Recent Buy

Enter the fire! I love days like this past Monday, when the S&P 500 fell more than 2%. Although not a noticeable pullback on its own, there were quite a few equities on my watch list, and in my own portfolio, that fell much further than this. Drops of 4-5% or more in one day tend to get my attention, and I love few things more in life than getting a piece of a high quality company when its on a fire sale. Just like I’d love to see chicken or bread 5% cheaper at the grocery store, I love to see stocks I was already likely to buy on sale. Cheaper shares means my capital goes further, because the same amount of capital can effectively buy more passive income via more shares. And cheaper shares also obviously means that you’re setting yourself up for a greater total return over the long-term. Win-win!

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 25 shares of BHP Billiton PLC (BBL) on 4/15/13 for $55.32 per share. I purchased these shares after a dip of over 5% on Monday. I love being greedy when others are fearful.

This purchase adds $57.00 to my annual dividend income total based on the current $1.14 semi-annual dividend. BBL currently pays semi-annual dividends like many European companies, with the interim dividend being paid in March and the final dividend being paid in September. The great thing is that BBL declares and pays the dividend in dollars. Also, because of a tax treaty with the U.K. there are no foreign taxes withheld on the dividends. BBL also usually raises the dividend with the final dividend payout, so the effective yield of 4.12% I received on my purchase is set to rise later this year!

BHP Billiton is the world’s largest publicly traded miner and diversified natural resources company. They are engaged in minerals and oil/gas exploration development and production. They are among the world’s top producers of commodities like aluminum, copper, energy coal, metallurgical coal, manganese, iron ore, nickel, silver and titanium materials. They also have significant investments in oil and gas.

I’m not naturally a huge fan of investing in commodities directly, other than oil. I’ve made my case for why I’m not a huge fan of owning gold, and commodities as a whole tend to be very cyclical. Overall, I prefer secular stocks where the underlying company sells products or services that people want or need on an everyday basis. Commodities, while certainly in great demand most of the time due to increasing scarcity among many basic materials, tend to fluctuate greatly in value based on where the overall economic business cycle is at. And right now, BHP Billiton has concerns over slowing Chinese demand for many basic materials, most notably iron ore. BHP scrapped a $80 billion 5-year expansion plan last year due to management’s view of a cooling global economy and commodities market.

However, I was drawn to this investment for a number of reasons. First, the company is the largest of its kind and its scale is a great advantage when you’re talking about mining vast stretches of land across many countries. They operate in over 100 different locations worldwide. They are also diversified across many different commodities, although iron ore does account for about 37% of profits. Also, as a dividend growth investor I like to see a history of fairly substantial dividend growth. BBL sports a 10-year dividend growth record with a dividend growth rate over the last 5 years of 19%. The entry yield of 4.12% is also very attractive in this low interest rate environment. The balance sheet is also attractive, with a debt/equity ratio of 0.4. They have a S&P credit rating of A+. Also, the aforementioned cancellation of a large 5-year $80 billion expansion shows management is prudent and careful about capital allocation. I’d rather not see management engage on a massive spending spree for expansion if prices on the materials it mines for are falling.

Revenue is up from $39.4 billion in 2007 to $73.1 billion in 2012. That’s a CAGR of 13.16% over that 5 year period. EPS is up from $4.58 in 2007 to 5.77 in 2012. That’s a CAGR of 4.73% over that same period. The dividend payout ratio currently stands at 39%, which leaves plenty of room for growth in the future.

BBL prides itself on operating large, long-life, low-cost, expendable, upstream assets diversified by commodity, geography, and market.

While I wouldn’t want a large portion of my net worth in this company, I feel confident owning a small piece of the world’s largest natural resources company as part of my diversified portfolio of high quality dividend growth stocks. While the global economy has been shaky over the last few years, I can’t imagine scarce resources not becoming more valuable over time as they continue to become more and more rare and as the global population continues to rise and countries needing more basic materials to build, expand or consume energy.

