What Are You Buying?

It’s been a little while since I asked you readers “what are you buying?”. I figured it would be a good time to find out what everyone is looking at. With the market blistering higher since the beginning of the year it’s become increasingly difficult for us value/dividend growth investors to find suitable equities at attractive long-term prices with a margin of safety to protect oneself in a market decline. I’ve been purchasing attractive dividend growth stocks every single month since I started my journey in early 2010. Major market slides and large upticks have both occurred in the last two years and I continue to purchase during both, relying less on my ability to time the market and more on the ability of time to compound my investments. I believe time is a much stronger force than my intuition, and an ally you surely would want on your side. Cash is king, except when inflation is eating away at it..which is pretty much all the time.

Although the market is showing no signs of a correction that many individual investors and talking heads have been looking for, I still continue to challenge myself to find quality businesses trading for fair or attractive long-term prices. As such, I’m considering the following three equities for purchase next month:

General Mills, Inc. (GIS)

General Mills is a formidable company with solid brands in its stable, brands like Cheerios, Betty Crocker, Pillsbury, Yoplait and others. I love owning companies that produce products that I buy, and this would certainly fit the bill. GIS has underperformed the S&P 500 YTD by a wide margin, going -3.22% on the year, compared to the S&P 500 at a strong +12.32% so far in 2012. This difference of over 15 points makes GIS a bit more attractive, despite its strong valuation at a 16.68 P/E ratio and a 3.6 P/B. It has a solid entry yield at the current price of 3.12%. The 5-year dividend growth rate is fairly impressive at 11.1%. The payout ratio currently stands at 53%, which is fair but I would like to see it go below 50% with growing earnings. The balance sheet is a bit of a weakness here with a debt/equity ratio of 0.9, but it’s manageable. I think with the strong lineup of brands and possibility of strong growth overseas, GIS should be a solid long-term holding. However, I wish the balance sheet was a bit stronger and the payout ratio is just a tad high. 

Medtronic, Inc. (MDT)

Medtronic is one of the largest medical device makers in the world. They have a wide range of products which include defibrillators, heart valves and pacemakers among others. With an aging population here and abroad, MDT should see plenty of demand for its products. It’s currently sporting an entry yield of 2.45% with a 5-year DGR of 17.8%. The P/E ratio is 12.79, which is fairly attractive in this market. The balance sheet is fairly strong and their ability to grow earnings appears to be in no danger of abating. The payout ratio is a very comfortable 31%, which leaves plenty of room for dividend growth. MDT is up 3.45% YTD, which is well under the S&P 500’s performance so far this year. I think MDT is attractive at current prices, and although I already have a position with this company I would be interested in increasing it.

Raytheon Company (RTN)

Raytheon is an interesting pick. I’ve written about my desire to own a piece of this company multiple times on this blog, but always found different directions with which to take my investment capital. I regret that a little, as I really missed an opportunity to invest with RTN when it was trading for around $40/share. It’s now over $52 per share. The entry yield is strong with this stock, coming in at over 3.78%. This company could be a controversial investment in the current climate of reducing the defense budget. RTN manufactures missiles and intelligence systems, so I believe they will be a little less sensitive to budget cuts than companies that manufacture large-scale products like ships and tanks. The 5-year DGR for RTN is at 12.1%, and the dividend was recently increased by 16%, going from $0.43 quarterly per share to $0.50 quarterly per share. This shows management is committed to increasing the dividend and is confident about the business. The current P/E ratio is at 10, with a P/B of 2.2. The balance sheet is solid, with a debt/equity ratio of 0.4. The payout ratio currently stands at 37.8%, which leaves plenty of room for management to continue to grow that dividend like they did this year. I think the low payout ratio, solid balance sheet and product lineup shields RTN a bit from DOD budget cuts and leaves the dividend relatively safe. Of course, this could change at any time in this industry. RTN is up almost 10% YTD, but is still trading at an attractive price.

These are just three stocks I’m considering purchasing in April. Market conditions change daily, so I may or may not purchase one or more of the stocks listed above. I think there are other attractive equities available, especially in the health care and transportation sectors.

What are you buying?

Full Disclosure: Long MDT.

Thanks for reading.

Comments

  1. Anonymous says

    Was considering by Total tomorrow after the drop. Just an add to my position and not going in that large.

    • says

      Anonymous,

      Nice choice there. TOT is one of the cheapest big oil plays out there, but I’m already long TOT or else I might consider it. Strong yield and cheap price, although not a pure DG play. That’s why I’m okay with my small position.

