Recent Buy

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.

Comments

  1. Anonymous says

    Mantra,

    I bought 18 shares of NSC on the same dip as you.

    I plan on buying CSX, NSC, and UNP as money comes available and when the stocks are attractively priced. The railroad stock prices have been the highest recently since I have been tracking them. NSC dipped after reporting earnings, so I took the opportunity.

    My interest in railroads goes beyond strict dividend value considerations. With peak oil (oil is $100 per barrel during a depression!), the efficiency of railroads makes them the key industry in the future.

    Ken

    • says

      Ken,

      Wow, good stuff there. Same dip, huh? Yeah it was down around 2.5% in the morning, so I figured that was a good time to strike. I guess I wasn’t alone. UNP and CSX look pretty good here too. UNP is a dominant player.

      I hear you on the railroads being attractive in the face of rising oil. That echoes my thoughts and one of the main reasons I decided to initiate a position with a railroad.

      Best wishes!

  2. says

    DM,

    Over at Fidelity, the “equity summary score” for PM is 9.4 very bullish on a scale of 0-10 with 0 being very bearish and 10 being very bullish. The score is an aggregate score/opinion of 15 analysts/firms providing coverage on PM. Picking up additional shares on a 3% pullback is a smart move. Nice play!

    I like NSC, great company that should fair quite well in an economic recovery. They score 9.6 on an aggregate score of 23 analysts/firms at Fidelity, so very bullish. I think the yield is a little skimpy for me, but as long as they continue to grow the yield I think you will do great!

    My portfolio is up nearly 3% just this week. I recently purchased 100 shares of APL with a cost basis of $37.81, an entry yield of 5.7% and an aggregate score at Fidelity of 9.6 very bullish. My portfolio is over-weighted in the energy sector, but I really like energy going forward. I will look to diversify and balance my portfolio with new purchases into different sectors starting around in February. I should have about $3100 for my next purchase. I also recently completed 2 swing trades for a small profit.

    Nice article, keep up the good work!

    DPS

    • says

      DPS,

      Thanks for stopping by. I think PM is going to be a very strong performer looking out over 10-20 years and more. NSC isn’t going anywhere either. Every purchase I make, I make with the thoughts of holding those shares forever unless something drastic happens.

      You’re big on the pipelines! I like the pipelines as well, and just haven’t migrated toward any yet.

      $3,100 for your next purchase is pretty big. It feels good to have that kind of capital ready to work for you. Good luck with making it count!

      Take care!

    • says

      Andrew,

      I wouldn’t mind a bit more MO, although I’d say it’s a tad pricey at current levels. At today’s prices I prefer PM, but if MO dips a bit I wouldn’t mind doubling my position.

      Take care and thanks for stopping by!

  3. says

    Hi DM,

    Nice buy of NSC and thanks for the mention. I think a railroad is a good addition to your portfolio. I agree with the comments about the fuel efficiency of railroads making them attractive in a time of high oil prices. At some point in the near future I plan to summarize my thoughts about railroads in general on my blog (stay tuned).

    PM is also a good buy. I’ve been tempted to increase my position, but it’s already my largest holding, so I don’t want to weight it too heavily. However, if it dips lower then I will probably buy a bit.

    Congrats on two solid buys and the future dividend income they’ll bring you!

    • says

      deedubs,

      No problem! Always good to exchange ideas and be inspired!

      Railroads have some benefits and drawbacks, just like any other business. Obviously they are infrastructure heavy and capital intensive, but the rising necessity of them, especially in the face of rising oil, makes them attractive to own. I wouldn’t bet the farm on railroads, but I also wouldn’t mind 5% or so there.

      PM is my largest holding as well now. For a while, it was JNJ and I still like JNJ…but I really like PM.

      Thanks for the congrats. I wish us both well as fellow shareholders of quality companies. Best wishes!

    • says

      Anonymous,

      I like the valuation of NSC, the higher yield and the more attractive balance sheet. I don’t dislike CSX, but NSC was the more compelling buy. If I was to take on a second railroad it would likely be UNP at this point.

      Best wishes!

  4. says

    Nice buys DM. I also picked up some shares of ABT, PG, and T on dips this week.

    I like the railroad business, but they’re too capital intensive for my cup of tea. What’s your take on UNP? It’s like the 800lb gorilla among the railroads. Since I live in the west coast, and UNP operates in the west, I mainly see UNP around and not NSC, CSX, and CNI. Cheers!

    • says

      Henry,

      Good stuff there. Always nice to top up some holdings with high quality companies. Nice!

      I hear you on the railroads. As I said above, I wouldn’t bet the farm on railroads but I wouldn’t mind a small allocation to them. The low yields and capital needs temper my enthusiasm, but I think there is a bright future here in terms of growth.

      UNP would be my second play here. NSC was picked because of the stronger valuation and higher yield. I think NSC is well-run but I like UNP for its size. I think either company could make a strong railroad play.

      Have a great weekend!

