Recent Buy

Just what us value investors were all waiting for! The S&P 500 is down some 3.9% over just the last couple days after Ben Bernanke, the Federal Reserve Chairman, hosted a news conference discussing the possibility of cutting back on some of the stimulus to the economy via quantitative easing. Of course there’s a lot more going on. There are concerns over slowing growth in China, the rising of interest rates and a broader stock market that was already a bit frothy anyway. The funny thing is that investors seem to be forgetting the reason why the Fed is discussing slowly scaling back on stimulus: the economy is improving. However, I’m glad that Mr. Market is so short-sighted. Makes for great days like today when prices are falling and I’m shopping!

There was a lot of action going on today. I chose to ignore all the noise and narrow my interest on some of the companies that I’ve been focusing on lately. It was a tough call, as there were a few companies that looked fairly appealing today, but ultimately it comes down to having limited capital and making due with such.

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 70 shares of General Electric Company (GE) on 6/20/13 for $23.41 per share.

I discussed some of the reasons I really like GE recently, but I’ll discuss some aspects of the company in greater detail here. Before I begin, let’s keep in mind this company was founded by Thomas Edison and it’s been paying dividends since 1892. Thomas Edison. 1892. Let that sink in for a second.

First, this is probably a controversial purchase for a dividend growth investor like myself, because GE was forced to cut their dividend back in 2009 by 68% from $0.31 per share to $0.10 per share. What was even worse about this cut – ending a 32-year streak of rising dividends – was that management kept insisting the dividend was safe all the way up to the cut. Although the cut wasn’t quite as dramatic as some of the big banks cuts were, it still burned.

The dividend cut was necessary because GE Capital, the banking division within the industrial conglomerate, was causing massive disruptions to the rest of the business due to risky real estate loans. The problem was that GE Capital had become such a large part of the business (upwards of 50% of all earnings at the time) and at the same time real estate had started falling in value, creating a headache for the balance sheet.

But things have changed in the last few years. GE has been focusing on core assets as it sells off non-core businesses. It recently completed the sale of NBC Universal for $18 billion and it’s also reducing the size of GE Capital. The company recently announced that GE Capital would be paying a $6.5 billion dividend to parent GE so as to continue reducing the size of GE Capital as that money will be used to focus on core businesses and returning value back to shareholders. GE plans on reducing GE Capital from about $600 billion in assets it had in 2008 to a goal of $300-$400 billion going forward.

GE, as it stands today, is extremely diversified. While GE Capital still accounts for about 31% of revenues today, the Power & Water (at 19%), Oil & Gas (10%), Aviation (14%) and Healthcare (12%) segments all account for large parts of the revenue as well. 52% of sales come from outside the U.S.

I think that the future of GE looks a lot brighter than its recent past as it focuses on energy infrastructure and away from financial services. GE predicts that about $60 trillion of infrastructure investment is needed worldwide by 2030 to support rising middle class consumers in emerging economies, and they want to be at the forefront of that business. They currently have a backlog of $210 billion, so they’re doing well in that regard.

Obviously, dividend growth is a priority for me. Check this out, from the 2012 Annual Report:

“Second, we are committed to allocating capital in a balanced and disciplined way, but with a clear priority for dividend growth. GE will generate $100 billion for allocation over the next few years, including cash from existing operations, dividends from GE Capital and dispositions. The top priority remains growing the dividend. Since 2000, we have paid out $106 billion in dividends, more than any company except Shell, and more than we paid out in the first 125 years of the Company combined. We like GE to have a high dividend yield, which is appealing to the majority of our investors. We plan to buy back shares to get below 10 billion, where we were before the crisis. We will make significant progress toward that goal in 2013 by allocating a significant portion of the NBCU cash to repurchase our shares. In total, we plan to return $18 billion to investors this year through dividend and buyback.”

It’s not all talk, either. GE has raised the dividend 5 times since the 2009 cut and I believe many more raises are ahead of us. Factoring everything together, I really like where GE is headed. Currently trading for a P/E of 16.25, I think shares are attractively valued here. At $0.19 per share quarterly, the entry yield on my purchase is 3.25%. Not bad. Using a Dividend Discount Model to value shares and using my usual 10% discount rate and 7% long-term dividend growth rate I get a Fair Value of right about $27 per share. I think the company is attractively valued here, and I was looking for a price below $23.50 to purchase shares and that’s exactly what I did.