It should be noted that BHP Billiton is a dual-listed entity with ADR shares trading on the NYSE under the BBL ticker and the BHP ticker. The BBL shares are the British shares (with no tax withholding to U.S. investors) and the BHP shares are Australian listed (which are taxed by the Australian government). Due diligence, as always, is required here.

I used a Dividend Discount Model to value BBL shares. I used a 10% discount rate and a 7% long-term growth rate which gives me a Fair Value on shares of $81.00. I typically use a 10% discount rate, but an argument could be made to use a higher rate to account for the greater beta (volatility) and the exposure to the commodity market. Of course, I also used a very conservative dividend growth rate (well below their average to date). The P/E ratio on my purchase price is 9.5, which is obviously attractive. Overall, I feel BBL shares are undervalued right now, which is a rarity in this market. I think a sufficient margin of safety exists with these shares, even factoring in the cyclic nature of the business.

I now have 32 positions in my portfolio, as this was an investment into a new position. This is my second holding now in the Basic Materials sector, with my purchase of shares in Air Products & Chemicals, Inc. (APD) earlier this month.

Some current analyst opinions on my recent purchase:

*Morningstar rates BBL as a 5/5 star valuation with a FV estimate of $100.
*S&P rates BBL as a 3/5 star Hold with a 12-month target price of $68.00.

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

Full Disclosure: Long APD, BBL

What are you buying?

Thanks for reading.

Comments

  1. says

    Yep! That is a nice one. I have been keeping an eye on that one. A good “satellite” part of a portfolio (as opposed to a part of the core portfolio).
    I really like how massive the company is and how diversified its operations are. I bought last summer at around the same price and will probably buy more soon.

    Cool stuff!!

    • says

      RO,

      This is definitely one of those satellite holdings. Certainly not a core holding to build a portfolio around, but I don’t mind a little exposure to natural/scarce resources.

      If you want to buy more, it’s even lower than when I bought it. It could definitely go lower from here with all the sheeple leaving commodities right now.

      Best regards!

  2. Steve says

    DM,

    Seems like a good move. I haven’t followed BBL but it looks like a good diversification move. Cyclical companies don’t really bother me because many times the volatility can work to your advantage when you’re in the accumulation stage of DGI.

    I used the drop on Monday to buy more COP. I’ve been increasing my stake the last few months as I have cash and am almost at my limit. It dropped a little over 3% Monday and is down over 6% since its high of $61 in late March. Although COP is not my first choice for energy, other companies I’m watching are close to their 52 week highs. I’m happy to get COP at these prices.

    I was a bit disappointed that the market recovered so fast today. I was hopping for a slightly deeper correction but I guess we have to take what we can get.

    I love DGI! I have finally found an investing strategy that allows me to make unemotional decisions in response to market movements. In the past, Monday’s dip would have left me contemplating selling and locking in gains from the recent bull market. I would have sold out of fear of losing gains. And based on today’s movement, that would have been a foolish move. Hence, the reason I never really made much money in my early investing days. I am now able to follow my strategy of DGI and exercise discipline in my investing. What a difference!

    Appreciate the posts.

    Steve

    • says

      Steve,

      Thanks for stopping by.

      Absolutely! The cyclical nature of some companies can present an opportunity when they’re falling. These types of stocks just require a little more patience. I think I got in at a good price, but it may go lower from here. However, I don’t time stocks or the market. I just look for an opportunity and go from there.

      COP has been weak lately as oil has fallen significantly with other commodities. I definitely wouldn’t mind increasing my exposure to COP or CVX, or maybe even picking up OXY. Maybe even another oil major. We’ll see!

      I’m glad you love dividend growth investing. The disconnect between emotions and investing is important, and I think dividend growth investing is a strategy that reinforces that disconnect. I don’t really get emotional over major market moves, but rather just look for opportunities to scoop up high quality shares at a discount.

      Appreciate the readership!

      Best wishes.

