Three Solid Stocks To Purchase On Weakness

Will “sell in may and go away” strike fear into the market and leave investors screaming for the hills? I’m certainly hoping it does! Broad weakness and raised volatility is music to my ears. When the prices drop on my favorite stocks, it’s like going to the local grocery store and finding that bread, cereal and milk are all on sale. I was going to buy these products anyway, but buying them for less money is even better. That’s how I feel when share prices drop. I was going to purchase shares in quality companies anyway as part of my long-term plan, so getting a stellar opportunity to purchase them at lower prices is certainly something that I’m excited about. As a net long-term buyer of stocks, a sideways, or declining, market is better for me than a steadily rising market.

There are a lot of solid dividend growth stocks that have very solid underlying fundamentals but have become fairly expensive in the current environment. With Treasuries currently starving fixed-income investors looking for big yield, there is likely a lot of investors bidding up the cost of strong dividend growth stocks. I’ve been scanning for value in this market, and although it’s difficult to find I’m okay with paying a premium for quality. With that said, however, long-term returns depend on the price you pay. Price is what you pay and value is what you get. I love quality companies, but I love value even more.

Here are three stocks that I’m interested in purchasing on weakness:

Philip Morris International Inc. (PM)

It’s difficult to find any weakness with this stock. It’s up over 11% YTD and not showing any signs of slowing. If it dips a few points you can likely count me in as a buyer. It’s already my largest position. It’s currently trading for a P/E ratio of 17.41 with an entry yield of 3.51%. That’s a pretty solid yield in this market, but certainly lower than a lot of other tobacco plays out there. What you get in lieu of a huge yield is strong fuel for future growth of earnings and dividends as PM operates as the #1 or #2 player in most emerging markets around the world. It’s been very strong lately, and I’m interested in seeing a 3-5% drop in current prices.

Colgate-Palmolive Company (CL)

What can you say about CL? It’s currently trading just below $100 on all-time highs. Colgate-Palmolive is one of the most solid companies out there. It sells products that I, and many millions of consumers worldwide, use every single day. I have not initiated a position in CL because every time I thought about buying this stock it was just so darned expensive. It’s currently trading for a P/E ratio of 20.15 with an entry yield of 2.49%. I simply do not pay more than 20 times earnings for a dividend growth stock, especially with a yield below 3%. I’d love to see a 5-10% pullback in CL shares and would be an interested buyer then.With great exposure in emerging markets around the globe, CL is poised to continue growing earnings at healthy rates for decades to come.

The Coca-Cola Company (KO)

I love a good can of Coke. I actually put mine in the freezer for about 15-20 minutes before drinking it so it gets a little slushy. That’s some good stuff. What isn’t good though is how expensive KO is right now. With a P/E ratio of 19.90, it’s just a little pricey for me. And I’m willing to pay for quality. It currently has an entry yield of 2.72%, and is one of the safest and most solid dividend growth stocks an investor can purchase. I’d love to have a larger position in KO than I currently do, but shortly after I purchased it in the low $50’s in 2010 it started a run-up that hasn’t shown any signs of slowing. If it dips back down below $70 per share I’d be interested in increasing my position in this solid beverage company. KO is making big bets overseas and is looking to retain its crown as the #1 soft drink company in the world.

Full Disclosure: Long PM, KO.

Thanks for reading.

Photo Credit: Stuart Miles

Comments

  1. says

    DM,

    You got into KO at a great price! I’ve heard rumors of a possible stock split. I agree with your assessment of CL, it’s just too pricey right now. I’m not sure they will grow fast enough to warrant a P/E that high. Owning PG will suffice for now as they make products similiar to Colgate. If PM takes a meaningful dive, count me in as an investor who will buy more!

    CI

    • says

      CI,

      Thanks for stopping by!

      Yeah, I got lucky on KO. I was still just starting back then and didn’t have much money so I bought 20 shares. Wish I had more. I’d love to buy more KO, but it’s hard to warrant the price.

      Speaking of the stock split rumor I’ve been hearing of, Deedubs just wrote a short note about it:

      http://deedubsdgi.blogspot.com/2012/04/stock-split-ko.html

      First split for KO in quite a while.

      I’d love to double or triple my position to keep it in line with PEP, but again hard to justify it. I love quality, but value even more.

