Tuesday, October 23, 2012
What Are You Buying?
Boom! Just like that, the Dow Jones Industrial Average is down almost 450 points over the last week. It's times like these that I really smile. As a long-term dividend growth investor I stay focused on value. I want to buy as many shares as I possibly can with my dollar, and the cheaper the shares are the larger the percentage of a business I can own and the more dividends I receive.
Mr. Market has been particularly grumpy lately, and it shows. Major companies like McDonald's Corporation (MCD) and Intel Corporation (INTC) have seen their shares sell off lately due to lackluster earnings numbers. Many things are to blame here, with the weak global economy and strong competition being commonly cited.
What one has to stay focused on is the long-term. Every time I look to purchase shares in a company I always keep in mind that I'm investing in a business. I'm taking my hard earned money and buying a percentage of a company, not just some ticker symbol. I work very hard for my money, and I take investing very seriously. So, I always focus on the long-term fundamentals of a company and I try to get the most bang for my buck. We dividend growth investors focus on value because the cheaper the shares, the higher the yield and the more income we can squeeze out of our invested capital. Better entry prices also lead to a higher total return when factoring in capital gains as well.
With all this being said, I'm taking a strong look at the following companies based on strong operations, solid values on the shares and long histories of paying rising dividends. I'll have some fresh capital at the beginning of November, but if a purchase compels me then I may pull the trigger sooner than that. I always like to share with you readers what's currently on my watch list for a potential upcoming purchase. Let's take a look at some solid long-term opportunities.
McDonald's Corporation (MCD)
McDonald's generates revenue through company-owned restaurants, franchise royalties, and licensing pacts. Restaurants offer a uniform value-priced menu, with some regional variations. As of March 2012, there were 33,500 locations in 119 countries, including 27,100 franchisees/affiliates units and 6,400 company units.
What can I say about MCD that hasn't already been said? Nothing, really. I recently wrote that the sell-off in MCD shares offers the long-term dividend growth investor a solid value at current prices under $88 per share. The P/E ratio stands at 16.57 and the yield is currently at 3.50%. That's a pretty strong entry yield for a global juggernaut like Mickey D's. I currently have 40 shares of MCD in my Freedom Fund, but would gladly pickup more if the weakness continues here.
Using a Dividend Discount Model to value the shares here, I used a 10% dividend growth rate for the next 10 years, followed by a terminal 8% growth rate and used a conservative 12% discount rate. That gives me a fair value of $107.50. Seeing as how MCD actually has a 10-year dividend growth rate of 27.4% along with 36 years of raising the dividend, I think the value is justified. The reasonable balance sheet doesn't hurt, either.
General Dynamics Corporation (GD)
Falls Church, Va.-based General Dynamics manufactures ships, armored vehicles, defense-oriented information technology systems, and business jets. The firm gets around 72% of revenue from the Department of Defense, and the rest from foreign sales and Gulfstream business jets. In 2011, the firm generated $32.7 billion in sales and $2.4 billion in earnings with the help of 93,500 employees.
General Dynamics is just a strong company. Although the reliance on the U.S. Department of Defense for a large percentage of its revenue is a bit scary with budget cuts expected, it's a diversified company in both the public and private sector businesses and the products it offers aren't going to be simply cut right out of the military.
If you're looking for value this is a strong opportunity. Currently trading for a P/E ratio of just 9.66 and a P/B ratio of 1.7, it's cheap. It currently yields just over 3%, and that hefty dividend is backed by 21 years of straight growth. I'm valuing the shares at about $65 per share using a DDM with the same conservative numbers as above. So, this name would have to come down the $64 level before I add to my position. That's near my cost basis as it stands, so I'd love to add more at that price point. This company has a very strong balance sheet, so that gives the firm additional flexibility in tough markets. The low 29.8% payout ratio also gives a little flexibility in continuing to raise the dividend in a slow economy. All in all, I like this company.
Southside Bancshares, Inc. (SBSI)
Southside Bancshares is the holding company for Southside Bank, which operates over 35 banking offices in over 12 cities in northeastern Texas. The bank provides savings, checking, money market, and individual retirement accounts, as well as certificates of deposit. Southside Bank also originates real estate, business, and consumer loans. Its BSC Securities subsidiary offers retail brokerage services.
SBSI is another strong value opportunity. Shares are trading for a lowly 10.03 P/E ratio currently, with a 1.4 P/B ratio. I'm not huge on banks, which is why you don't see a lot of financial companies in my portfolio. But, SBSI appears to be pretty solid from what I can see. The shares currently sport a 3.84% yield, which is pretty strong and much higher than most of the bigger regional and national banks. They have been raising the dividends for 18 years, and with a low 38.4% payout ratio I see no reason this won't continue.
I valued the shares at just over $25 using the DDM numbers I used in the MCD example, which is significantly higher than they trade for currently. This bank seems to be pretty conservative, focusing on old-school banking operations like local lending and securing deposits. I wouldn't mind adding to my SBSI holdings at these levels.
The above companies represent some fine opportunities in today's market. Of course, much can change on a daily basis and what I purchase early next month may or may not be represented above. It's important to stay nimble and flexible in a market that gyrates so wildly day after day. I would feel confident initiating, or adding to, positions with any of the above companies at today's prices however.
What about you? What are you buying?
Full Disclosure: Long MCD, GD, SBSI
Thanks for reading.
Photo Credit: Free Digitial Photos