    • says

      MFIJ,

      Well, definitely make sure you’re comfortable either way. If there is any doubt, don’t invest. Many high quality companies to choose from.

      I find it to be attractively priced right now, with a solid yield. The underlying business is sound, even while the products they mine for vary in value significantly.

      Best of luck either way! :)

      Take care.

  3. Anonymous says

    Good pick. I know you have a long-term horizon, however, I think you can probably pick up BHP for at least 10% less in May.

    • says

      Anonymous,

      Thanks! Yeah, you could very well be right about that. I don’t really try to time purchases, but if it goes significantly lower I’d think about averaging down on it. I don’t want to go too crazy with this name, but I wouldn’t mind a little more. I started small.

      Keep in touch!

      Best wishes!

  4. says

    Glad you got to take advantage of the sell off on Monday. BBL has solid dividend fundamentals so I think its a great buy. I also like that it hasn’t had a huge run up so far in 2013 despite its strong growth. Great pick.

    • says

      Dividend Ladder,

      BBL does have very solid fundamentals, especially for a commodity play. Quite surprising, actually. The debt is fairly low for a capital intensive business like this and the dividend growth is impressive with a high starting yield. They are the biggest at what they do, which is something I like. Scale is very important here.

      The weakness YTD has been especially attractive from a buying standpoint. It’s underperformed the general market by far. Not a bad time to initiate a position. :)

      Take care!

  5. Michael D says

    I realize none of this is your fault, and you’re simply taking advantage of a predictable market movement, but even a token acknowledgment of the *death and destruction* that had to occur to net you your 5% market dip would make this post seem a lot less callous.

    • says

      Michael D,

      I didn’t mean to make this post come across as callous. My heart goes out to all the victims of the terrible tragedy in Boston.

      However, my purchase didn’t need the tragedy. I bought BBL before the explosions, and the broader market was down significantly before the tragedy in Boston. So, the “death and destruction that had to occur to net you your 5% market dip” isn’t actually correct at all, as it didn’t have to occur and had nothing to do with my purchase.

      And, furthermore I don’t use this forum to comment on tragedies like that because it’s not a news feed. Don’t take this the wrong way, but this isn’t CNN. If I were to comment on the Boston tragedy, I’d have to be fair and start commenting on every tragedy. Before you know it, I wouldn’t be talking about what I’m here for. This is a focused blog on frugal living, retiring early, dividend growth investing, health, wealth and such.

      Hope that clears things up.

      Best wishes!

  6. says

    BHP is a great way to get exposure to the basic materials since they’re in to just about everything. Early last year the acquired an oil/gas E&P that has leases primarily in the Eagle Ford Shale in Texas. This was their first foray into land based drilling and doing it half way around the world. I’ve actually only done work for BHP since April 2012. Seeing how some of their operations work over here is a little mind-boggling. I don’t know if it’s from lack of experience or what but some of their decisions just don’t make sense.

    Picking up BBL instead of BHP to avoid the foreign tax withholding was smart. I’ve been tempted to pick up some shares, but have held off for now.

    • says

      Pursuit,

      I was quite aware of the Eagle Ford Shale exposure, but definitely was not aware of some missteps there. That’s unfortunate to hear! I’m surprised, as BBL seems to be quite good at what they do, although I am aware that they’re not primarily and E&P oil company. That’s something I’ll have to dig into a bit more.

      Hope all is well with you! Keep in touch.

      Best regards.

  7. says

    Good luck with BBL, I also noticed the drop and it has a good starting yield. I was hoping for more of a correction before the rebound in the markets. We have to take what we can get. I ended up making a speculative commodities play that I’ll be posting soon.

    • says

      AAI,

      Thanks! I’m not ultra concerned about the underlying share price, other than to offer me a chance to average down on a significant drop. Rather I just hope they can keep growing the dividend at a modest pace. If they can grow it in the high single digits for the foreseeable future I’d be very happy.

      I would also argue the commodities play I made here with BBL is rather speculative, especially when compared to the other holdings I have. I guess dividend growth investing is so conservative that investing in a gigantic company like BHP Billiton can be considered speculative. :)

      Best regards.

