Recent Buy

Well, everyone is expecting a pullback in the markets. I read about a lot of investors currently selling equities and converting that capital into short-term bonds or cash. I continue to believe in my long-term strategy of buying attractively priced businesses every single month on my march to financial freedom and holding those businesses as long as they continue to raise dividends and don’t become extremely overvalued or lose the fundamentals that compelled me to purchase in the first place.

The S&P 500 is up 6.81% YTD already and we’re not even two months into the year. It’s been an extremely strong start to the year, and although I am expecting a pullback like a lot of other investors I don’t know exactly when it’s going to come so I just continue to do what I know how to do. I take excess capital from my high savings rate and purchase what businesses I think give me the best chance to grow my burgeoning portfolio.

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 actually didn’t plan on making any purchases this month. This was due less to the strong market performance and lack of value, and due more to the fact that I’m a little light on cash after the recent purchase of my car. Alas, I just can’t stay away from the market when I see a weak day or see equities I’d like to add to my portfolio under-performing the market. Earlier today I made two purchases and I’ll discuss them below.

I purchased 16 shares of Norfolk Southern Corp (NSC) on 2/15/12 at $68.23 per share. I initiated a position with NSC last month, and I feel it’s one of the stronger railroad plays. I wasn’t planning on adding to my position with this company so soon after my purchase, but it has dropped significantly since my last purchase and I do believe in averaging down on my positions. Today’s 3.64% drop offered me an opportunity to do so. I believe railroads are a strong investment right now. The cost of oil is extremely high and railroads offer a cheap transportation option to get goods across vast distances cheaply. The low demand for coal right now, due to the low cost of natural gas, has hit NSC hard due to their reliance on transporting coal to grow earnings. I believe this is an opportunity, so I decided to add to my position with NSC. The entry yield on my purchase is 2.76%, which I think is respectable. This investment will provide me with $30.08 in yearly dividends based on the current payout.

For my second purchase, I decided to buy 19 shares of PepsiCo, Inc. (PEP) on 2/15/12 at $63.10 per share. This now makes PEP one of my larger positions, as I now own 77 shares of PEP. I love PEP. They have a wide economic moat due to their economies of scale, wide distribution network and quality product that people are usually willing to pay a premium for. I know I personally use their products on a near daily basis. The P/E ratio is 15.7, which while not fantastic, is a fair price to pay for this quality company. The moderately weak balance sheet is the only thing I really don’t like about this company. I like the management in place, and I like the fact that CEO Indra Nooyi is staunchly against splitting the company’s beverage businesses from the snack food businesses. I think PEP is a solid dividend growth holding for the long-term with 39 years of dividend growth behind it. It has a 5-year dividend growth rate of 12.2%. The entry yield on my purchase is 3.26%. It will provide me with $39.14 in yearly dividends based on the current payout.

I still own 24 positions, due to my adding to positions I already owned.

Some analyst opinions on my recent purchases:

*Morningstar currently rates NSC as a 4/5 star valuation.
*S&P currently rates NSC as a 4-star Buy.

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

I’ll update my Freedom Fund in early March to reflect my recent purchases.

What are you buying?

Thanks for reading.

Comments

  1. Anonymous says

    Hey DM. Nice buy. Just curious if you do all of your buying in taxable accounts or if you do some within a ROTH in order to get tax free dividends? Thanks.

    • says

      Anonymous,

      Thanks for stopping by!

      I do not invest in a ROTH for a few different reasons. I plan on living off dividends at a fairly young age, so I do prefer to invest in taxable accounts for that reason. Also, I’ll likely be living off a lower income base, so my taxes owed will likely be small anyhow.

      ROTH, as an investment vehicle, is excellent for most however. I highly recommend it. I just personally do not use one.

      Best wishes!

  2. says

    Great purchases DM! It’s always nice to buy on dips, especially when there’s nothing fundamentally wrong with the company. I also bought some shares of PEP today at $63.40, slightly higher than your purchase price. Darn it!

    It’s really frustrating watching the market go up because most folks are chasing performance right now. So it’s pretty hard to find decent value in the market. If the market does pull back, I’ll probably pick up some more shares of KO, JNJ, PG, and EMR.

    By the way, have you looked into MORN? I see you reference their ratings a lot. I read their annual report and the company is really solid and management is top notch. I purchase the stock a while back and it’s been flat. They just recently raised the dividend by 50%, but the yield is pretty low. I believe with time MORN will be mention along with other dividend stocks like PG & KO.