    • says

      Thanks for the insight. Have you looked into UPS or FDX? I think both are similar to railroads in that they transport goods, but on a global scale. I’ve peaked at them in the past and their capital intensive industry keeps me at bay. I like my companies boring and cash rich. Transportation is fairly boring, but not really a cash rich industry. Of course there are exceptions at times, perhaps this is one of them?

    • says

      Henry,

      I’ve looked into them in the past, or I should say “I took a peek”. UPS isn’t really a dividend growth stock, and has been a little pricey for a while. FedEx has had a very low yield for quite some time. I’d be willing to sacrifice yield a bit for a cash cow business like Visa, but not for FedEx.

      Buffett is a large fan of railroads, as you probably know. They have a corner on a certain market, transporting large amounts goods across vast distances relatively cheaply, and I like anything that has a certain market. The industry has obvious high entries to barrier and economies of scale. Also, there’s only a few major players so competition is limited. There are benefits and drawbacks to this industry, but again, I think 5% or so of my portfolio could be allocated toward transportation. I wouldn’t be comfortable with any more than that, at least not at this time.

      Hope that helps.

      Best wishes!

    • says

      Warrior,

      Nice picks there. T had a nice little dip, and allowed for a nice price point for additions. I like VOD in the telecom space as well.

      GE and INTC are both interesting. I think INTC is probably one of the best tech plays, but I’m not as sure about GE. GE could make an investor a lot of money, but I’m just not sure about it.

      Best wishes.

    • says

      Ken,

      That’s very high for a company like GE, which I’m sure is related to the financial arm’s woes. 3.9 is higher than I remember it being, so perhaps it’s climbing. I thought last time I looked at it, it was maybe 2.2 or higher? GE just doesn’t really interest me at this time, but certainly I’m hoping they really turn things around. They have some good things going on in emerging markets. They are a big player in Brazil, if I remember right.

      Take care.

  5. says

    Hi DM! Great buy. I love PM but Im not a shareholder yet!

    I recently bought Tesco Plc (Buffett also…). Tesco is a rival to Wal Mart and has a great history of rising dividends. The stock is currently depressed and maybe its a good time to accumulate stocks. Take a look at this great company!

    Keep up the good work!

    ägamintid (take my time)

    • says

      ägamintid,

      Thanks for stopping by. PM is definitely a strong play, in my opinion.

      I don’t know a lot about Tesco. I’ll have to look into that one a bit. Thanks for the heads up.

      Keep up the good work on your end as well.

      Take care!

  6. says

    Hi DM!

    I am a big fan of PM as well. We just don’t have the same amount of money in common, we also buy the same shares at the same time :) The same day, the same morning (afternoon for me) as you purchased your shares in PM, I purchased 30 shares in PM for 73.95.

    I look forward to read about the update of your freedom fund!

    Best wishes!

    • says

      Eyes,

      Thanks for stopping by. Glad to have you here.

      So we purchased the same stock on the same day at almost the same time? That’s good stuff! I think you made a great purchase, and you got in a little less than I did. I think buying PM under $80 is a great purchase currently.

      What else do you find attractive right now? Looking forward to hopefully buying the same stuff at the same time again!

      Best wishes.

    • says

      I totally agree, PM under USD 80 is a great purchase.

      I keep an eye on a lot of different companies (many Swedish and European), but for example VOD is currently traded at intresting multiples.

      Take care and keep up the good work!

    • says

      Eyes,

      VOD is trading at an attractive price. I’m looking to add to my position when the time is right. It’s currently the only position I own trading below my cost basis.

      Take care!

    • Scott says

      Congratulations on the Norfolk Southern purchase. I started scaling into Union Pacific (UNP) on a monthly basis this past September using their Direct Stock Purchase Program (no purchase fees and no fee to set up the direct investor account). I think railroads are great companies to build positions in right now, as my amateur research indicates they begin going up before an economy coming out of a recession starts to pick up.

      Also added to my REIT holdings in Omega Healthcare Investors (OHI) to catch the ex-dividend at the end of this month.

      My wife won’t let me buy tobacco stocks, so I plan to sneak them in by buying a Consumer Staples ETF (VDC) and not telling her what’s in it.

    • says

      Scott,

      Thanks for stopping by. UNP is solid here too, and like I said above would be the other railroad I’d own right now. UNP has been a strong performer.

      Great to see another dividend investor out there.

      Best wishes!

  7. says

    Congrats on pulling the trigger, it’s been kind of tough this month. PM is my favorite dividend stock, it’s going to be a winner long term IMO. It has taken off the past few months, glad to see a pullback.

    • says

      Compounding Income,

      It has been tough this month, for sure. Us value investors have been kept at bay. I’m surprised we haven’t seen a strong pullback yet. I know PM is your favorite, and now it’s also my largest holding. Gotta love that strong dividend!

      Anxious to see what you purchase next!

      Take care.

    • says

      inq,

      Good to hear from you. Hope all is well.

      PG is on my list. Some of the dividend stocks that were such high-flyers from 2011 are starting off the year a bit weak as investors trade into cyclical plays. This bodes well for us value/dividend investors.

      Best wishes!

Join The Discussion!