Thursday, January 26, 2012
The markets have been strong right out of the gate and we're starting 2012 off with a bang. The S&P 500 is up 4.84% YTD just over 3 weeks into the year. Generally when the markets are this strong, us value investors like to wait on the sidelines with a heavy dose of cash and wait for a pullback. I do consider myself a value investor, and dividend growth investor, however I also believe in purchasing shares of quality companies at the most attractive opportunities available every single month. When the market is down, I purchase quality at an attractive long-term price. When the market is up, I do the same thing. I don't believe in my ability to forecast the future, so instead I rely on the power of averaging my capital into the markets. I walk the walk when I talk the talk, and I made another round of purchases very recently.
As part of my Recent Buy series, I try to let my readers know of any equities I purchase soon after the transaction is completed. This is just one way I try to document my progress toward early retirement and financial independence.
I plan on achieving personal financial freedom through an ever growing source of passive income, with dividends from my stock portfolio fueling the majority of that passive income. I'm building that passive income stream one month at a time...slowly building my own little dividend growth machine. Think of every share I buy as a small gear in that machine. One day this machine will be busy working while I'm busy relaxing and doing the things I like to do.
For the first of two purchases this month, I decided to purchase 17 shares of Norfolk Southern Corp. (NSC) on 1/25/12 at $73.55 per share. I purchased these shares when NSC was very weak in the morning, followed by a strong bounce in the afternoon. Although NSC has been on my watch list for some time now, this purchase was partially inspired by my fellow dividend growth investor, and blogger, Deedubs. He owns shares of NSC and recently also purchased shares with Canadian National Railway (CNI). Although railroads aren't my favorite businesses in the world, as they are asset and infrastructure heavy along with being capital intensive, they do provide a great way to invest in the recovering economy. As the general economy recovers this business should start booming again as the general transportation industry starts to move more goods across vast distances.
I think NSC is one of the more attractively priced railroad businesses right now, with a P/E ratio of 13.74 and a P/B of 2.4. The balance sheet is fair with a debt/equity ratio of 0.7. As a dividend growth stock, the fundamentals appear pretty strong with 10 years of dividend growth and a 5-year dividend growth rate of 19.5%. Earnings and revenue are relatively flat over the last 5 years, as the economy has struggled, but I think NSC appears to be a well-run company. The entry yield on my purchase was 2.56% and will provide me with $31.96 per year in dividend income based on the current quarterly payout of $0.47. NSC appears to be shareholder friendly and committed to growing the dividend, and recently raised the dividend by 9.3%. This is the second time in the past year they've raised the dividend. NSC is a new position for me.
My second purchase was 20 shares of Philip Morris International (PM) on 1/25/12 at $74.43 per share. This was another purchase in the morning on weakness. It recovered strongly in the afternoon. PM has been weak lately, down 3% over the last 30 days compared to the 30-day performance of the S&P 500 at +4.2%. I've discussed why I like PM many times on this blog, but it basically boils down to the fact that as the middle class grows in emerging economies and developing countries there will be more and more consumers consuming the products PM produces. And, as they gain consumers the prices will also go up. I suspect PM will continue to grow their earnings, revenue and dividends for many years to come. I received an entry yield of 4.14% on my purchase price. Based on the current payout, I expect to receive $61.60 in dividend income per year. The major drawbacks of PM, as a business, is the fact that they have more leverage than I'm usually comfortable with and the fact that they sell a product that some people disagree with due to health implications. On the other hand, they are a cash cow business that produces an addictive product that has high margins. Philip Morris is now my largest position.
With the addition of NSC, I now own 24 positions.
Some analyst opinions on my purchases:
*Morningstar currently rates NSC as a 3/5 star valuation.
*S&P currently rates NSC as a 4-star Buy.
*Morningstar currently rates PM as a 2/5 star valuation.
*S&P currently rates PM as a 5-star Strong Buy.
I'll update my Freedom Fund in early February to reflect my recent purchases.
What are you buying?
Thanks for reading.