Recent Buy

What can I say that hasn’t already been said? It’s tough to buy stocks right now with the fact that the Dow Jones Industrial Average has recently broke all-time highs and it doesn’t appear to be slowing down. What’s a value focused dividend growth investor to do? I think the answer to this conundrum is to continue to do what you have always done. Stick to your plan. Ignore the noise. Keep your focus on the businesses you’re interested in and their operations. That’s what I’m doing. I like to focus on businesses and whether or not I want to be a part-owner in those businesses. Are operations doing well? Profits up? Dividends growing at a rapid pace? Are people buying their products or services?

The DJIA could rise or fall 500 points, but that doesn’t really affect the day-to-day lives of most everyone and what they’re doing or buying. Valuations are paramount, but again I always value individual businesses rather than the market as a whole when making purchasing decisions as I am, after all, buying individual shares in said businesses. I’m not buying the Dow Jones Industrial Average or the S&P 500.

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 Lorillard Inc. (LO) on 3/8/13 for $38.09 per share. This is an addition to my current position, and brings my LO holdings up to a full 100 shares. The capital I used to make this purchase was partially from the recent sale of my UNS Energy Corp. (UNS) holdings.

I posted a little while ago about why I like LO as a medium-term investment. Although the number of smokers is declining here in the U.S., LO is taking market share from competitors, including Altria Group (MO), and also investing in the emerging e-cig products. Since I purchased my initial shares in LO, it appears the talk of potential negative regulation against its menthol products has risen. However, I view this is a very unlikely event. Potential negative tax revenues are a high possibility, but a larger looming side effect would be a black market for these products. That would only serve to cut out the government and give them a bigger, and unnecessary, headache.

My purchase comes with an entry yield of 5.77%, which is obviously very enticing in the low yield world we currently live in. This is backed by pretty solid dividend growth. They have a 3-year DGR of 17.3%, and recently raised the dividend by 6.5%.

This purchase adds $88.00 to my annual dividend income based on the current quarterly payout of $0.55 per share.

The valuation of LO shares is pretty attractive, likely depressed due to the already mentioned potential headwinds regarding further FDA regulation. Shares in LO are currently trading at a P/E ratio of 13.74. I used a Dividend Discount Model to value the shares and used a 5% long-term dividend growth rate with a 10% discount rate and got a Fair Value of $44 per share. This gives me a 15% margin of safety, which is pretty solid considering the market run-up.

I currently have 30 positions in my portfolio, as this was an addition to an existing holding.

Some current analyst opinions on my recent purchase:

*Morningstar rates LO as a 3/5 star valuation with a FV estimate of $43.00.
*S&P rates LO as a  4/5 star Buy with a FV calculation of $39.40.

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

Full Disclosure: Long LO, MO

What are you buying?

Thanks for reading.

Comments

  1. says

    Nice buy! We both added to LO at around the same time and price. I have a sizable portfolio weight in tobacco stocks now so I don’t plan to add any more for a while. It was just too hard to resist that huge yield especially in this market.

    I am not too worried either about FDA regulations. My biggest concern is lack of international exposure. As you mention though, they have been taking market share for a while locally. I like the stock but it is certainly a buy and monitor a little more often company.

    I like all the recent moves you made. I keep hoping for a correction but I will continue investing regularly regardless and looking for what few values may be out there.

    Take care

    • says

      AAI,

      Thanks for stopping by!

      Yeah, I seen we both had the same thought in mind regarding LO being a fairly attractive value in this market.

      I also agree with you regarding allocation to tobacco stocks. I’m fully loaded here and am not interested at all in adding any further. PM is my largest position and now LO is a fairly large position as well. MO is small, so if I were to add to tobacco in the next 6 months or so that might be where the capital goes.

      I also fear LO’s lack of any international presence. That doesn’t bode well for its prospects looking out over 20-30 years, but for the medium-term (over 10 years or so) I think this is an attractive play. I mentioned my thoughts on that in my last article regarding LO.