  8. says

    I’m still focused on selling a piece of real estate right now. That funds may get converted to stocks when the time comes. Hopefully there’s a good correction around that point. It was definitely a good day for bargain hunting. Nice job!

    • says

      Pretired Nick,

      Good luck with the sale of that real estate. I’ve never owned any real estate, but I can imagine what an albatross that must feel like when you want to unload it. I hope it all goes smooth for ya.

      I hope that correction happens – for both our sakes. I’d love to see a major sale. I don’t have a ton of capital right now, but I’d be up for a buy or two. Let’s keep our fingers crossed! :)

      Best wishes!

  9. says

    I have heard the name BHP Billiton before, but I confess that I know nothing about it. I will not buy anything that pays annually or semiannually, I think that’s why. However if the historical dividend and eps growth continues you are in for a treat!

    • says

      CI,

      I’m not completely opposed to semi-annual or annual dividends, but I definitely prefer quarterly, or even monthly dividends when possible. Semi-annual don’t bug me too much. Annual dividends aren’t something I’m real thrilled about. That was one of the reasons I’ve not invested in Novartis yet.

      Yeah, I do hope the dividend growth keeps up at a modest pace. I’d be happy with 6-10% dividend growth long-term, as that would mean the price I paid was attractive. We’ll see how it turns out!

      Congrats on your success so far, especially with the $100k in savings. It feels great to be a part of a group of young, active investors!

      Take care!

      Best regards.

    • says

      Compounding income, many of the world’s largest mining companies pay dividends semi-annually instead of quarterly. However, they are still strong dividend growth companies, that raise their dividends. Don’t let the frequency of dividend payments influence your decision.

      In fact its better IMO, becuase you will receive a larger dividend payment and therefore will be more likely to DRIP your shares (if you choose to).

      Cheers
      The Dividend Ninja

  10. Anonymous says

    Definitely always a nice strategy to go after income! I’m assuming you hopefully get some income from this blog/ad’s which should help the cause as well?

    • says

      Anonymous,

      Passive income is my primary focus, as that’s how I’ll be funding my early retirement. Dividends will most likely make up the vast majority of that passive income. At some point bonds will be in there, and even possibly real estate. We’ll see about that last part.

      This blog is definitely not ‘passive’ income, however I’m very grateful for the fact that I earn a modest income from it. I’ve been earning about $150/mo over the last few months, but the real payback comes in two forms – the inspiration I provide others and others provide me, and the fact that this blog keeps me honest and true to my journey. Anything I’d be embarrassed to post about should probably be avoided.

      Best wishes!

  11. Onassis says

    Dear Jason,

    great buy!

    “I love being greedy when others are fearful”
    You are right!

    I think I have heard the same words from Warren Buffett:
    “Be fearful when others are greedy and greedy when others are fearful.”

    What do you think about Rio Tinto (RIO)?
    In 2013 or 3014 I want BHP Biliton AND Rio Tinto in my portfolio.
    I don´t know, which company is better!?

    Yesterday I have bought 10 shares from Procter & Gamble.
    The price is very high, but I want to test, whether the dividend payment fees will be deducted in Germany! I´m not shure, so I have to test! :-)

    And Peter Lynch say: A high Price is not bad! If the company will grow, also the share price will grow and of course the dividend!

    Best regards :-)

    Onassis

    • says

      Onassis,

      Thanks for stopping by! Always good to hear from you.

      I took a quick look at RIO. Not my cup of tea. Negative EPS, and the dividend growth profile is very erratic/poor. Just doesn’t have a place in my portfolio.

      Nice buy on PG. You’ll be very happy owning a high quality company like that! I have great confidence that 10 years from now PG will be selling even more of their products than they do today. They have one of the greatest stable of brands known to man. Great buy!