      I agree with you on CL. Although, I thought it was expensive back at $75 per share. It just keeps on rolling. I don’t chase stocks, so I kept passing on CL. I would like it to dip quite a bit and be an owner. I’m with you on owning PG instead at current prices.

      And PM. Gotta love it. What’s your thoughts on LO at current prices?

      Best wishes!

    • says

      I do not follow LO. About a year ago I was considering picking up some shares when they were in the middle of a court decision. I see the shares went up considerably (50%) since then.

  2. says

    I agree about KO and CL. Been watching them for a while but just too expensive. If WMT keeps dropping I’m going to have to buy some more.

    • says

      fiveoh,

      Thanks for stopping by.

      I agree with you. Both KO and CL are quality stocks (and companies), but just pricey. Sometimes you gotta pay up for quality, but at the same time you have to make sure you’re not going overboard. Valuation at time of purchase will determine your long-term returns.

      WMT has taken a hit lately. Could show further weakness and really produce an opportunity to buy that stock.

      Take care!

  3. says

    PM is already my largest position and accounts for 10% of my dividend income, so I will probably hold off buying more until I build up other positions in my portfolio.

    KO is one of the positions I would like to build further. However, I will wait for a better valuation. I agree that a dip below $70 might be a good point at which to buy more shares.

    I’m not too keen on CL because of its high valuation, somewhat low yield, and heavy debt. However, Dividend Monk published a good article a while ago that explained why their debt is not as problematic as it might appear to be on the surface.

    • says

      deedubs,

      I hear you on wanting to diversify away from PM. It’s also my largest position.

      I’m with you on KO. I’d really love to increase my position significantly, but the valuation has just not given me much opportunity after I purchased my shares back in 2010.

      Hopefully “sell in May” comes around and we’ll get our wish!

      Take care.

  4. says

    I agree on KO, wish I could have had a chance to jump in on it, especially with the upcoming stock split, but I don’t think I’m going to see it at valuation levels I’m comfortable paying.

    One thing that does appeal to me about it, though, is the fact that I currently pay for US stocks at a discount over what I usually would. With the Canadian dollar hovering at parity, US stocks look more affordable to me than they usually would. After all, the long term status of the Canadian dollar is usually below that of the US by about 10-20%. If the US economy recovers, while Canada’s continues on course, I see the US dollar recovering agains the Canadian dollar, which would mean US holdings in my portfolio increase even more.

    Which also brings me to my star stock which is my ‘Buy on Weakness’ favourite, Methanex (MEOH on the NYSE, MX on the TSX). A Canadian company that produces and markets Methanol, it was one of my first purchases ever back in the days of the economic crisis. I got in it at its all time lows, made a good profit on it, then had to sell when I moved back to deal with family matters. I’ve been waiting to jump back in on it since, and managed to restart a position when it was around $21. It closed today at almost $32, and they just announced a 9% increase in their dividend. Given their rock solid balance sheet, expansion plans, and their dividend increases over time, it’s definitely my big ‘buy on weakness’ stock.

    • says

      Neu Grufti,

      You have a strong Loonie providing you a unique opportunity to get a slight discount on U.S. stocks. I’d be taking advantage of that for sure!

      I don’t follow Methanex, but I’ll have to take a look at it sometime. Thanks for mentioning it!

      Best wishes.

  5. says

    Dm, 3 great stocks to buy on any dips. I have a comment / question. KO at $70 I would back up the truck and buy more. However at this price $75.02,I wonder if buying the bottler would be a great way to add to the KO position. Two bottlers I have in mind are CCE and CCH. CCE has a 2.24% yield but has a 5-year DIV growth at 16.3% and the other CCH yields a whopping 3.73% vs KO 2.72% yield. I think here you have exposure to KO and get the higher yeild and growth while waiting for a pull back on KO. Any thoughts on this?

    • says

      jdavis4982,

      I’m with you on buying KO under $70. I’d be interested in doubling or tripling my KO position.

      I took a very quick look at CCH just now. The payout ratio looks dangerously high, they do an annual dividend, the dividend and earnings aren’t rising in tandem, the P/E ratio is higher than KO and KO has the margins because they sell the syrup which doesn’t cost much to make. KO also has the product, so they exert pressure over the bottlers. I think I’ll stick with KO.

      Best wishes!

  6. Anonymous says

    what about MSFT and IBM? THey are being pushed around the press this week but given the recent div raise by IBM and the PE…..esp with MSFT seems like a lot of potential for tech over the next year or two…thoughts?