      I also hope we see a correction. The market has been on a historic run. Makes us feel warm and fuzzy when we look at our brokerage balances, but warm and fuzzy doesn’t pay my bills. The dividend income is what will pay my bills and I can buy more of it with cheaper shares of course. So, we’ll see what we get. Either way, I’ll continue to scan for opportunities!

      Best wishes.

  2. Steve says

    Good buy. I’m not a buyer of tobacco companies myself just on principle but I can see the value in LO.

    I’ve been thinking about something and I’d like to know what you think. With the recent market run up, I’ve got one stock that has really taken off. Normally I don’t sell off shares of anything because, as you have often said in your posts, I don’t want to cut off the limbs of the dividend money tree. However, I’ve got some shares of COP and would like to add more. I think COP is way undervalued right now.

    So, should I sell off a few shares of the over valued stock so I can buy more of the undervalued stock or should I just wait until next month and add to COP when I get more cash? I’m torn.

    Thanks in advance for your input.

    Steve

    • says

      Steve,

      That’s a tough call. I don’t sell often and it pains me to do so. My decision to sell ABT and ABBV was after weeks of agonizing thought processes. Even then, I still don’t know if it was the right call. Sales create taxable events and extra fees.

      I try to only sell if a stock is severely overvalued, fundamentals change or the dividend is cut. A static dividend will also grab my attention and probably warrant a sell. For instance, my recent sale of my UNS shares came because the dividend growth was very small and the shares were heavily overvalued. A P/E over 20 for a utility is very strong and that’s because of the low interest rate environment we’re in.

      It’s hard to say what to do. I try to limit sales in all cases and buy when fresh capital comes my way.

      BTW, I’m not so sure COP is way undervalued here. If you look at a lot of metrics, CVX actually looks cheaper. COP has the higher yield, however. The thing to remember with COP is that the recent spin-off of refining and downstream operations to PSX and the other asset sales will have an effect on the company moving forward. They’re looking to concentrate on domestic projects for the time being. I think energy has some good plays right now, as many have underperformed the market…but I wouldn’t say COP is a steal here.

      Best wishes!

  3. says

    Great purchase DM. I too just bought LO. I think the concern over menthol cigs is way overblown. There is no way the government will ban these products. You’d see riots if they ever did imo.

    • says

      wes mantooth,

      Glad to see you as a fellow shareholder and recent buyer.

      I agree with you. I can imagine severe negative backlash if they were to ban them now. I’m not sure if we’d see riots or not, but the black market would cut the government out of tax revenue and increase costs by trying to fight it. It would be a mess. It just wouldn’t make sense. I can see, however, additional warning labels.

      Best regards.

  4. says

    I only have exposure to tobacco with PM, so no US exposure. LO would be a great addition and I’ve been considering starting a position. That yield is quite juicy and when the menthol ban chatter dies down a nice little run up in price will be nice. Although I’ll be purchasing for the yield and dividend growth a little capital appreciation is always welcomed.

    • says

      Pursuit,

      PM is the cream of the crop, so it’s great you have PM. PM is my largest position and already overweight, so I don’t have any plans to add to it any time soon. My portfolio would have to almost double before I feel comfortable increasing my exposure. Of course, a healthy dip could change my tune! :)

      Take care.

  5. Anonymous says

    Have you considered RJ Reynolds (RAI)? They currently have a 5.47% dividend yield and manufacture smoking products as well

    • says

      Anonymous,

      Thanks for stopping by.

      I’ve looked at RAI before and nothing really impressed me about that company. Not to say it’s not a great holding, but just didn’t strike me as something I’d like to invest in.

      Best wishes.

  6. Anonymous says

    Hi DM,

    I have been following your blog for sometime. I am new to dividend investing. Do you recommend any books that I can read to understand a bit more on Dividend investing?

    Thank you!

  7. Larry says

    It’s definitely difficult as a buyer with prices so high on so many stocks but there’s always some stocks that are pulling back or trading sideways. I look at my portfolio and see which ones that have dipped and buy more of those. INTC for example is still quite low.

