Recent Buy

It felt great to get some time off from work! I’m back in Florida from a well-needed holiday break. I spent the last 8 days in Michigan with my entire family. We exchanged gifts, sang karaoke, played games and did other crazy family stuff. It was great!

However, that doesn’t mean I’m not still focused on the long-term journey. I’ve been a bit busy with the aforementioned family activities, so I’m back now to post about a transaction I made just before Christmas. I’ve been watching the stock market here and there to varying degrees during the holiday, but overall I’ve been content to see what 2013 brings us and sit on what cash I still have. I’m happy with the addition to my Intel Corporation (INTC) position I made earlier in the month, and I’m just as happy to add to my largest position as you can read about below.

As part of my Recent Buy series, I try to let my readers know of any equities I purchase soon after the transaction is completed. This is just one way I try to document my progress toward early retirement and financial independence.

I purchased 20 shares of Philip Morris International, Inc. (PM) on 12/20/12 for $84.67 per share. Any long-time readers of this blog know that I’m a big fan of this business. They are the world’s second largest tobacco company, manufacturing and selling their flagship brand of Marlboro cigarettes among other brands. They are the #1 or #2 player in almost every market they compete in. And while regulations are an ever-present risk to tobacco companies, PM is able to spread and diversify this risk across the globe. I think Philip Morris International will be a big winner over the next decade or so, as the addictive nature of their products and global scale of their operations give them a wide economic moat against competitors.

This purchase adds to what is already my largest position by far. Due to this, with PM now being a round lot of 100 shares, I’ll most likely not add to this position until the rest of my portfolio catches up to it. Although I’m a believer in the medium-term to long-term success of this company, I believe in diversification as a key tool to reduce risk.

I believe PM is attractively valued here, currently trading hands with a P/E ratio of 16.52 and strong growth prospects going forward. I purchased my shares with an entry yield of 4.01%. While a strong entry yield by itself, that high yield is backed by a history of outstanding dividend growth. Previously part of Altria Group Inc. (MO), PM has raised its dividend heftily since operating as in independent company. They raised it over 20% in 2011 and increased the annual dividend payout slightly over 10% in 2012. I anticipate a low double-digit annual dividend growth rate for at least the next 5 years. The payout ratio currently sits at 68%, which while high is pretty consistent with other tobacco companies. This purchase adds $68.00 to my annual dividend payout, based on the quarterly dividend of $0.85 per share.

Although PM is currently trading for a slightly lower price than I paid, I purchased my shares with the right to receive the next quarterly dividend payout of $0.85 as PM had an ex-dividend date of 12/24/12. So, the difference is pretty negligible.

I anticipate this being my last stock purchase of 2012. Even though I have enough cash to still make one more sizable purchase, I’ll likely carry this cash over to 2013 and see what the new year brings us!

With this addition I still have 29 positions in my portfolio.

Some analyst opinions on my recent purchase:

*Morningstar currently rates PM as a 3/5 star valuation.
*S&P currently rates PM as a 5/5 star Strong Buy.

I’ll update my Freedom Fund in early January to reflect my recent addition.

Full Disclosure: Long PM, MO

What are you buying?

Thanks for reading.

Comments

  1. says

    Nice buy! It seems like we were thinking the same way since I initiated a position in PM that same day. PM is high on my list of stocks to pick up soon, KO is probably the only one that would jump over them if the price pulls back to the $33-34 range since you get very few chances to pick up KO for reasonable value.

    I wish I had a lot more capital free to make some buys because if the market sells off I want to pick up some more KO, PM, MDT, TGT and probably some BDX since I don’t have any exposure to them right now. There could be some big sales, although tomorrow could prove interesting since if Congress waits until late tomorrow night to make a deal the markets will sell off tomorrow and I’d fully expect at least an equal bounce back on the next trading day. I’m kind of glad I don’t have more capital just because I’d have to make the decision of whether to put the money to work tomorrow or wait until the next year, but I do have enough to make at least 1 purchase or 2 smaller purchases.

    • says

      Pursuit,

      Thanks for stopping by! I appreciate the support.

      That’s awesome that we picked up PM on the same day. Funny stuff. Great minds do think alike.

      It’s a little cheaper now, but the ex-divi date has already passed, so it’s relatively moot.

      KO is just a bulletproof stock/company and one I wish I owned more of personally. I wouldn’t mind buying it if it fell down to the $35 level.

      I anticipated a weaker market than we’ve seen over the last week or so, but it proves to be continuously resilient and as unpredictable as ever. That’s why I don’t try and time the market, but rather continue to buy quality at an attractive price.

      I hope the first few trading days of 2013 bring us value investors joyous opportunities. I’m anxiously awaiting!

      Best wishes.

    • says

      I wouldn’t mind having those opportunities come around mid January when I’ll have a lot more capital available. I can’t only make 1 good size purchase or 2 smaller purchases right now. No fun if we do get that elusive pullback. The markets have really been confounding, but like you I try and get quality for the right price. That’s why I picked up some more shares last week ahead of the looming fiscal cliff deadline.