    • says

      Anonymous,

      I like MSFT, but I’m not in love with it. I like INTC better in the tech space, personally. I think MSFT is a cash cow due to licensing and the still-strong popularity of Windows, but I don’t see continuing innovation which is required to stay fresh in tech. I’d be interested in a small position in MSFT at some point, but I’m not crazy about it. The numbers, however, are really great here.

      Best wishes!

    • says

      Financial analysis,

      Google and Apple? Nice choices there. I know there are plenty of fans of Apple, and they do make very nice, and innovative products that people think they need. It’s an amazing company. I’m a little worried about continuing product changes without the leadership of Jobs, so we’ll see!

      Take care.

  7. Anonymous says

    I like that someone mentioned MSFT. It does not make it into the dividend discussion as much as it should. They have raised dividends 4 times since 2007 and as of their most recent quarter have $60B in cash and cash equivalents and only $12B in long term debt. With their relative monopoly in the market they should be a consistent dividend payer for a long time. Their current P/E is 11 and they are close to their 52 week high. Does not get much cheaper than that

    • says

      Anonymous,

      MSFT looks good numbers-wise. They are strong in almost every category, and the cash on the books is nice. I’m a little concerned about innovation and catalysts going forward, but looking back everything looks great because of products/licensing opportunities produced in the past. Cloud computing could provide MSFT a profit stream for the future.

      I think there are quite a few fans of MSFT in the dividend growth circles. I know Dividend Monk is very warm to MSFT. I would consider a small position in MSFT, and was actually very close to initiating a small position before they had their recent pop. It’s still attractive, but I’m still on the sidelines at this point.

      Best wishes!

  8. Anonymous says

    Hey D. Mantra,

    I haven’t commented for awhile but I’ve been following most of your postings. Your recent post on owning vs. renting was an informative one on a complex topic. I might have to comment on it.

    But back to this topic: All seem like good choices to buy on dips. KO and CL have good moats w/ a solid arsenal of brands. With KO being a bit pricey however I think PEP is a better value right now (though still not cheap). Don’t really follow PM as I personally would not invest in it for ethical reasons. I do NOT negatively judge people who do but I could not myself (guess I figure there’s plenty of other good opportunities out there).

    Since I’m nearing my goal of dividend income, I’ve decided to focus on paying down my mortgage and will limit my stock purchases and focus on monitoring my current positions (but still keep a few on my watchlist).

    I like a lot of your recent buys. I especially liked NSC. I actually strongly recommended it to a relative looking for bargains in the current market.

    As far as other good bargains (which are getting hard to find), thoughts on EXC? I know it’s been mentioned in several comments. Despite some drawbacks I think it’s a good value right now.

    Congrats on your journey so far. Your dividend income and Freedom Fund are keeping up their steady progress and your postings continue to be education, information and inspiration to many who read this site I’m sure.

    Just a couple of topic suggestions for future postings: If you could only own one (or three) stocks what would it (they) be? Not exactly academic but a fun topic that might engender some interesting discussion. Also, ethics in investing. Maybe a bit touchy and controversial but still important and interesting. I rarely see investing posts on this one. I think D. Monk did a good post on this topic once. Finally, taxes on dividends and their role. Maybe a bit controversial too but still good.

    Thanks for being patient w/ the long comment. Figured I’d make up for my lack of comments. :)

    Cheers.

    -Rock the Casbah

    • says

      defensiven,

      I’m with you. KO is fairly expensive at these prices, even factoring in the quality you’re getting for the equity. PM, all things considered, is probably the better buy and exactly why I’ve continued to load up on it even as it continues to run.

      Best wishes!

    • says

      pacified,

      PG did experience quite a bit of weakness after it cut its outlook and weak earnings. I think it’s still a very good long-term company to own, but there are some concerns about the amount of goodwill on the books and their ability to compete against generics and their own price increases. I wouldn’t mind adding to my PG holdings, but I’d prefer closer to $60 or so.

      Take care!

  9. says

    PM is one of my next dividend purchases. I’ve missed out on it up until now. Too bad for me. I prefer KO over PEP long term but PEP has a pretty decent yield on it now at 3.1 vs its average of 2.9. KO will have increased its dividend by 8.5% over 2011. I like it.

    • says

      DSO,

      PM is a solid purchase here, even without much weakness. The long-term outlook is, in my opinion, strong.

