Thursday, November 29, 2012
What Are You Buying?
As we end the month of November, and move into the full swing of the holiday season, I thought now would be a great time to ask you readers what equities are on your shopping list. I look forward to receiving a healthy chunk of fresh capital from my day job early next month. I plan on continuing to scan the market for attractively priced entry points to quality dividend growth stocks for the long-term.
For now, I do have a few stocks that are pretty high on my shopping list. If Santa has a "naughty or nice" list, the following stocks are definitely "nice" for my portfolio.
As I take a look at my portfolio, and as it grows to larger portions month after month, I have to keep proper allocation in mind and make sure I'm not over-allocating to any one company. For instance, I find Intel Corporation (INTC) very attractively priced right now at the $20/share level. However, I already have a fairly large allocation to this one particular company, and if unfavorable conditions were to force them to cut their dividend this could cause outsized disruptions to my dividend income. So, I'm not sure I want to add to that position right now even though it's trading for more than 10% below my cost basis. When my portfolio was smaller, allocation didn't matter as much. Also, technology stocks in particular frighten me a bit due to the ever-changing nature of their industry. However, INTC is on my list for a potential purchase since it's significantly undervalued by almost any measure.
I'm listing below some attractively priced dividend growth stocks that I believe offer the long-term investor an opportunity for intelligent allocation of capital. If market conditions change rapidly over the next couple weeks, then this shopping list could change accordingly.
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.
MCD is not as attractively priced as it was just two weeks ago, but when you're investing for multiples of decades, a price change of 3-4% doesn't really matter that much. MCD started off the year at over $100 per share, so recent prices of $85-86 per share offers investors a great opportunity to invest in a global restaurant with huge growth opportunities ahead. The current entry yield of 3.56% is fantastic, the balance sheet is strong, and the 10-year growth rate of the dividend at 27.4% is phenomenal even if it's halved over the next decade. The P/E ratio is currently at 16.29 and I believe the fair value of MCD shares is over $100, so there is a margin of safety here. With a payout ratio of 58%, the dividend also has a margin of safety with room to grow.
Kinder Morgan Inc. (KMI)
Kinder Morgan Inc. owns the general partner, incentive distribution rights, and an approximate 11% interest in the limited partner units outstanding of Kinder Morgan Energy Partners. It also owns a 20% stake in NGPL, a major interstate natural gas pipeline.
KMI is, in my opinion, a long-term winner as it's incentive distribution rights ensures an ever-growing stream of cash from Kinder Morgan Energy Partners (KMP) and the energy infrastructure it provides. The entry yield at 4.21% is well above average, and the projected dividend growth rate of 12.5% is well above inflation. I anticipate steady long-term growth from this name as it's insulated from commodity price swings and as our country ramps up usage of natural gas. I already have a fairly large allocation to KMI, so I have to be careful here not to get too excited. It's hard not to get excited about an opportunity like this, however.
General Mills, Inc. (GIS)
With operations that began more than 150 years ago, General Mills is now a leading global manufacturer and marketer of branded consumer foods, such as ready-to-eat breakfast cereals, refrigerated dough and other baking items, snack foods, ice cream, and yogurt. Its portfolio of well-known brands includes Cheerios, Betty Crocker, Pillsbury, Haagen-Dazs, and Yoplait. International sales account for about 20% of the firm's consolidated revenue.
GIS operates a high quality global branded consumer foods company, and that's pretty enticing. I like fairly defensive holdings as we head into a time of uncertainty surrounding the outcome of fiscal compromises in Washington. This is about as defensive as it gets with a beta (measure of volatility) of 0.16 (closer to 0, less volatility). With an entry yield of 3.24%, a P/E ratio of 15.91 and a pretty solid balance sheet, this is a long-term investment that is priced right. I hope for a little weakness in the market over the next couple weeks, and would love to buy GIS closer to $38-39 per share, which is just under what it's trading for right now. This is a company that I do not own an equity stake in yet, so I would love to initiate a position and further diversify my portfolio here. The payout ratio of 51% provides fuel for future dividend growth, and the 10-year DGR is only 7.8%, but is accelerating.
Wells Fargo & Co. (WFC)
Wells Fargo is one of the four largest banks in the United States, with $1.3 trillion in assets at the end of 2011. The company is split into three segments for reporting purposes: community banking, wholesale banking, and wealth, brokerage, and retirement. The company is a major player in the residential mortgage market, servicing $1.8 trillion in loans.
WFC might be a surprising pick. A lot of dividend growth investors are not big fans of banks, especially national U.S. banks, since many banks reduced, eliminated or failed to increase dividends during the Great Recession. WFC is just now getting back to growing the dividend, raising it by over 83% earlier this year. If recent actions are any indication of future changes, WFC is anxious to get back to rewarding shareholders. WFC is a fairly conservative pick among the big banks, as it doesn't have a large showing in the investment banking field. It mostly makes it mark in mortgages, and real estate coming back to life here in the U.S. bodes well for WFC. Also, it doesn't hurt that one of my personal idols, Warren Buffett, is a huge fan of WFC as the Berkshire Hathaway investment portfolio has an almost 20% weighting to WFC. The stock currently yields 2.65% and with a low payout ratio of 27.5%, I expect a significant raise next summer.
This is my short list. Again, ever-changing market conditions may provide other opportunities and I'll take them as I'm provided. I'm also looking at names like GPC, BDX, UNS, AVA, SBSI, GD, UTX, BBL and CAT.
So, what are you buying?
Full Disclosure: Long MCD, INTC, KMI, UNS, AVA, SBSI, GD
Thanks for reading.
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