  2. says

    I like this purchase. Even though it is your largest position, the rest of your portfolio will catch up as you mentioned. I initiated a position on 12/19 and if the market has another pullback tomorrow, PM will be at the top of my list for an addition.

    Happy New Year!

    • says

      All About Interest,

      I see I’m in good company with the PM addition! I’m not looking to add any more of this company to the portfolio due to the size of the position, but a crater in the stock price might compel me to buy more. We shall see!

      Take care.

  3. says

    have you looked at csco? thats actually top of my list for purchases. csco has been in the duldrums for 10 years now and I believe its their time to shine a little bit. the nice yield also helps. unfortunately they dont have the greatest dividend history, less then 2 years. However, during those 2 years they’ve shown investors that a top priority for them is dividend growth and have grown more than 100% in 2 years. and still at a very modest payout ratio of about ~33%. not bad for a 2.9% entry yield. However this is not a traditional DGI stock (yet) but I believe it will be in the next 5-10 years. The only reason they aren’t a DGI is because they just initiated their dividend 2 years ago, and perhaps its best to get on the train early?

    • says

      Took2Summit,

      I’ve looked at them recently, actually. I mentioned that company in a dividend increase article not long ago. They have been actively and aggressively increasing their dividend over the last couple years so this could be the start of something good.

      I’ll have to take a serious look at them in the near future, but right now I’m over-allocated to tech in general with my massive (for me) position in INTC. I wouldn’t mind if the entire tech sector only made up 5% of my portfolio, and that was spread across a few different companies.

      Best of luck going into 2013! Thanks for stopping by.

      Best regards.

  4. Anonymous says

    Nice buy on PM, I actually also purchased on the same day to make the ex-dividend date and am considering buying more in the new year if it takes a deeper dive.

    On another note, I caught up on some reading over the holidays and read the Millionare Teacher. In the book he makes a very compeling argument for index investing. I was wondering what your take was on index investing and why you chose a dividend growth approach over index investing.

    • says

      Anonymous,

      Nice buy on PM on the same day! Looks like we’re in wonderful company together.

      I don’t have anything against index investing, but it’s not a strategy I’d like to pursue. I’ve talked about this a few times, but my basic thoughts on it are that while it’s a great wealth building investment strategy, it falters a bit when one is actually relying on the portfolio to pay for expenses in the retirement stage. Index investing would force you to slowly sell off your portfolio (generally 4% as a SWR) so that you can raise funds to live off of. You would upwardly revise your withdrawals to keep up with inflation and slowly drain your funds dry. Imagine taking out 5% of your portfolio when the market is down 25%! Yikes.

      Dividend growth investing will allow me to live off my dividend income while fully retaining the capital in my portfolio. The capital would likely grow as the companies I’m invested in become more valuable and my dividend income will likely grow faster than inflation, which would not require me to take out any of the capital base.

      I hope that helps!

      Best wishes.

    • Shopteacher says

      I too have been doing some reading lately about indexing. A blog that DM links to by jlcollinsnh is educational, entertaining and very convincing.

      Check it out if you are still deciding which way to go.

      As mentioned above by DM his dividend stragety is to focus on building a nest egg that will payout money without selling shares in the possible downturn that you may need the funds. Nice point DM!

      Additionally I thought it was interesting to go and look at Vanguard’s Stock Index jlcollinsnh suggests. It had a very strong focus (some of the biggest shares) are in some of the stocks many of us have such as XOM, CVX, MCD, PG, JNJ, KO, T, CAT, MMM, PM, WFC, BAC, ABT, UTX,VZ,KRFT,MDLZ,ADP,etc. with some growth ones in there too.

      Either way my family and I are thankful to be celebrating our second year of dividend stock building. Our dividends are up from $335 last year to $1304 this year!

      Thanks DM and all of you for sharing your thoughts these last two years!

    • says

      Shopteacher,

      Thanks for stopping by!

      Indeed, jlcollinsnh does blog about index investing and makes a compelling case for it. Index investing certainly has its advantages, and is a good fit for the right kind of person. It’s up to you to decide if you’re “right” for it. For me, I know I’m not.

      Congrats on quadrupling your dividend income YOY. That’s fantastic! That kind of progress is tangible and feeds on itself. Best of luck on continuing the progress.

      Thanks for continuing to follow the journey. It’s much appreciated!

      Take care.

  5. Chad says

    Good purchase. I nearly bought it today. Bought MCD instead. If PM wasn’t already my largest holding, I would have added some more. Very hard to pass it up at the current value. Also hard to pass up MCD with a 3.5% yield which is why I added some more of it. Glad you enjoyed your time in Michigan and here’s to a healthy and prosperous 2013.

    • says

      Chad,

      Can’t go wrong with MCD here. There’s few things I can accurately and confidently predict, but if I were to take a stab at the future I’d say that MCD will be selling more Bic Macs and McNuggets 10 years from now than they are today.

      Thanks for the support and I did have a wonderful time in Michigan…even if I did freeze my ass off! :)

      Best wishes!

    • Chad says

      My wife’s parents are in Pennsylvania near Lake Erie. Freezing my ass off in the winter is why we will never move up near them. I can handle summers in Texas easier than I can winters in Pennsylvania. And you’re right, I also see more Big Macs and McNuggets being sold 10 years from now.