      I’m with Peter Lynch on that. I’m definitely okay with paying a fair price for a high quality company. I don’t always have to buy when undervalued, however I will look for a sufficient margin of safety with a risky play like BBL.

      Keep in touch!

      Best wishes.

    • Onassis says

      Hi Jason,

      where do you look for the EPS? Morningstar? The companys website? The Street?

      Best regards!

      Onassis

    • says

      Onassis,

      I usually use Morningstar and S&P. I find these to be typically fairly accurate, but do also often check them against the specific company’s records for validity.

      Most brokerages offer free access to research tools that include financial records going back 5-10 years. Morningstar offers 5-year records for free.

      Hope that helps!

      Best wishes.

    • says

      Martin,

      Thanks!

      Yeah, APD is a long-term dividend winner. Great business and I’m glad to finally be a shareholder. BBL is definitely less followed and owned here in the U.S., but is much more popular in the U.K. and especially Australia.

      It’s funny how relatively unknown they are considering they’re the largest natural resources company in the world.

      Hope all is well!

      Best regards.

  12. says

    Good timing Mantra! I also purchased a couple of mining stocks after the recent panic selloff on Monday – in fact I bought late Monday morning right at the height of the panic. Too good of an opportunity to pass up!

    BHP Billiton is one of the world’s largest mining companies – nice move into the international resource companies. I think resource stocks are a “gold mine” right now – excuse the pun.

    Will have a post soon on my two purchases. :)

    Cheers
    The Dividend Ninja

    • says

      Ninja,

      Nice! Looks like we were thinking along the same lines at the same time! That’s awesome. I’ll be heading over to your site to take a look at the moves you made.

      I agree with you on that pun! Good stuff. Yeah, I’m okay mining for value in mining stocks. :)

      Best wishes!

  13. Spoonman says

    Right now I don’t own ADRs or foreign companies, but I will keep this one in the back of my pocket. Thanks for the suggestion!

    • says

      Spoonman,

      Glad you enjoyed the suggestion. A stock like this isn’t for everyone due to the exposure to commodities and the semi-annual dividends, but I do believe the valuation is very compelling right now.

      Keep in touch!

      Best wishes.

  14. Anonymous says

    Hi DM,

    If you consider to diversify your portfolio further by adding some international quality companies, I suggest to take a look at Nestlé, Daimler and Total. Their share prices are currently suffering, cause of the European currency crisis, however, they all do most of their businesses globally.

    You are a great inspiration – good luck & all the best to you on your journey.

    Best wishes from Europe.

    D

    • says

      D,

      Thanks for stopping by from Europe!

      Great names there. I actually owned Total S.A. (TOT) at one point, but I didn’t like the lack of dividend growth. I decided to part ways with that stock.

      However, I do like to keep an eye on Nestle. That’s a company I’d really like to own a piece of at some point.

      I’m glad you find inspiration here. That’s really what this site is all about. Best of luck to you on your journey as well!

      Take care.

  15. says

    Good morning ! Great Pick indeed. Thanks so much for the advice. BBL has a better piotrosky score than BHP, and a better sustainable dividend (higher dividend too). don’t know how you found it, it escaped from my radar. As an old english teacher told us: there is always somebody smarter than you, and must admit that in many cases you are.

    • says

      Aspenhawk,

      Good evening to you!

      BBL is a gigantic company, and like I said above that kind of scale is a huge advantage in this type of business. Again, it’s not a holding I’d like a great deal of my net worth in due to the cyclic nature of commodities, but I do think the valuation makes sense here. I don’t mind a small amount of exposure to base materials.

      Thanks again for your support! It’s great to have readers like you. Stay safe over there.

      Best regards.

  16. says

    Curious to get your opinion on Harris Corp (HRS) at the moment. It’s currently just above the $41 mark with a 3.6% dividend yield. Thanks

    • says

      $25,000,

      I first purchased HRS shares in the mid-$30′s and would love to do so in that range again. Analysts are forecasting anemic returns for the next couple years, and HRS has been releasing guidance that isn’t very wonderful. That being said, it’s still a business I’m a fan of and if it continues dropping I would consider picking up more. Obviously with the U.S. government being their main customer and defense spending being cut as part of the budget sequestration, business may be a bit slow over the next couple years. Quite a few of the major defense companies are attractive right now.