      Best wishes!

  2. says

    Hmmm… the only stocks on my buy list are UTX, BDX and DE. They haven’t performed well this year, which is a good thing. Hopefully some of my companies miss estimates and sell off heavily during earning season. I’ll do my spring shopping then haha.

    Btw, GIS’s payout for 2011 was 83% according to their free cash flow. Same for kraft and kelloggs. Have you looked at Unilever?

    • says

      Henry,

      Interesting choices there. DE has had quite a run, hasn’t it? I would love to own BDX, and although I’d like it closer to $70, it’s still trading for an attractive price at ~$77 in my opinion. UTX is a solid company. I’m with you on the spring shopping! I’m hoping the same thing as you!

      GIS isn’t the most stellar stock out there. I’m looking at it from an asset allocation and diversification stand point, and it’s been a pretty strong under performer this year.

      I’ve looked at UL in the past, and may look at it again. The dividend growth hasn’t been stellar, but I do like the products it sells and the global footprint. I also like the fact that I don’t have to pay withholding on the UL shares.

      Keep in touch!

  3. Anonymous says

    I ended up grabbing some WPZ recently after the pull back from (which I believe stems from the expectation of an equity offering to fund a potential acquisition). Historically, they have increased the distribution pretty consistently, have a good dcf coverage ratio and have projected distribution growth of 10-12% over the next few years, as well as have a very good footprint in the Utica and Marcellus stale areas.

    • says

      Anonymous,

      I don’t personally follow WPZ, but I do wish you the best of luck with your investment. I’ll eventually have to look into investing in some MLP’s.

      Take care!

  4. Bo says

    I’m considering buying NSC, it’s been going down for a while, it seems really cheap right now.

    Best wishes,

    Bo

    • says

      Bo,

      I like NSC at today’s prices. The only thing keeping me from buying additional shares is my allocation to this company right now. I think that I have a large enough position, but I might change my mind on that as I think it’s trading for an attractive price point looking out over the long-term. Good pick!

      Best wishes.

  5. Anonymous says

    Activision Blizzard (ATVI). Pretty undervalued and this year they have an opportunity to grow revenues with the release of a bunch of very popular titles, including this Diablo game that is apparently a huge hit. Also, they’re making moves in the social/in game purchasing aspect that will be an additional stream of revenue for them.

    Yield4Years

    • says

      Im buying Vivendi, a media and telecom conglomerate. It has a depressed valuation and trades 5-7 times average earnings and free cash flow. I think the “sums of the parts” are worth a lot more.

      The stronger operations, Activision Blizzard +emerging market telecom, would probably sell for a PE of 12+ if sold individually. When you buy Vivendi you get these operations + double the revenue for free. This includes Frances second largest telecom, Universal Music and Canal+ TV. The interest coverage is quite good at about 10.

  6. says

    I’m looking at buying either UPS or Fedex, I like UPS ‘s dividend but Fedex’s PE is more appealing. I think that as the United States Post Office reduces it services, these two companies will pickup business.

    • says

      Lemuel,

      Good stuff! Thanks for stopping by.

      I think FDX has a yield that is much too low for me and UPS is pretty expensive at today’s prices. I do like your line of thinking, however, on both companies picking up business as USPS continues its slow death. Keep us updated on those!

      Stay in touch!

    • says

      Anonymous,

      Nice picks there. I know there are a lot of fans of SDRL and the yield is certainly enticing!

      I should take another look at BP. It’s fairly cheap here with a pretty solid balance sheet and strong yield. I’m glad you brought that one to my attention yet again. That one yields further attention. I’ll take another look at it!

      Best wishes.

  7. says

    There are several companies that I would like to add to my portfolio to better diversify, but just can’t justify today’s prices compared to just four months ago.

    This is my biggest challenge these days: if entry price matters or if DCA would be the best approach.

    Cheers

    • says

      The Stoic Investor,

      I can understand your concerns.

      I try to look less at the market and more at individual companies. For instance, let’s say it’s four months ago and you’re extremely interested in Company Z and feel it’s very attractively valued at $40 share and you like everything about the investment but don’t have the capital. Fast forward four months and the market has had its huge run-up and now Company Z is trading for $41.50 per share. You now have capital. Would you buy Company Z shares?

      That’s the question I ask. I try to ignore the overall market when buying stocks and look at the individual performances. There are always going to be stocks performing better and worse than the market. I try to find attractive equities performing like the latter.

      Best wishes!

