Tuesday, February 12, 2013
The Dow Jones Industrial Average crossed back over the 14,000 point mark today, a level it's been hovering just under or just over for the last couple of weeks. It's no secret the stock market has been like a rocket ship since the beginning of the year. As such, us value investors that focus on dividend growth stocks trading at attractive long-term prices relative to their intrinsic value face an uphill battle. What I've been focusing on over the last few weeks is buying quality on dips, as you can see here and here.
In a market that's as strong as this one, I like to increase my ownership stake in high quality businesses (even if they're trading for a fair price) that have durable economic moats. This affords a certain level of comfort in case the market starts to decline precipitously. High quality dividend growth stocks tend to do well in falling markets due to their defensive nature and investors history of fleeing to safety in the face of volatility. As such, I recently increased my ownership stake in one of the highest quality companies in the world.
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 40 shares of The Coca-Cola Company (KO) on 2/12/13 for $37.64 per share. When I think of high quality, there are few companies that come to mind as quickly as Coca-Cola. This is a company that was one of my earliest purchases, as my first purchase was back in July of 2010 for a split-adjusted cost basis of $26.56 per share. Obviously KO has had quite a run since then! I've been meaning to increase my ownership stake on many occasions, but always ended up finding other equities in which to allocate my capital. This purchase doubled my position with KO, and I'm very happy to have a larger stake in the largest beverage company in the world.
I decided to add to my position today as it was down considerably (down 3% at one point) due to missing analysts estimates for Q4 earnings and revenue. Q4 EPS came in at $0.41 per share, compared to $0.36 per share a year earlier. This missed analysts estimates of $0.44 per share. I love overzealous analyst estimates and the opportunities they provide! Profit and revenue up, stock down. Lovely.
The fundamentals of this company are simply fantastic. The balance sheet is solid, with a debt/equity ratio of 0.5, the EPS CAGR over the last 4 years has been 9.4% and the 4-year revenue growth rate has been a very strong 12.7%, compounded annually. This company is a true dividend champion, as it's one of the few companies that has raised its dividend for 50 years straight. The 10-year dividend growth rate is 9.8%. The current P/E stands just under 20, so this stock is fairly valued as I'll discuss below.
With little debt and fairly strong growth, backed by one of the strongest brands in the world (Coca-Cola) I feel this is a long-term winner, and one of the strongest companies a dividend growth investor can possibly invest in. Did I mention this company has 15 $1 billion brands? Huge economies of scale, a global supply chain and operations in more than 200 countries build a pretty strong economic moat around this castle of a business.
This purchase added $40.80 to my annual dividend total based on the $0.225 per share quarterly dividend. The great thing is that KO usually increases its dividend in time for the March payout, so I anticipate a higher dividend payout shortly. My entry yield on this purchase is 2.7%.
This stock is trading for a fair price. I performed a Dividend Discount Model using a 7% long-term dividend growth rate (conservatively below it's 5-year DGR and 10-year DGR) and used a 10% discount rate (appropriate, especially for the quality) and got a Fair Value of $36.38. This is slightly below where I purchased at, so again it's trading for a fair price. I didn't purchase these shares because they're a steal in an expensive market, but rather because my allocation to this extremely high quality company was low and I wanted to increase the defensive nature of my portfolio in the face of a rising market.
I don't know if I'm going to make any more purchases for the rest of the month. With earnings season upon us this may allow further opportunities, but as of right now I plan to sit tight with the capital I have.
With this purchase I still have 28 positions in my portfolio.
Some current analyst opinions on my recent purchase:
*Morningstar rates KO as a 3/5 star valuation with a FV estimate of $38.00.
*S&P rates KO as a 5/5 star Strong Buy with a FV calculation of $34.20.
I'll update my Freedom Fund in early March to reflect my recent addition.
Full Disclosure: Long KO
What are you buying?
Thanks for reading.