This purchase adds $53.20 to my annual dividend total based on the current payout. I just missed the next dividend payout, but the drop in share price today more than made up for that.

I currently have 36 positions in my portfolio after this purchase, as this was yet another new high quality investment.

Some current analysts opinions on my recent purchase:

*Morningstar rates GE as a 4/5 star valuation with a Fair Value Estimate of $27.00 per share.
*S&P rates GE as a 4/5 star Buy with a Fair Value calculation of $24.00 per share.

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

Full Disclosure: Long GE

What are you buying?

Thanks for reading.

Comments

  1. says

    nice buy, im kind of frustrated i didnt add to GE back in mid april when they dropped to the 21.50 area and then they shot right back up.

    I’m currently eyeing KO, PG, NSC and BBL. didnt pull the trigger at all today though I got close towards the end of the day. top two contenders are PG and KO seeing as I have no shares in either at the moment which is unacceptable for me. Whichever one I end up buying ill sell a put in the other. the Oct 19 75 strike put on PG for $4 looks awfully nice. Ofcourse I’d like to buy PG for 71 in October, or get paid $400 to wait and see if I can

    • says

      Took2Summit,

      Great list there. BBL is particularly cheap. It’s been absolutely hammered this year. I bought in around $55 a share, which I thought was cheap even factoring in a slowing China. Buying in at these levels would be even better.

      KO, PG and NSC are all high quality companies. Sounds like a great watch list!

      Best regards.

  2. says

    Interesting purchase. I’m not fond of GE for some of the reasons you mentioned (cut their dividend after saying it was safe; a large part of their earnings depends on GE Capital), but it does seem like management is working to right the ship. I do like their recent TV commercials, including the one with the Knight Rider car (KITT) racing against an NSC train and the more recent one with Agent Smith of the Matrix talking about GE’s healthcare technology.

    • says

      DGM,

      Thanks for stopping by.

      Yeah, the commercials are definitely interesting. The one with Agent Smith is particularly entertaining! Good to see GE looking to have a presence on American’s minds again (in a good way).

      I think management is doing a great job righting the ship. Immelt has been vilified, rightly or wrongly, but I think since the crisis he has done a great job of putting GE on a path for growth.

      Best wishes!

  3. says

    Grats on your purchase, you managed to get GE on sale! Recently I made a purchase of my own just a couple of days ahead of the fed news conference. I should have waited I guess because every time Mr. Bernankie speaks the market seems to tank. I’m done trying to time the markets though. I just wait for enough capital in my account to make a purchase and whenever that occurs I pull the trigger despite market fluctuations.

    • Steve says

      I agree. Every time I try to get cute, I get burned. Systematic investing has worked well for me. The hard part is not looking in the rear view mirror and thinking, “if only I had . . .”

      Happy shopping!

    • says

      Captain,

      You know, it’s interesting on the Fed. Actually, I keenly remember the last couple times Ben has spoken the market actually had huge days on the upside. I recall seeing a statistic on it, and I think it actually shows the market having more up days than down days when the Fed releases statements. I could be wrong on that, but I do remember the last few times rolling my eyes because everything popped way up.

      That’s why I don’t bother trying to really time anything. If I find something attractive and I have capital I’m highly likely to buy. If everything is expensive, or I don’t have cash, I’m just as likely to sit out.

      Take care!

  4. Steve says

    DM,

    I’ve already shared that I’m not a big fan of GE but my reasons are not nearly as objective as yours. If they are initiating the turn around you suspect then it should be a great long term investment. I just can’t bring myself to forget their recent past. There are quite a few other companies available where I feel much more excited about their management.