  8. says

    While I understand a good entry yield is nice, and is usually how I pick my monthly stock top-up (I use DRIPs) I think that if you really believe in the companies long term I don’t see the need fuss about it quite so much, or worse yet chose not to make another buy because all of your watchlist yields are low-ish.

    Ineed most stocks are more expensive than they were 4 months ago, but if you are a buy and hold long term investor and are going in based on strong EPS and divend growth metrics than a 4 month run up in price is really nothing to concern yourself with compared to the long term. Do you really believe the company will have a lower stock price after 5, 10, 20 more years of growth? If I was worried about that, I wouldn’t have picked the company in the first place.

    • says

      CashMoney101,

      Good points here. I agree.

      I always like to tell myself that if I like PEP at $64 per share as an investment for the next 30+ years, then why wouldn’t I like it at $66 per share? I try to remind myself that I’m not buying for the short-term price fluctuations.

      However, with that said, entry points still are extremely important and valuation is my top priority when looking at a stock. If the valuation doesn’t look good, then I don’t buy. I just think that in just about any market (unless things are really crazy) you can probably find some value out there if you look hard enough.

      Best wishes!

  9. says

    I am looking at Suncor. I have shares but I really like the company and would like to have more shares. Of course the yield is low now at 1.3% but they have a good history of increasing dividends.

    • says

      Poor Student,

      I haven’t really followed Suncor. That yield is a bit low for me, but I’d consider a yield that low if I felt the DGR was going to be extremely high (25%+) for many years to come. Otherwise, the math just wouldn’t work out for me.

      Best wishes!

  10. says

    I am also watching RTN. It’s right up near its 52-week high, though, and I don’t like buying at the top.

    I’m not sure what (if anything) I will be buying in April. I don’t see many attractive opportunities for new positions, so I might just make small additions to existing positions on whatever dips the market gives us.

    • says

      Deedubs,

      Thanks for stopping by.

      I hear you on not buying at the 52-week high. I also do not like buying at such points. I think it’s still attractive on an absolute basis, however. Even so, one has to be careful when a stock has had a run.

      I might join you in making small additions to existing positions. MDT might fit that bill for me, and maybe even NSC.

      Keep me posted!

    • says

      TheDividendAddict,

      I haven’t investigated options yet, but it sounds like it’s certainly working for you. I like to keep things simple (KISS) and I feel my strategy is working for me, but I may look into options at some point in the future.

      Anything attractive on your horizon?

      Take care!

    • says

      Put options work like a charm. It’s a strategy I use for the last 2-3 years and it brought more cash than dividends did. The only issue is risk management. There must be a limit to how much your portfolio is exposed to avoid a margin call when the sky falls the next time.

      We are on the same page with the Addict.

  11. Anonymous says

    I too am more or less holding off until there is some pullback. Though I have been keeping an eye on SNH. Seems like a good pick, but the portfolio is a little heavy on the REITs as it is. There’s a possibility that I will add to my position in ITW, but not sure yet.

    • says

      Anonymous,

      Thanks for stopping by.

      I really like ITW as a business, but it has had a monster run YTD. I can’t see myself adding to my position at current prices, but wouldn’t mind on a 10% dip or so.

      Best wishes!

  12. Anonymous says

    I recently purchased GIS. 3% yield is pretty good. The stock never seem to go down. I have been monitoring it for months and I decided to make the purchase. Got some in the 38ish price.

    Bill

    • says

      Bill,

      So, another GIS taker I see? Nice! I really like the product lineup, but the more I look at the stock the more I find it mediocre. I might still make it a small position for me, however. I am a bit concerned, however, about a number of metrics and it’s not exactly “dirt cheap” to make up for the laggard metrics. We’ll see. It’s still a solid long-term investment, but you do wonder if it’s the most attractive fish in the sea?

      Take care!

    • Anonymous says

      DM,

      I have been watching WAG as well. It seem to be priced reasonable. WAG’s 5 year avg p/e is 15.5. Current TTM p/e is 11.9. S&P suggest fair value is $39.40. 5 year div/growth is 23.76%. Current yield is 2.6% with a 29% payout ratio. If it drops to around 30ish. I might pick up some. This will be a good longer buy.

      Bill

    • Anonymous says

      Bill,

      I really like WAG and bought late last year when they dropped on an expected low earnings report. Got in almost at the low in the 30s. Have been selling and rebuying Puts on it around 33, which I view as an extremely good value and would be happy to own more shares at that point. It’s still almost 50% below where it was just a year ago and has an EXTREMELY strong history of increasing dividends, especially in the last few years.