    • says

      Larry,

      I also look to my portfolio and compare current prices with my cost basis and that gives me a good idea of where to go next if I’m looking to add to current holdings. If I did my research right the first time and fundamentals are unchanged I’m more than happy to average down.

      INTC is indeed cheap right now. I’m already fully committed to INTC with 240 shares, and actually it’s a larger position than I’d really like as I’m quite tech averse (if you couldn’t tell by looking at my portfolio). Tech appears to me to have more of a risk/reward spread. Some are crazy winners, but many are land mines.

      Best wishes.

  8. says

    Great ! Dividend Mantra, you make the right choices and help me the same way. I was considering LO some weeks ago. Was also considering RDS.A. Some weeks ago bought some UVV. Now I really consider imitating you next week. Wish everything is ok for you and that the weather there in Florida improved. Good to you.

    • says

      Aspenhawk,

      Thanks for the kind words and warm wishes. The weather is wonderful here in Florida. Today it was in the mid-70′s (Fahrenheit).

      I believe LO represents a solid value with a great entry yield. It is not without risks, but what stock is?

      Best regards!

  9. gibor says

    It’s funny, but I also was considering buying LO last 2 weeks…. but a got a little scared that LO has negative book value, also I was holding already MO in this specific account, so at the end I added MO shares… now I have available cash on another account and again thinking about LO…
    P.S. also long PM (3rd biggest position in portfolio)

    • says

      gibor,

      Book value is hard to read with tobacco stocks. These companies tend to have high FCF and high debt as well. The value is in the product itself. Also, these companies tend to send out a lot of cash to shareholders so that government entities can’t get their hands on it in case they go bankrupt. They are cash machines.

      MO is very nice as well, with diversification into alcohol and smokeless products. And they still have the powerhouse that is Marlboro. I think LO is a lot cheaper, currently. Also the expected growth is slightly higher for LO last I looked.

      Best wishes.

  10. says

    Bought some LO recently as well. Just a small position. Was waiting for 37.50 to buy some more but they announced another $500 million of buy backs on Friday and the stock went up 1%. Could be the catalyst that turns it around. I’m curious why do you think LO is not in a good long term position?

    • says

      fiveoh,

      They announced the buyback like an hour after I purchased my shares. It was lucky timing.

      I don’t necessarily think it’s not a great long-term investment, but am confident about them in the medium-term. The major headwinds against them looking out over 30 years will be increasing regulation, increasing taxes and a dwindling number of smokers. As a consumer goods company, it’s never good when the number of consumers you are targeting are shrinking. Also, it’s a domestic company only, so there is no access to international markets.

      I hope that helps!

      Take care.

    • says

      Journey,

      I hear you on not wanting to go overboard with exposure to tobacco stocks. I’m already heavily allocated myself, and really probably more so than I should be. I don’t have any plans on adding anytime soon.

      Hope all is well!

      Best wishes.

    • says

      gibor,

      Absolutely. That risk is what’s keeping the stock depressed right now. There’s been some additional chatter lately on proposed FDA bans on menthol cigarettes.

      However, as I mentioned above I don’t believe this will happen. There are numerous reasons for that belief, including loss of tax revenue and the chance for social unrest and black market products which would require the government to monitor and fight.

      Even if a ban were to come to fruition, it wouldn’t happen overnight. The stock hit would be tremendous, but it wouldn’t be an immediate total loss.

      Best regards!

  11. says

    At the start of the post suggesting thats its a tough time to buy stocks right now considering the dow jones is making new highs. Most investors forget that the market declined by almost 18% late in 2011 from its high point a little earlier in the year. The market is moving higher but maybe theirs a reason for it. Markets usually begin declining a few months before a recession begins. All the stuff you hear on TV is negative news about the economy. Historically markets begin heading sharply higher when a recovery is just beginning. Theirs no reason to believe that the rally must come to an end because the bears want that to happen. I believe we will see a sharp selloff but maybe not until 2014.

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