      I also prefer KO over PEP business-wise, but valuation-wise I prefer PEP by a large margin. I love both, and that’s why I own both..but I own significantly more PEP because the price has been right.

      Take care!

  10. Chad says

    PM is attractive at today’s prices. But with it being nearly 10% of my portfolio, I can’t really convince myself to pull the trigger and buy more. Though I really do love their quarterly dividends.

    • says

      Chad,

      PM is also a significant portion of my portfolio, so it’s hard for me to add. I hear you there. Although, on the flip side of the coin many believe it’s best to concentrate on your best idea. And PM happens to be one of my best ideas.

      Best wishes.

  11. Anonymous says

    Hey D. Mantra,

    I haven’t commented here for awhile but I’ve been following most of your posts. Your recent one on renting vs. owning was an interesting post on a complex topic and received a lot of comments. Also really liked the one on what you could do if your financially independent. Might have to comment on those.

    In regards to this post, I agree that with their good moats based on their strong brands, both KO and CL would be good buys on dips. Near bulletproof picks but a bit pricey. I think PEP is a better value than KO right now (though still not cheap).

    I don’t really follow PM as I would not invest in it for ethical reasons. I do NOT negatively judge those who choose to do so but I cannot myself ( guess I figure there’s a lot of other good opportunities anyhow).

    As far as bargains in the current market, thoughts on EXC? I know some others have mentioned it in their comments. I think that, despite some drawbacks, it’s still a good value right now. Also, any thoughts on JNJ which seems “stuck” in the low-mid 60’s.

    Keep up the good posts. I think they serve as education, information and inspiration to many of us who read this site.

    Cheers

    -Rock the Casbah

    • says

      Rock the Casbah,

      Thanks for stopping by! Sorry, your comments got put in the spam box for some reason. I made sure to change that.

      I agree with you on the valuations regarding the two beverage companies. Valuation-wise, PEP is the better buy currently even if the more sound business happens to be KO.

      I’ve looked at EXC a few times and it seems to go nowhere. I don’t mind that from a price standpoint as it allows me to build a position at an attractive price-point, but the dividend has also gone nowhere for quite some time now. There are too many utilities out there that are also attractively valued that continue to raise the dividend. EXC does appear attractively priced if a growing dividend is not a priority for you, however.

      I wouldn’t mind buying more JNJ at current prices and may do so soon. I like the company long-term, and I feel they’ll right the ship when it comes to quality control.

      Thanks for the comment. Again, sorry it somehow ended up in the spam box. Keep in touch.

      Best wishes!

  12. says

    Got some KO at around $67 in early January, and even at that time I thought I got in too high. Low $50’s, that’s awesome! Like you, I’ve been wanting to add to this position, but it’s been on a tear lately. Under $70 sounds like a great re-entry point. I’ll be on the lookout as well!

    • says

      FI Fighter,

      Thanks for stopping by!

      I did get a pretty good price on KO, but unfortunately didn’t really take advantage of it by loading up. I just didn’t have much capital at the time.

      $67 sounds like a pretty good price in retrospect and I was actually considering adding to my KO position on a couple different occasions when it was trading for the price. I, like you, thought it was a little pricey back then. I still think it’s pricey, it’s just that the market is willing to pay it right now. That won’t last forever.

      Keep in touch!

  13. says

    As long as the economy remains lackluster’ House brands will continue doing well. Consumers no longer display the faithful allegiance to brand names like they did in the past. What now gives brands like Coca Cola a great advantage is not so much the household name Cocoa Cola but the economies of scale that these mega corporations have compared to the smaller players in the business.

  14. says

    Nice list, Dividend Mantra. I agree that all three of these stocks would be nice to pick up on dips, but, for KO and PM especially, I would not feel bad if I overpaid for them.

    I consider KO and PM ‘forever stocks’ (stocks that I will hold for the rest of my life) that will reward a shareholder handsomely in the long term, no matter what price point they get in at. As the years go by the amount you receive from dividends will likely dwarf whatever amount you felt you overpaid by.

    As for CL, I am waiting to initiate a position as I feel there are better values in the sector/industry (CLX, KMB, PG) for now. Since I don’t consider CL a ‘forever stock’, I don’t mind holding out for a slight dip, or at least a better yield.

    Take care!

  15. says

    I am very happy to be here because this is a very good site that provides lots of information about the topics covered in depth. Im glad to see that people are actually writing about this issue in such a smart way,

Join The Discussion!