      Yield4Years

    • says

      Bill,

      I think WAG is cheap at current prices, but I’m a little concerned about the long-term viability of the business. There’s a ton of competition in that space and rarely do I see a Walgreen’s without a CVS right across the street. Does WAG have an economic moat? I think it’s cheap, but I do wonder if it’s a value play or a value trap?

      Keep us updated on your decision. Best wishes!

    • says

      Compounding Income,

      Nice choices there! I like OMI and haven’t looked at it in a while. NSC is certainly attractive at these prices, as are a few others in the transportation sector. I wouldn’t mind adding to my NSC position, but I have to be careful before it gets too large.

      On an absolute basis RTN is still fairly cheap, but compared to what it was just recently it’s expensive. I think it’s still a good buy here, but I also understand what you’re saying about the allocation issue (HRS and GD). We’ll see on this one. I like the yield and the business, but I don’t love the price. Maybe wait for a fatter pitch?

      Thanks for stopping by. Take care!

  13. says

    I recently added more NSC and VZ and initiated position in MO. I will likely add more BDX or OMI next. I’m looking at adding some EXC in another account as a value + dividend play.

    • says

      austinbroker,

      Thanks for staying in touch!

      I like NSC at today’s prices, as to many others I see. I have to be careful with allocation here as it’s already a sizable portion of my Freedom Fund.

      I’m not sure about MO. I love that yield, but I do wonder about the growth going forward. The recent lawsuits over the graphic labels have not been going well for the big tobacco companies, so that’s a bit worrisome. I think it’s also a bit richly valued at today’s prices. I prefer PM here.

      EXC is hit-and-miss with me. Solid dividend and it appears to be a good value, but it has been a value play for quite some time now. I am trying to keep utilities below 5% of the portfolio right now, but maybe I’ll give EXC another shot at some point in the future.

      Since you are looking at EXC, do you know why they recently split the dividend between a special dividend and regular quarterly dividend?

      Best wishes!

    • Anonymous says

      The dividend split was becuase of their merger with Constellation… from their website:

      “”The Exelon board of directors previously declared a pro-rated dividend equal to $0.14575 per share of Exelon’s common stock, which will be paid on April 11, 2012, to Exelon shareholders of record at the close of business on March 9, 2012. The Exelon dividend declaration also included a second pro-rated dividend equal to $0.37925 per share of Exelon’s common stock, which will be paid to all Exelon shareholders of record, including the former Constellation shareholders, at 5:00 p.m. New York time on May 15, 2012. This portion of the dividend will be paid on June 8, 2012. Together, the two pro-rated Exelon dividends total $0.525 per share, ensuring that Exelon shareholders will receive their regular quarterly dividend, although it will be paid in two portions.”

  14. says

    UNP is what I am eyeing and this is why.From a multiples perspective, UNP is equally attractive. It trades at 16.4x past earnings but only 11.9x forward earnings. This compares to 12.6x and 10x for CSX and 11.9x and 9.8x for NSC. Assuming a multiple of 17x and a conservative 2012 EPS of $7.70, the rough intrinsic value of UNP stock is 130.90 and it sports a 2.2% yield. With today sell off I feel that $107 is a great entry into this stock.

    • says

      jdavis4982,

      Thanks for stopping by!

      UNP seems like a solid pick here. Although not the cheapest railroad, it’s definitely a strong company. I like just about all the railroads at today’s prices.

      Best wishes!

  15. says

    Hi DM!

    Sorry to interject my personal situation into your comments but for me right now the US stock market just seems a bit over valued. As an ex-patriot I’m going to start investing in my local market in Japan. I’m a big beer fan and Asahi Beer Holdings is within a price range I like. I don’t see the Japanese economy recovering any time soon (but it has stabilized some) so things like beer, cigarettes, and snack parlors should have strong positions.

    Outside of RTN however I think all three of those companies you wrote about look good and have given me something to think about.

    • says

      The Kechi One,

      Thanks for adding that.

      I agree with you that the U.S. stock market has been on a tear and that makes it difficult to find value out there. However, I think that if one is diligent enough that it’s still possible to find quality companies trading for an attractive long-term price.

      inq,

      ABT just kept on rising. That split seemed to “unlock” the shareholder value that management kept talking about. I really wish they weren’t splitting the business, however.

      PG and COP are both solid companies!

      Take care!

  16. says

    Hi DM, thank you for asking. A nice list of ideas came out of this topic. For example I have not looked at OMI in the past, it seems like a company worth investigating.