    • says

      Henry,

      Great minds think alike! I’m glad to see you also purchased PEP today. I’m loading up on that one while it just continues to lag the market. I’ll be happy I did one day in the future.

      I have a few of the same stocks on my watch list. I’d love to pick up more KO, PG and EMR. I actually wouldn’t mind PG and EMR at today’s prices, but would prefer KO slightly lower. JNJ is already a fairly large holding for me.

      I haven’t looked at MORN. The only stock I have on my watch list that has a yield of under 1% is V. I just keep missing on that one, and have just about whiffed completely. I should have purchased it last year and kept waiting. I’m kicking myself now. I think that’s a runner, and may have to pay up for my mistake now. We’ll see. You did great buying V!

      Best wishes.

    • says

      V and MA are something to behold. I keep wanting to add more to my positions, but they keep going up and up. I initiated a position when the P/E were around 18. Now they’re around 27. Bummer… I hope both pull back so we can both be fellow shareholders. =)

      Oh, another position I initiated was CME at $260. They raised the quarterly dividend by 50+% and initiated a variable annual dividend (to be paid the first of every year). I really like the business model and management thinks it’s better to return value to shareholders in the form dividends rather than share buybacks.

      Cheers!

    • says

      thestoicinvestor,

      I like PEP long-term. It’s been a chronic under-performer over the last couple years, but I think that, as always, the earnings and yield will boost the share price over the long haul.

      Best wishes!

  3. says

    I too bought some NSC yesterday. I’ve been interested in the company for a while, but buying opportunities are rare since I require a 2.75% entry yield in my strategy. I also like PEP, but not looking to add shares right now since it is one my larger positions.

    • says

      Compounding Income,

      I’m in good company. Great minds think alike! That was a pretty large drop, so I figured I’d average down on it. If NSC drops from here, I’ll probably stay pat unless it’s a huge drop…as NSC is already as large a position as I’d like it to be.

      Take care.

    • says

      MoneyCone,

      I completely agree. No zero sum game there between those two giants. I’d LOVE more KO in my portfolio at this point, but just have not seen an opportunity to add to my very meager position. I think KO is a great company, one of the best.

      Good luck with your investments!

  4. says

    Hi DM,

    I was very tempted to buy some NSC yesterday, but I held off because I just added to my position a few weeks ago (around the same time you initiated your position) and I am looking to diversify my portfolio with some new positions. Also, I’m a bit low on cash right now and I want to have a decent amount on hand in case of a pullback later this month. That said, I may end up pulling the trigger to buy more NSC if it stays at this level or drops further in the next week or two.

    PEP has also caught my eye, but from what the CEO has said about this being a transitional year for the company, I wonder whether more downside is forthcoming. I plan to simply watch it for the time being. Also, I don’t know whether you saw the early announcement, but PEP is increasing its dividend by 4% (starting with the June payment), so you can expect to receive a bit more each quarter after the March payment.

    Take care,

    Deedubs

    • says

      Deedubs,

      I hear you. I wasn’t really looking to add to my NSC position so soon, as I really see that as being a relatively small position for me going forward. I just figured that such a large drop offered me an opportunity. I’ll likely look elsewhere unless it craters from here.

      I’m a little mixed on PEP. I think it’s a fantastic company with rock-solid products and a wide economic moat. On the other hand, the balance sheet is concerning and it seems to lag KO on many major metrics, except it’s value relative to price. KO may be worth the premium, but I think PEP is a solid play. A 4% raise is a little disappointing, and I’m hoping they can get back to 9%+ raises soon. I’ll likely be holding on any further PEP purchases in the future as well, at least until my portfolio grows substantially.

      Best wishes.

  5. says

    I have not looked at NSC as deeply as I would like.

    I have heard that a lot of rail cargo is coal, and that there is less demand for coal because the price of natural gas keeps going down. Are they finding cargo to replace coal? Or is this not an issue?

    • says

      Everyday Freethought,

      The low price of natural gas, and hence the increased demand, is something I mention in the post as being a catalyst behind the recent weakness in NSC shares. Coal transportation does provide them with a large part of earnings, so it’s price fluctuations have an impact on their bottom line. Commodities fluctuate, so while it’s something to keep an eye on…it’s just part of that business.

      Best wishes!

  6. Anonymous says

    You doing well DM keep up the good work and continued success toward early retirement. May I ask who use for your online brokerage account or who you would recommend? Thanks

  7. says

    DM,

    Nice buys on PEP and NSC. It’s hard to argue against either of these stocks long term. I like your strategy with NSC. Railroads should get a nice boost as oil prices and energy costs escalate. PEP is really a no-brainer. You use their products everyday. I use their product every day. Millions use their products on a daily basis. Plus you get your dividend growth and income.