    • says

      Chad,

      You know, I originally moved here to Florida back in the summer of 2009 because I simply got tired of the endless gray days of winter. I guess it affected me more than some others, and I actually felt a little depressed during those long months of sub-freezing temperatures and snow storms.

      I quite enjoy the climate of Florida, and the heat doesn’t bother me at all. However, I miss my family more and more every day. I thought it would get easier the longer I lived here, but it’s actually gotten more difficult. This will be something that’s on my mind in 2013.

      Thanks for sharing. Texas was on my short list of places to move back in 2009, before I picked Florida. The lack of state income tax and favorable climate were attractive. Florida held more promise for me, and luckily for me it worked out fantastically. Being on a straight shot down I-75 was nice too.

      Take care!

    • says

      Accumulating Assets,

      I’m just glad that there is PM shares left over after you’re done accumulating them! Keep up the great work.

      MO looks good too. If it comes near that $30 level again I’d be highly interested in adding.

      Best regards.

  6. says

    Hi Mantra, do you know if PM have been increasing their payout ratio to fund the dividend increases, or has it been pretty stable at 68%. Trying to work out if its organic growth funding the rises.

    • says

      Integrator,

      The earliest dividend payment from PM as an individual company was $0.46 per share back in 6/08. They are now paying out $0.85 per share. The EPS has grown from $3.32 in 2008 to a TTM EPS of $5.03. So, you can see it’s an increase in earnings that’s funding the increasing dividend, not just a ballooning payout ratio.

      Best regards!

  7. says

    Nice purchase! I also noticed the recent drop in PM and I would like to increase my position. However, one of the first things I need to do in the new year is update my watch list and see what attractively valued stocks are available. I would like to increase the diversity of my portfolio in 2013, so I might focus more on establishing new positions than on increasing existing ones, but it will ultimately depend on what opportunities appear compelling.

    • says

      DGM,

      I hear you on increasing the diversification of your portfolio. I haven’t been as active in that department as of late, but it’s something I always keep a keen eye on. I always try to focus on value first and foremost, and if that value comes in the form of existing positions than so be it. I’m also more than happy to take that value in the form of new companies.

      We’ll see what 2013 brings us. I’m hoping a shovel full of cheap stocks!! :)

      Best wishes.

  8. says

    Good one! Picking up more PM is a thought that has crossed my mind quite a bit the past week. Really the only thing holding me back is allocations. Locking in a 4% yield with this company sounds like a winning long term proposition! It looks like the fiscal cliff will be resolved so I may have missed my chance.

    • says

      Compounding Income,

      That 4% yield mark is pretty attractive and I figured it would be a good time to add. We’ll see how it goes. Further regulation in Europe is a bit troubling, but even if it were to become law this would be a few years from now. Besides, Asia is where the growth will be for this company looking out over the next 10 years or so.

      I think 100 shares is a strong position size for me based on my income level and portfolio value, so this is probably where it will stay for a while.

      Looks like a a cliff resolution is in sights, so we may not get some of the deals we were hoping for. Of course, Mr. Market is infamously irritable so you never know!

      Best regards.

  9. says

    Altria was one of the first dividend growth stocks that I purchased and it has been treating me well.

    I like PM as well, especially with a 4% yield. It’s a tough decision. I’ve got a lot of money in consumer staples and tobacco already, so maybe not. But the current yield and dividend growth rate of PM are very attractive. I am a little worried that the high payout ratio may not leave much room for years of additional dividend growth.

    Currently, I’m eying NSC for my dividend growth portfolio.

    • says

      Journey,

      Congratulations on starting your blog. I hope it treats you very well. Personally, blogging gives me a sense of clarity that is hard to otherwise replicate. However, it’s also extremely time consuming so you have to factor that in.

      You mention PM’s high payout ratio, but it’s actually among the lowest (or possibly the lowest) payout ratios among tobacco stocks. MO typically targets 80% and last I checked LO targets the mid-70%. I anticipate a growth level high enough to keep the payout ratio well below these levels while still allowing for significant dividend growth. If PM were to pay out a higher percentage of earnings, on par with MO, it would be yielding close to 5%.

      NSC also looks solid here. I would be adding more, but I’m very comfortable with my position size as it stands. I might look at other railroads, however. CSX and UNP quickly come to mind.

      Best wishes!

    • says

      DM,

      Our blogging intents are similar. I really want to grow as an investor and a FI-aspirant. Forcing myself to write down my thoughts and start talking with others is the next step down that path. I’m a little bit worried about the time commitments, but we’ll cross that bridge when we get there.

      I did dip into NSC already by selling a put option, but I am thinking of picking up some shares as well. A similar strategy worked out very well for me back in ’10 when AFL and LOW had prices in the gutter.

    • says

      Brett,

      High yielding telecom companies certainly have their place in my portfolio, as I’m long T and VOD. I don’t want to go overboard with these names as competition is pretty fierce which certainly affects pricing power. Of course, the barriers to entry here are pretty high.

      I hope you have a great 2013 as well!

      Best regards.

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