    My watch list is long. At the top of it I have (in no particular order):
    - MDT, albeit recent troubles with a haert defibrilator cause me some concern
    - BDX, even though at times I think of it as a commodity-type business
    - IBM, if it ever fall in price
    - Visa, there is little hope of buying on the cheap, but you just never know. In a mean while put options provide me with some cashflow

    Here are a couple of outliers not mentioned by the posters above:
    - McCormick & Co (MKC). There is more debt than I would like to see, but the business itself is rather appealing and seems very stable (with great results)
    - TMX Group (X – Toronto Stock Exchange). As a Canadian I can’t resist advocating for a local company. It is a near-monopoly, generates plenty of cash and has no debt. The firm received a purchase offer, but I doubt it will pass by our regulators. Thus the price will go down offering an attractive entry point.

    • says

      AverageCFA,

      I’m glad you have found value in the comments. I, personally, enjoy the comments more than I enjoy writing/reading articles.

      You have some solid stocks on your watch list. MDT, BDX, IBM and V are all very solid stocks. I really love V and would be very happy to be an owner. It just keeps on going up and I try not to chase stocks. MDT and BDX are both solid businesses and appear attractive at today’s prices. IBM is about as blue chip as tech gets.

      I wish you luck with whatever purchases you make!

      Best wishes.

  17. Anonymous says

    I really liked the following statement from your post…

    “…relying less on my ability to time the market and more on the ability of time to compound my investments”

    I learned this lesson the hard way.

    I have initiated positions in INTC and MO in the past month.

    MrCrore

    • says

      MrCrore,

      Thanks for stopping by! I’m glad you liked that quote. Although it sounds a bit “cliche”, I really believe in that and continue to put my money where my mouth is.

      I like INTC and I feel it’s going to be a strong performer in 2012. I’d like a small pullback before buying more. MO is a tad pricey for me, I prefer PM at today’s prices for the growth.

      Keep in touch! Take care.

    • says

      mrledocall,

      I really like AFL at these prices. Nice purchase. I like AFL below $50, and if it wasn’t already in my portfolio at its current size I would buy more.

      Thanks for stopping by.

      Keep in touch!

    • says

      What I especially like about this stock is that it combines the two things I most like, a solid dividend payer plus it is what I consider a value stock right now. Of course, if I was really clever I would have bought it about 6 months ago when it was in the low 30’s. But I still like it as a long-term investment.

  18. Anonymous says

    I am waiting for a bit of a recession to buy some good stocks with moat, e.g. UPS (maybe you don’t know, but it’s the favourite service of its kind in Slovakia) or some railways (CNI). There are many other stocks i would like to own, and they do nice drops in price in recession, for instance ITW. Meanwhile I am earning, saving, waiting and increasing some emerging market exposure by etfs (DEM, VWO — I don’t have time to track and analyse emerging market companies). And I bought a big chunk of Tesco (TSCDY) after the January price drop. (I like the company’s stores, they do nicely in Slovakia, Czech republic, and also in China — it was the best place to shop for me there, the only place where they had something similar to ordinary bread :)

    • says

      Anonymous,

      Good ideas there. I really like transportation stocks right now, and am highly interested in the railroad companies like NSC and UNP. UPS is a little pricey for me right now, however.

      I like your buy on Tesco. It’s not one I personally track, but I’m fairly sure Buffett made a large purchase not too long ago, correct? That one has a very nice yield on it.

      Sounds like you know where you’re buying when the market correction comes.

      Best wishes!

    • Anonymous says

      Well, I think that if Buffett was not buying, I could get Tesco a bit cheaper :)

      I also like BIP very much, but it is not cheap right now. On the other hand, we have zero tax on dividends in Slovakia, so I get the full yield. However our new government is making promises to change this. :(

      Another company I like is BASF. I bought it last year and the price got up by 45%, so I am not buying anymore. They certainly have some kind of moat (first, the Verbund concept, second, not every chemical company is so big that they can offer a customer to build a plant especially for him), and a reasonable dividend policy. And they are German — so even if euro kicks the bucket in some way, the shares should not devalue just because of currency devaluation.
      Nevertheless, I don’t understand chemical industry so can’t evaluate the company properly. Still, in crisis/recession the stock price tend to drop a lot, and that should give me enough margin of safety.

  19. Josh says

    A little late here, but I just bought a little OHI and am looking at more MCD. Maybe even diversifying a little with some DPS.

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