Recent Buy

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.

Comments

  1. says

    I think I’ve got the same dividend addiction problem you do. Maybe we should start a 12 step program.

    I’ve been looking at WFC as well. I’m pretty optimistic that the dividend will continue to rise at least until the next banking crisis. Getting in on the ground floor, now that the bank has permission to actually raise its dividend (as opposed to BAC) is probably a good idea.

    • says

      Journey,

      Haha. I’m with you on the 12-step program.

      Step 1: Admitting you have a problem. :)

      I wish I could say I was getting in on the ground floor with WFC, but I know I’m also far from the penthouse at this level. I looked at WFC quite a few times in the past and kept passing. I tend to be ultra-conservative. With my portfolio now humming along nicely, I felt I could take on a position with one of the major banks.

      Best wishes!

    • says

      Gareth,

      I also really enjoy investing in companies I admire, and whose products I use regularly. A lot of the consumer stocks are easy for this. It gets harder in other sectors. I actually use a smaller, regional bank for my personal banking and only keep my account there because it’s the same account and transferring all my finances over to another bank is such a hassle.

      However, if WFC treats me right I may have to re-think that!

      WFC shares have definitely recovered nicely. I see a lot of the major banks have had similar performance. I like WFC because of their conservative business model. We seen what can happen with the investment banking business go sour during not only the recession but also with JP Morgan’s recent losses.

      Best regards!

    • says

      Integrator,

      DAA! Sounds like we have enough people to start a club here. :)

      WFC and USB have always been the big two that I’ve kept an eye on as well. Both were significantly cheaper not long ago, but I always want to be 100% comfortable before pulling the trigger on anything and sometimes it takes me a while. Helps me sleep better at night.

      Best regards!

  2. Larry says

    Hey DM, I know this is a bit off topic but I was wondering what would be a good place to find dividend stocks that payout during certain months. I’m looking for stocks that pay out in Feb,May,Aug,Nov (not the ex-div date but the actual pay date). Right now I have INTC, PG and KMP for those months as well as a couple of monthly payers MMT and O but I’d like to get one more for those months. I can’t seem to find a decent screener for that and was hoping you may know of one. Thx

    • says

      Larry,

      Anonymous below listed a few good picks in GIS, RTN, GD, T and the like.

      I’d also add KMI as a consideration to your KMP holding.

      Also VOD tends to pay out semi-annually, with the first payment occurring in Feb.

      INTC is actually on a Mar/June/Sep/Dec schedule for the dividend payment.

      Best wishes!

    • Larry says

      Hey thanks for the reply, I did check those out. A couple of those look good.

      According to yahoo finance INTC issues their dividend on Feb 28th but I know alot of these dividend payers pay on the last day of a month or the first day so it’s on the border either way I guess.

  3. says

    “What do you think of this purchase?”
    I’ve been studying Wells Fargo for a while now, analyzing the older annual reports. I think I’m gonna pull the trigger on it and buy some in the near future. There were a few passages I really enjoyed from the 2010 annual report:

    “The best way to grow capital is the old-fashioned way: earn it yourself internally rather than relying on unpredictable markets. We’ve grown our capital internally at a higher, more consistent rate than any of our large peers because we’ve earned more per dollar of assets than they did.”

    “Our capital position is among the strongest of any large bank in the world, but capital isn’t meant to be hoarded, it’s meant to be used.”

    I love the way management thinks. If the world continues to recover and the economy is fine in 10 years, I don’t see how it’s not at least a $70 or $80 stock, pumping out more and more dividends, year after year.

    “What are you buying?”
    There where rumours about WMT, sales would be “A disaster”. Ocourse, the market is punishing the stock after that. If it gets punished more I’d love to pick some shares up.

    Take care,

    Bo

    • says

      Bo,

      Thanks for stopping by!

      I like the blog. You have a nice portfolio there, and I see plenty of names I also own. Keep it up!

      WMT is an interesting play. I’m long WMT and like it long-term, but am concerned (as everyone is) about the increased competition coming from online players and B&M stores like Costco. Definitely something to watch.

