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)

Per Morningstar:

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)

Per Morningstar:

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)

Per Morningstar:

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

Comments

  1. says

    I’ve been buying O lately, for the monthly dividend, and because its just a great company with a great history…but also bc I just dont feel like doing a lot of research lately, lol. MCD will be fine, and almost wish I had held off on O bc now would be a good time to snag a few shares of MCD. I have no opinion on GD, and make it a point to stay away from bank stocks…Google bank failures over the last four years and see why, if you have some free time. Of course, SBSI may be a great stock, but the whole industry reeks to me.

    • says

      High Yield Soldier,

      O looks like one of the better REIT choices, and the monthly dividend adds to the appeal. REIT’s have had quite a run lately, however.

      I hear you on staying away from bank stocks. I don’t blame you there, as the 2008 crash showed us all just how ugly banks can be. I think what makes a lot of the big regional and national banks dangerous, however, is the trading arms. Smaller banks take away that risk for the most part.

      Best wishes!

  2. says

    I don’t have any cash right now to buy stocks, but if I did, I would likely increase my position in KMI. After that, there are several possibilities that are getting close to my target prices, and I would probably have difficulty choosing among them. For that reason, it might be good that I won’t have new capital until early November — more time to let the market move things around and perhaps make my decision easier.

    • says

      DGM,

      I hear you. I technically don’t have any cash either, but could scrounge up enough for sizable purchase if I had to. I’d actually have some capital free right now, but I’m holding on to some for a potential purchase in personal transportation due to the bus being tardy once more.

      I hope, as you do, that the markets remain volatile and continue to provide us long-term investors plentiful opportunities over the next couple weeks.

      KMI is a strong purchase. I’m loving that company right now and I only wish I would have become so enamored with it last year.

      Best regards.

  3. says

    DM, love what you are doing. I agree that GD is cheap, but only in comparison to MCD. When I look at discount, I look beyond the yield. I look for low P/B and P/S. For instance, a ratio of 1 or less times P/B and P/S would be considered cheap. I don’t see much cheapness in the market, because there aren’t many high quality stocks selling at the ratios mentioned. As of today, GD’s P/B is 1.78 and it’s P/S is .72. GD’s P/S is attractive at .72, but it’s P/B needs to shed that .78 for me to consider it cheap.

    • says

      fasdmh

      Thanks for stopping by.

      I find it difficult to buy solid companies with P/B ratios of less than 1. Finding companies on good footing trading for less than book value has to be pretty rare. If I remember correctly, the only company I track that fell below book value recently was Aflac. And that was after the tsunami. I guess during the 08′ crash you could have picked up bargains below book value on major dividend growth companies.

      Hope your value hunting goes well and stay in touch on your results.

      Best wishes!

  4. Chad says

    I’ve got enough capital to make one more purchase before the election. I purchased KMI and MCD earlier this month. I’m thinking if we have a few more drops like today, I’ll be buying some more MCD. SBSI is also on my watch list, but it will be hard to pass up on getting some more MCD in my portfolio at its current price.

    • says

      Chad,

      Nice choices. KMI and MCD are both solid and I’m very much looking forward to adding to both companies. I think both are very well situated right now against competition and both are paying out handsome dividends to the patient investor.

      Best regards.

  5. says

    Nice picks you have here! I’m also watching MCD and will look to add in the next month or so. Hopefully I’ll still have an opportunity.

    I published my latest watchlist before market open today. I see MMM and KMI got pretty beat up today. I’ve been adding a lot of KMI lately, but you’ve got to love it at these levels. Though I also want to add some more ABT before the split. I don’t think ABT is as attractively priced as some others, but I would like to increase my allocation. Too many choices! What a great problem to have, wouldn’t you say?

  6. says

    increased my position in France Telecom yesterday. Looks like a good value to me. P/FCF of 3 and P/E of 5 based on five year averages. Good q1q2 despite the entrance of Illiad.

    • says

      defensiven,

      Thanks for stopping by.

      I’ll have to take a look at France Telecom. I remember looking at it briefly when I owned TEF, but passed up. Seems pretty cheap from those ratios.

      Best regards.

    • says

      fiveoh,

      NSC took quite a beating today after releasing 3Q results, and the reduction in coal shipments seem to have hurt quite a bit.

      I still can’t imagine this being a long-term problem, even with the reduction in coal usage here in the U.S. due to cheap natural gas. Things balance out, and I’d like to imagine they’ll make up for the lack of coal merchandise with other shipments. Rail isn’t going anywhere.

      Best wishes!

    • says

      For investor like us, who cares if the near term really turn neutral? The thing about short term prediction is that you can be right and you could be wrong, so why cares about near term prediction.

      Try to buy when all is looking good and you will pay the higher perception price. You got to thank those “not to good” moments for they give you opportunity

      The real profit is made on the long term and right now you can have NSC for a very decent price at an attractive yield. In less than 10 years I will be glad I bought this great business moat.

      Of course NSC is not the only bargain in town, but it’s the one that got down the most today (7%+) on better earnings!

    • says

      grox01,

      Great points there. Near term pressures have little to do with long-term investors as long as it’s not a change in business fundamentals. Rather, the bigger effect that near term pressures provide is lower prices for intelligent investors to pick up on.

      Scooping up cheaper shares on businesses that have excellent long-term prospects is an excellent recipe for building wealth.

      Thanks for adding that!

      Best wishes.