      Best wishes!

  17. says

    I have my eyes on Lorillard and Lockheed Martin. The size of the yield and growth rates they have been averaging make them pretty appealing to me. I’ll just have to see how I can fit them into the portfolio, if at all!

    • Anonymous says

      The yields look great. I personally prefer MO and/or PM within the tobacco space. If you do not mind semi-annual dividends British American Tobacco and Imperial Tobacco are worth looking at.

    • says

      Integrator,

      Thanks for stopping by!

      I like Lorillard quite a bit, and increased my position not that long ago. Lockheed seems like a company I’d love (biggest in their industry, sell a necessary product), but I’ve been concerned about debt and unfunded pension issues. Overall, however, Lockheed is very compelling with that high yield and strong DGR.

      Take care!

  18. TiglatPileser says

    BHP Billiton sound very tempting I have to admit after reading your article – I haven’t had them on my screen so far. Still considering a buy after I read your comment and an analysis by Dividend Growth Investor who rated the stock a Hold only. For the moment I might add some K+S (http://en.wikipedia.org/wiki/K%2BS) the German fertilizer company. I have wanted to get into the potash producers for a long time because this is an industry with a kind of oligopoly-structure that should have immense pricing power in the long run. What had prevented me from investing so far was the usual low dividend yield and excessive management compensation eg in the case of the Potash Corp of Saskatchewan. However after their price has fallen one might reassess the impact on the value of the options granted so that the compensation doesn’t look that disproportionate any more. For the time being I am watching companies like the Potash Corp or Mosaic however, adding K+S which offers a more decent dividend yield.
    Considering Microsoft for quite a while now – but what prevents me from stepping in is their long history of wasting money on ill-managed aquisitions, exaggerated management compensation and so on. A cash cow is of no use for the owners/shareholders if most of the money is not given to them via dividends but invested – rather wasted – in futile projects.

    • says

      TiglatPileser,

      Well, if you’re looking for potash exposure keep in mind that BHP Billiton is currently building what will be the largest potash mine in the world – the Jansen potash mine.

      I’ve been mixed on MSFT for a while too. Cash cow business with solid entrenchment with MS Office and the like, along with potential growth in the cloud, but the lackluster management moves (bad acquisitions) and lack of innovation has kept me away so far.

      Best wishes!

  19. says

    BHP shows 2 things I like: dividend yield over 4% and a payout ratio under 5% :-)

    I think it’s a good buy :-)

    I’m currently waiting on the sideline for my next purchase as I am waiting for a stock correction or roughly 10%. It seems we are about to see it but for some reasons the stock market always find a “good” reason to bounce back lately. I hope earning won’t be too good for MCD so I can add it to my portfolio!

    • says

      Mike,

      Thanks for stopping by!

      The dividend yield with BBL/BHP is compelling to be sure. However, the payout ratio is well above 5%. Per Morningstar TTM EPS of $5.79 the payout ratio is somewhere near 40%, which is still very good.

      MCD did have a nice little dip today. IBM really dropped. That’s enticing.

      Hope all is well!

      Best regards.

  20. says

    Interesting purchase. I see you’ve been expanding into basic materials with APD and BBL — some good diversification there. It’s been at least a year since I last looked at BBL; it might be worthwhile for me to take a closer look, although I am a bit wary about commodity-based businesses.

    • says

      DGM,

      The expansion into basic materials wasn’t really planned this way, but I’m opportunistic. BBL is down over 22% and the S&P is up over 9% YTD. That’s a full 31% spread that I simply cannot ignore.

      I’m as wary as you are about commodity-based businesses. But the significant underperformance, great entry yield, solid dividend growth history and size/scale of the business is compelling.

      Best wishes!

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