Wednesday, January 30, 2013
Some things never change. The Dow Jones Industrial Average is flirting with 14,000 points, and with my work being so crazy and unpredictable now would be a good time to take a break from buying stocks. I've talked about my plan of increasing my cash position over the first few months to counteract any potential surprises at work and so due to that my buying may be a little lighter through the first few months. Well, with the recent sale of AbbVie, Inc. (ABBV) and Abbott Laboratories (ABT) I find myself with more cash than usual and so Dividend Mantra is back to doing what he does best: buying high quality dividend growth stocks at attractive long-term prices.
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 30 shares of Johnson & Johnson (JNJ) on 1/30/13 for $74.13 per share. I consider JNJ one of my core holdings, and one I feel very secure owning for the long-term. I haven't purchased shares in JNJ since early 2011, so it's been quite a while since I added to this position. JNJ needs no introduction, operating as a $200 billion health care giant. This extremely diverse healthcare company stands as one of the true leaders in the sectors and I've been a very happy shareholder for almost three years.
I purchased additional shares in JNJ for a number of reasons. First, when the market is as heated as it is now and equities seem to go up on a daily basis I like to focus on large cap, blue chip high quality stocks. When the market is down and value is everywhere that's the time I feel appropriate to take on a little risk with some smaller cap plays as the market has a good chance to rise. With the DJIA being near all-time highs, a pullback could be imminent and as such I feel safe with some defensive plays like JNJ. Second, as I recently sold off a couple of major healthcare holdings in ABT and ABBV, I wanted to divert some of that new capital back into the healthcare sector to retain my exposure here. Third, the valuation here is pretty fair. I think JNJ is trading at a moderate price, and pretty close to its fair value. I think JNJ is worth paying fair value for, especially in a market littered with expensive stocks. A fair value, exposure to the healthcare sector and being about as high quality as it gets makes this an easy purchase for me. 50 consecutive years of raising the dividend definitely doesn't hurt either!
Getting back to the valuation, I calculated a fair value of just under $76 using a Dividend Discount Model with a 10% discount rate, a 10% long-term dividend growth rate (just under its 10-year DGR) and a 5% terminal growth rate. Again, JNJ isn't a steal at these prices. It's a very high quality stock trading for a fair price.
This purchase came with an entry yield of 3.30%. Pretty solid for a blue chip stock. In addition, JNJ usually raises the dividend in time for the June payout, so I expect a rise in my yield on cost fairly quickly. Bonus! Looking at other fundamentals, the balance sheet is stellar, P/B is 3.2 and the P/E stands just under 20 at the moment. With this transaction I added $73.20 to my annual dividend income total. Awesome! The other great thing is that with these additional shares I now have a full 100 shares of JNJ. This adds JNJ to the exclusive 100+ share club in my portfolio currently shared with PM, VOD, INTC and KMI. The portfolio is growing nicely.
Qualitatively, I love JNJ. It has a strong consumer segment driven by brand names like Band-Aid, Tylenol and Johnson's Baby Care. JNJ also has a very strong pharmaceutical business. Its medical device and diagnostics segment is robust. These segments are all very strong and will likely drive earnings growth for the long-term. It looks like the worst as far as quality control issues (recalls) is behind the company and the $20 billion Synthes acquisition offers tremendous opportunity for the future growth in the devices segment.
Overall, I still have more capital to put to work. I didn't really plan to make a purchase in January due to a number of factors discussed above, but the recent sale of ABT and ABBV provided a lot of cash that I feel comfortable putting to work - even in this market. Due to the sale, however, I still haven't fully made up for the loss of income from ABT and ABBV. This purchase makes up some ground, but I still have a little ways to go. I'm going to have fun scanning the market for further opportunities.
With this purchase I have 28 positions in my portfolio. That's a net decline from last month due to the aforementioned recent sale.
Some current analyst opinions on my recent purchase:
*Morningstar rates JNJ as a 3/5 star valuation with a FV estimate of $77.00.
*S&P rates JNJ as a 4/5 star Buy with a FV calculation of $74.40.
I'll update my Freedom Fund in early January to reflect my recent addition.
Full Disclosure: Long JNJ, PM, VOD, INTC, KMI
What are you buying?
Thanks for reading.