      Best regards!

  4. says

    As you know I’m not a fan of large American banks. The meltdown a few years ago left a sour taste in my mouth. That said I am starting to come around a little bit and think you can make money here. WFC would be the large US bank for me if I ever go down that road. I used their checking account service for a few years and can put a mental picture to the company behind the stock.

    I think you’re right about the dividends and this is a better move than other large banks.

    Currently contemplating picking up KRFT or exchange traded debt for allocation purposes.

    • says

      CI,

      I don’t blame you for the sour taste with banks. I started investing just after all that happened, so the bad blood was still in the air and I stayed away from banks for a long time. I hope that WFC keeps the trend up and I think the payout could rapidly rise from here. We’ll see how it plays out.

      I’m contemplating KRFT too. I don’t like the fact that they have no international exposure anymore with the spin-off, but there is certainly plenty of sales ahead here in the U.S. We, as a society, love their products. The yield is nice and I like the fact that they’re serious about returning cash to shareholders. The brands are solid.

      Best wishes!

  5. Anonymous says

    Hi, Mantra,
    I am soooo a dividend junkie. Before I got hooked, I would spend my money on all sorts of stupid stuff. Now I save every single penny that I can, nervously waiting til I have enough to buy 10 shares of something…when I do, its the greatest high going! I even sell eggs from my flock of chickens and save that money to invest! Its a sickness, I tell ya.
    Larry, I looked at my dividend sheet for my February dividend payers, and came up with T, GIS, RTN, GD, NUE, AMLP, NNN, PG, SDRL and TE.

  6. says

    Hey DM,

    If you do have an addiction problem, dividends are probably the best addiction you could get. Seeing those increasing dividends each month can give you a high.

    I think you’ll do fine with WFC long-term as they seem to be the more “conservative” American bank and are getting their dividends back on track with large raises. I think my next bank purchase would probably go to Canada, possibly TD or RY. If I did buy an American bank though WFC would be my choice.

    • says

      AAI,

      I can definitely think of worse addictions to have than a dividend addiction! And it definitely feels good to see those dividend tallies rise month after month. Tangible reinforcement at its best.

      I wouldn’t mind TD in the portfolio. It’s a little further exposure to the financial sector, with a good yield, good dividend growth and international diversification as well. It’s on the watch list and one I’ll likely own at some point.

      Best wishes.

  7. says

    I have been following your blog for a while now and really like what you are putting together! I enjoy the dividend strategy you have and while I maintain nowhere near the number of positions, I see how you are doing well managing these with your goals!

    • says

      Eric,

      Thanks for stopping by and I really appreciate you following the blog.

      I’m only doing well due to persistence and diligence. I’m no genius. But that’s what’s really great about this strategy; you don’t have to be uber-smart to succeed. It simply takes a dedication to saving excess amounts of money and regularly investing that capital into high quality companies.

      Please keep in touch!

      Best regards.

  8. says

    At least our shared addiction is a constructive one.

    I like WFC and wish I had picked some more up when I made my first purchase. I’ve been checking into them more, especially through acquiring through puts. I feel that WFC is one of the better big banks since it’s much more traditional. My YOC is over 4% with my WFC shares, sadly it’s much too small of a position.

    Nice purchase here.

    • says

      Pursuit,

      Absolutely. An addiction to dividends makes one wealthier and happier. I’d say that’s definitely constructive!

      I see you are long WFC as well. Nice YOC there! I anticipate that rising quickly for you as well. Great job!

      My position is rather small right now too, but I like to ease into positions.

      Best wishes!

  9. says

    Cheers to your healthy addiction, DM!