    • says

      Matt,

      Thanks for stopping by. Always appreciate your opinion.

      I’ll have to take another look at IBM. It seems you’re fond of it. I just have a hard time accepting such a low entry yield. Of course, that was what kept me out of Visa and I really regret not buying V.

      Best regards.

  7. says

    SBSI looks good, but they haven’t reported earnings yet. I don’t know if it’s better to buy now or wait, but it’s worth considering.

    I think I’m going to concentrate on core stocks for a while. I’ll be looking to add to MCD, KMI, KO, ABT, and JNJ. Maybe CVX but I’m not 100% sure on it yet. Currently happy with my PG, PM, and PEP positions. These are the companies I am willing to bet my retirement on. Sometimes I wonder why I fool around with other stocks as much as I do!

    So I’m looking at MCD and KMI right now. That said NSC is mighty tempting!

    • says

      Compounding Income,

      I hear you on concentrating on core stocks. I’m a little split on it. The more I invest, the more I like the idea of my investments being pretty spread out and diversified. I am fond of the idea of having no one company having an outsized effect on my income. Even the best companies make mistakes. For instance, banks made up core positions for a lot of dividend growth investors a few years back and it wouldn’t have been unheard of to own BAC, WFC, USB and C in one portfolio. Of course if any of these were “core”, or god forbid all of them were a core you would be in trouble. I really like PM and PEP for instance, and they make up large parts of my portfolio…but moving forward I’d eventually like to the portfolio to be allocated almost evenly across positions when I’m finished in a decade or so. My portfolio is obviously still in the accumulation phase, so allocation isn’t quite as important right now.

      I do like MCD and KMI right now and wouldn’t hesitate for a second adding to both.

      NSC has taken quite a hit lately and has underperformed the other major railroads by quite a large margin. It does make it tempting to want to buy more.

      Thanks for stopping by!

      Take care.

  8. says

    I’ve been eyeing CMI as a way to play the increasing use of natural gas in our economy. The company has been increasing its dividend strongly since 2006 with a 5-year average growth of over 30%! Trading at 10x P/E, what’s not to like?

    Also, I can’t get enough DAKT. I’ve been a long time shareholder and couldn’t be happier with how the company treats its owners. They pay special dividends when cash levels get too high in addition to a regular dividend. The stock price has languished which makes me salivate.

    • says

      Headed Home,

      CMI does look interesting. I also really like the natural gas angle. That could be huge in the near future. There is a lot of value to be had in industrials due to their cyclical nature. EMR looks good here, a long with CAT. ITW has had a run, but it’s a great business.

      Haven’t looked at DAKT. Will have to take a peek.

      Best wishes!

  9. says

    It’s probably a good thing you don’t have the cash now, because there’s a good chance the market will dip even more! I’ve been trying to be disciplined about buying, but I sometimes get a bit of an itchy trigger finger. I bought a tidbit of NSC and APD this week, OHI today and maybe more tomorrow if it dips on earnings (in time for it’s ex-div date next week). I’ll probably buy some VOD in the next month. And if you like KMI, you should also think about LNCO. I bought some the first week after it IPO’d. If PM, GE, CAT, and KO dip more, I’ll def snap some up. Also, I’m a big fan of bank stocks, I think they have a lot of room to grow and because they’re precisely what most people don’t want to buy. I’m long JPM, BAC, WFC.

    I see you have VOD and T. Do you like one better than the other? T has been dipping, but it still feels overvalued, and I’m unsure about its prospects. Also, are you holding onto ABT through the split?

    • says

      kolpin,

      Thanks for adding that. Good stuff.

      I personally prefer VOD over T. Not only is it more attractively valued, but it lacks much of a land line business (legacy costs) and it has a much larger geographical footprint. Not much to dislike.

      Nice buys there. NSC is very attractive right now. I’ll have to take a look at APD and OHI. I follow both.

      I haven’t looked at LNCO yet. I remember it being mentioned over on Compounding Income’s blog. I think the main difference between it and KMI would be that KMI is the general partner. LNCO is a corporation set up to own LINN units, correct?

      If I were to own big banks right now it would be WFC and USB. Both seem to be fairly conservative and are shareholder friendly.

      I will be holding on to ABT through the split. I see no reason to sell right now, and I hope the split treats shareholders well. The COP split so far has been great, and PSX has taken off. Splits seem to benefit shareholders from what I can tell.

      Best wishes!

    • says

      Anonymous,

      Nice buy on MCD. Great, quality business for the long-term. Same with KO. I’d LOVE to own more KO if the price is right. Such a high quality business with a wide economic moat.

      Best regards!

  10. says

    In the last couple days, bought KRFT, SYY (due for a raise soon), CSX, LO, INTC, MCD, and the mighty Reckitt B.
    Have a great weekend and looking forward to reading more of your journey.
    Dying to buy MDT but I need it to be a bit lower.

    • says

      Joe,

      Thanks for stopping by.

      You’ve been busy. Solid moves. All great businesses sporting some pretty attractive yields right now.

      I don’t follow Reckitt, I’ll have to take a look!

      I like MDT as well. I definitely wouldn’t mind doubling my position!

      Take care!

    • says

      Larry,

      INTC is definitely attractive for the long-term investor at this price point. If they are able to continue as a dominant chipmaker and make inroads into the mobile space, this will turn out to be an excellent investment. I do hope they capitalize on their potential.

      Best wishes!

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