Sunday, February 17, 2013
Hi. My name is Dividend Mantra. I have a problem. I'm addicted to dividends.
Ha! I'm just kidding of course. But, if there were a "Dividend Addicts Anonymous" I would probably be a founding member. Who wants to join me?
I had planned on refraining from purchasing any more equities until next month, choosing instead to sit on a small cash position hoping for some market weakness heading into March. But I always go back to remembering what I'm doing here in the first place: building a dividend growth portfolio to supply me with rising passive income to fund an early retirement. It's hard to build a portfolio if you're not buying stocks. Besides, as always I believe it's possible to find attractively valued/fairly valued stocks in all market conditions. I don't focus on the value of the market as a whole, but instead focus on the individual businesses behind the stocks and the valuation of those individual stocks. And so with this viewpoint I decided to deploy some capital and add a new position to my portfolio.
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 Wells Fargo & Company (WFC) on 2/14/13 for $35.09 per share. This is my second bank holding in my portfolio, joining the 63 shares I own of Southside Bancshares, Inc. (SBSI).
I won't kid anyone and say I can fully analyze a gigantic bank like Wells Fargo. My cup-of-tea is typically consumer stocks that don't have massive deposits and loans to sift through. I do hope, however, that my limited, but growing, financial analysis skills are aided by the fact that Wells Fargo is one of the biggest banks in the U.S. and they appear to be one of the more conservatively managed banks we have. They focus on traditional banking and loan origination rather than speculative investment banking. Warren Buffett is a huge fan of this bank as well, as he currently owns 466 million shares. I always like siding with Buffett! WFC escaped The Great Recession relatively unscathed and actually came out stronger, having merged with Wachovia in an all-stock deal back in 2008. That deal required WFC to issue quite a bit of new stock to fund the deal, but I anticipate the share count to dwindle going forward, awaiting Fed approval.
WFC was the scorn of many dividend growth investors, as they cut the dividend by 85% back in 2009, which ended a 20-year streak of annual dividend raises. But, management has been eager to get back on track since then. They have since raised the dividend three times, most recently by 14% to $0.25 per share quarterly. They have also issued special dividends over the last couple of years and are anxiously awaiting approval from the Federal Reserve to deliver even more cash to shareholders through dividends and share buybacks. There is speculation that there could be a second dividend raise this year, perhaps large enough to bring it close to the level they were paying out before the crisis hit now that the share price has stabilized.
This purchase gave me an entry yield of 2.85%, but I feel that the payout could rise substantially later this year. Based on the current quarterly dividend of $0.25, this purchase will add $40.00 to my annual dividend income. Banks, especially large national or multinational ones, have historically been favorite holdings for dividend growth investors. However, I started investing in early 2010 right after the Great Recession and banks were paying scant dividends. So, I built my portfolio around stable dividend growth stocks in energy and consumer sectors specifically. But that has led me to have little exposure to the financial sector. I don't believe in diversifying just for diversification sake, but I feel exposure to this sector is healthy when looking at historical norms and I like to keep my mind on long-term historical trends rather than looking in the rear view mirror.
Quantitatively, this bank looks pretty solid. The balance sheet is fairly solid and stable and the valuation looks attractive right now, albeit less so than it was just a few months ago (as is the general market). The P/E ratio stands currently at 10.45 and P/B is 1.3. I performed a Dividend Discount Model on the shares and used a 8% long-term dividend growth rate and a 10% discount rate. This gives me a Fair Value of $54.00 per share, which is well under where shares are trading at currently. I think things will change dramatically once the dividend is raised back to pre-crisis levels. This is an event that could happen quite soon. The payout ratio stands at 29.7%, so there is plenty of room for payout expansion there. EPS has grown at a compounded rate of 4.33% annually over the last 4 years (albeit bumpy and through a major recession), but TTM earnings are up fairly significantly and I think once banking operations normalizes and interest rates rise a bit WFC stands to do well.
With this purchase I now have 29 positions in my portfolio.
Some current analyst opinions on my recent purchase:
*Morningstar rates WFC as a 4/5 star valuation with a FV estimate of $42.00
*S&P rates WFC as a 3/5 star Hold with a FV calculation of $38.00
I'll update my Freedom Fund in early March to reflect my recent addition.
Full Disclosure: Long WFC, SBSI
What are you buying? What do you think of this purchase?
Thanks for reading.