    One stock besides TAP that I’m looking at adding to my portfolio is Universal Corporation UVV which focuses on distributing leaf tobacco to major manufacturers. Postive factors include:

    *Rock solid balance sheet: Net Tangible Assets= $1.085 B compared to Market Cap of $1.29 B. This puts very little value on their positive cash flows and earnings history
    *Attractive Valuation- P/E = 10.4 based on trailing 3 years earning average
    *Dividend yield is 3.6% at a healthy payout rate of 43%
    *Very steady, although not spectacular history of dividend increases over the last 40 years

    I plan on some more research of their financial statements and 10-k’s, but UVV is looking very attractive. I know you are pretty heavily staked in the tobacco sector, but what are your thoughts DM?

    • says

      Snowball,

      Thanks for stopping by!

      I’ve actually looked at UVV in-depth about a year ago or so.

      The EPS has gone basically nowhere over the last 5 years, and due to this the dividend growth has also been extremely lackluster. The FCF has barely or been unable to cover the dividend at times throughout the last few years.

      I also don’t like direct exposure to the commodity, but prefer my tobacco plays through brand name manufacturers like PM, MO, LO and the like. Also, some of these manufacturers are getting leaf directly from the farmers. Something to keep an eye on.

      On the bright side, the balance sheet is solid and the yield is pretty decent, albeit significantly lower than most other tobacco plays. They have a long track record of dividend growth. Valuation is there, but I think some of that cheap valuation is based on the lack of growth up until now, and the lack of growth going forward.

      Again, for tobacco I prefer direct finished product manufacturer plays and think PM is the brightest star in this space.

      Just my thoughts. I hope that’s helpful!

      Best regards!

  10. Steve says

    DM,

    WFC looks great from a financial and dividend perspective but I’ve resisted American Banks because of the regulation. Especially after Dodd/Frank passed, JP Morgan said they had to hire 100 personnel (lawyers, accountants, tax professionals, etc.) just to help them be compliant. I know many industries are regulated but I hesitate to invest in a company that has to get permission from bureaucrats before they can raise their dividend.

    Maybe I’ll feel differently after Dodd/Frank has a few years to work its way through the industry.

    Steve

    • says

      Steve,

      Well you can look at regulation through two different lenses. Obviously there is the negative aspect in that the government has a hand in the pot. But, on the other hand, there is no doubt that heavier regulation was necessary in our banking sector after what happened that led up to the Great Recession. You can make arguments that the regulation pendulum has swung too far in the opposite direction now, but I think WFC will do well as they were already conservatively managed anyhow.

      We’ll see how it works out. Again, I’m FAR from an expert in banking and trying to analyze bank stocks, but I wanted to get into WFC before it ran any higher on further dividend increases. I think they could almost double the dividend from here in the next couple years.

      Best wishes!

  11. says

    The financial crisis still has me scared off of bank stocks. I think if I were to look into banks, WFC would be the one to check out. The endorsement from Warren Buffett’s position makes me think it’ll be a good investment for you over the long term.

    I like dividends but I feel I’m more addicted to making purchases of the dividend growth stocks. I don’t have any cash ready for a new buy right now and it drives me crazy. I get a rush every time I make a buy of a good dividend growth stock!

    • says

      Dan,

      I don’t blame you for staying away from bank stocks. I’m still treading lightly in this sector.

      I hear you on the rush. I love logging into my brokerage account and hitting the “Buy” button and then seeing the reference number for the transaction. It means that I just grew my long-term wealth. It feels so awesome in a way that buying the newest gadget can’t replicate.

      Best regards!

  12. says

    I am also long WFC, BAC, JPM…I’m a big fan of bank stocks for the time being, but am aware that it could turn on a dime, so I watch them closely. Have you also looked at Canadian banks? TD, BNS, BMO, RY, etc. There are a lot of in-depth Seeking Alpha articles on them (and how they’re much less risky than US banks), and I am tempted to buy if there’s a pullback.

    • says

      kolpin,

      Thanks for stopping by.

      I’ve looked at the Canadian banks and generally like what I see there. I’m actually going to publish an article soon on some Canadian stocks I’m looking at…including banks and communication companies.

      The only thing that concerns me about Canada’s banks is the housing market and what seems like a potential bubble up there. Real estate is crazy in some of those big markets.

      Best wishes!

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