.

    Take care and good luck with your H&M investment!

  11. says

    The Dividend Ninja,

    I love being a bottom-feeder! It’s yummy down here. :)

    Indexing isn’t a bad word. I say go with whatever serves you best, and index investing certainly has its advantages. The passive nature would certainly come to mind. It would definitely be nice to auto-pilot things.

    You keep up the great work too!

    Thanks for stopping by! Best wishes.

  12. says

    DM,

    In regards to foreign taxes withheld:

    Do you actually get the amount withheld returned? Or is it a credit? e.g. a $100 credit really only gives me $15 back (or whatever tax bracket you’re in) since it reduces my taxable income accordingly.

    Waiting to get the money till tax time isn’t a big deal to me.

    I thought it was a credit which is why I avoid most foreign countries, but I might be wrong. I know that UK Corps do not withhold and Canadian Corps don’t if held in a ROTH IRA (don’t know about regular IRA as I do not have one).

  13. deedubs says

    KO and GD seem pretty good (I am long KO). V does have a low yield and its P/E ratio is a bit high, but strong growth and capital appreciation might make up for that. One thing that keeps me away from MMM is that, despite its consistent dividend growth, the dividend growth rate is somewhat low (5-yr DGR of 4.6%). I tend to focus on stocks with DGRs of 8% or higher.

    Last week I went on a shopping spree and bought BDX, CVX, ITW, and UTX. The last three help to diversify my portfolio, which was previously lacking in energy and industrial stocks.

    I probably won’t do any Christmas shopping; I’ll wait until the new year. However, I may unload two or three old stocks (relics from before I switched to dividend-growth investing) to clean up my portfolio and for tax purposes.

    Anyway, thanks for posting your watch list and keep up the good work!

  14. says

    Stuart,

    Thanks for asking that. Great question.

    It is a dollar-for-dollar tax credit, and not a deduction of your taxable income. For more information see:

    http://www.irs.gov/publications/p514/ar02.html#en_US_publink10001561

    I received all my foreign dividend taxes back to me last year and I expect to this year as well. There is a limit on the credit, which you can see in the link above. I think you have to earn quite a bit in foreign dividends to exceed the cap.

    Best wishes!

  15. says

    deedubs,

    Thanks for giving me some of your picks. Excellent picks there, and I’m strongly looking at BDX right now. I think it’s attractive when it’s below $75, personally and it’s well below that. It also just recently had a 10% dividend hike, which is below it’s norm but still nice. ITW is high on my list, as is UTX and CVX. I’m long CVX and it was attractive on that dip down to the lower $90′s but has since rebounded.

    I agree with you on V. Low yield, high P/E ratio, but I think this could be a real winner long-term.

    Great picks there. Those will be solid long-term dividend payers to anchor your portfolio.

    Keep in touch!

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