    I recently purchased 300 shares of CHKR and 200 shares of SDT. Both are oil trusts spun off from Chesapeake Energy (CHK) and Sandridge Energy (SD), respectively. I sold my APL position to fund these trades, plus used a small amount of margin. I can work the margin off with a month or two so I am happy with these positions.

    Another great post…take care!

    DPS

    • says

      DPS,

      Thanks for stopping by. I agree with your comment. I think railroads are well positioned in an environment of high energy prices. That also bodes well for my oil stocks. So, that might be a win-win. PEP has been disappointing when you compare it to the market, but I just view that as an opportunity. I think PEP will be much higher 30 years from now! :)

      Good luck with your investments. I’m not very knowledgeable on oil trusts and the like, but I’m sure you’ll do great.

      Hope all is well in Guam!

  8. says

    DM,

    Pepsi has faltered recently with its Tropicana juice and Pepsi branded colas. There are investors who have not been happy with the current CEO and the results and valuation have demonstrated this. Fortunately management can be changed and the business can be fixed, it’s a matter of time.

    The charts indicate that there is pretty good support at this price. I would still like it a few dollars cheaper.

    • Anonymous says

      Hi, SFI.

      I was actually about to pull the trigger on PEP. But after going through the news and finding out about the comments by management, I decided not to. One of the articles spoke about management saying they believe they can add water to their orange juice, and people would still buy it for the same price or more. That tells me that sticking to quality is not the top priority of the management.

      I decided to buy a bit of KO instead. I’d still like to get some PEP, but I’ll wait until their is changing of the guards.

    • says

      SFI,

      Good observations there. PEP has faltered lately, but as a value investor I look for times when a company is unloved and people are looking in other directions. It will eventually rebound, because it has such a wonderful lineup of products that people use every single day. They are positioned well for long-term growth and I’ll keep adding to my position on dips.

      As for the price, it may come back down to the $60 level, and that’s great. I think looking out 20-30 years, I’ll be happy with picking it up at either price.

      Best wishes!

  9. says

    I like the Pepsi buy. They are slipping just enough for you to get a good price, although personally I’m going to wait for it to drop a few more points. Could miss out though.

    Was wondering if you had any thoughts on COP. I got in under 70 pretty recently and really like it anywhere below 70. I think it’s a good div stock (high and increasing dividend) in a good company with good growth prospects. I also like the split that’s coming up and think both companies look to be good div stocks to hang onto (although I might ditch the spinoff).

    • says

      The Med Student Blogger,

      PEP has been at a pretty solid valuation for quite a while now. I don’t expect it to break one way or another anytime soon, so you’ll get a chance to strike at it. If you’re looking to make a quick buck, PEP isn’t it. But, as a long-term value I think the price is right. I think PEP will turn things around, as they have such a solid lineup of products. The business is too good for it not to rebound and start doing better.

      COP is solid, and is my biggest energy holding right now. I’ve thought about selling XOM and adding to COP, but I like both so I keep both. We’ll see how the split goes, but it seems to align well for shareholders.

      Best wishes!

  10. Scott says

    Added to my Duke Energy (DUK) holdings to catch the ex-dividend date at 4.7% current annual yield. Continued my monthly accumulation of Union Pacific Railroad (UNP). Also reinvested February dividends via DRIP in Procter & Gamble (PG), Oneok (OKE), and Omega Healthcare (OHI).

    • says

      Scott,

      Great stuff there. I really like UNP and PG here, especially PG at these prices. It was actually a close call between PEP and PG for this month’s purchase and came down to the wire for me. I would have been happy with either. I’ll be adding to PG soon. I haven’t looked into utilities lately, simply because they had such a monster run in 2011 as a group. DUK is solid here and I like quite a few others. I will eventually start a round of utility holdings when the opportunity arises. I’ve looked at OKE before and found it richly priced, at least last time I looked. It had quite a run, no? OHI is a solid buy, and solid company.

      Sounds like you’re doing fantastic. Best of luck with your purchases!

    • says

      Anonymous,

      GPC is a solid dividend growth stock. I missed a few opportunities to get in, and I find it (as you stated) a little overpriced at the time being. I’m sure eventually it will be one I own. The opportunity will come.

      Best wishes!

  11. Jeannine says

    Anonymous,

    I use sharebuilder. No monthly service fee, $4 trades on Tuesdays, $9.95 any day trades and free dividend reinvestment. A friend of mine trades frequently and uses foliofn.

    Good luck checking out your options.

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