    As far as what I’m buying–that’s a hard one. So many possibilities opened up today after the accelerated selling began. REITs are just getting creamed so I think I’ll probably start there. I’ve owned O for a while and when they started going crazy over the last few months, I initiated a trailing stop loss order on a portion of my shares. That triggered at $54 and change. Boy did that work like a charm!! Like you, I normally don’t sell off shares, even at high valuations, but O was getting ridiculous. I have since used those funds to diversify a bit into DLR and SNH. I especially like SNH because senior care is and will continue to be a major industry. At this point, I’m adding to these positions until they reach my target weighting in my portfolio.

    I wish I had more cash. I’m a teacher so summers are lean for me. I normally don’t invest in July and August but I’m pulling some cash out of savings to take advantage of the sale that’s on.

    Wish I could do more. Times like these are where the real DG money is made!

    Take care and happy shopping!

    Steve

    • says

      Steve,

      Well, that’s what makes it a market. GE isn’t for everyone, and I can respect that.

      The REITs have definitely been creamed. More pain could be on the way with rising interest rates, but if O drops below $40 I’m highly likely to add to my position.

      I agree with you. I wish I could do more as well, but there’s so many stocks and so little capital!

      Happy shopping to you too. Good luck out there.

      Best wishes!

  5. Anonymous says

    GE’s debt is nearly 3x larger than the market cap. I avoid these type of stocks because when the cost of lending increases they will have to slow or cut the dividend (again).

    • says

      Anonymous,

      The cost of capital is going to go up for almost everyone because interest rates are rising. However, GE is focusing less on GE Capital and more on the $200 billion backlog. That’s encouraging.

      Much of their debt is a function of the GE Capital segment and the huge balance sheet.

      Best regards.

  6. Spoonman says

    Congrats on getting GE!

    It’s great to see such a nice market slide. Hopefully this is the beginning of what a lot of DG investors have been waiting for. I hope Mr. Market enters a nice state of depression that leads to another 5% slide.

    Let the feeding frenzy begin!

  7. TiglatPileser says

    I have very mixed thoughts about GE. You have already mentioned the dividend cut but even more important for me is the pathetic use of share repurchases by the company finally redounding to the disadvantage of the existing shareholders. GE is almost a paradigm company that bought back shares when the price was high and issued new shares when the price had gone into free fall therefore diluting the ownership of its loyal shareholders. Because I am very much like you thinking of ownership when it comes to shares and not of speculation, I cannot be content with a policy that is diametrically opposed to that what every rational merchant would do. If buy low and (if at all) sell high is right at the personal level you cannot tolerate the opposite at company level. Or do I get that wrong?

    • says

      TiglatPileser,

      Your comment echoes many of those that don’t really like share repurchases. Reality is that when the economy is doing well, companies are typically flush with cash and anxious to buy back shares. Typically this is exactly when shares are priced higher, so this is the worst time to buy. The times when markets are going crazy and liquidity is hard to come buy is when stock prices are tanking and companies are starving for capital, hence issuing shares.

      It’s not the way any of us want it to be, but many times it happens like that. Also, the recent crisis was unprecedented and GE Capital was geared way too heavily. Not sure we’ll ever see a crisis like that again in our lives, and even if we do GE appears to be making the moves to insulate itself from that kind of danger in the future.

      Best wishes.

  8. says

    I have mixed thoughts on GE. I’m in the middle of doing an analysis on it and I’m not convinced that it’s turned itself around enough to be worth buying. I don’t think it was a bad buy. The company will probably turn itself around and go back to being solid. I guess my feeling is more of a “maybe next year” kind of feeling.

    PS: I love how the market crashed right after I spent the last of my capital this month on DLR. Oh well. If it stays down that will just make the stocks I purchase over the rest of the year that much cheaper.

    • says

      MFIJ,

      I had mixed feelings about GE too, but went into the analysis with an open mind. I was surprised about how good I felt about their future after doing some due diligence on the company. I think the future is significantly brighter than the past. We’ll see how it goes.

      That sucks that the markets have a slight correction after you spend your capital. The same thing happened to me. I dipped into the reserves to purchase GE. I was already technically out of ammo after buying shares of DLR and OKE earlier in the month. I could make one more purchase if I felt compelled, but that would leave my piggy bank completely dry (which I’d rather not do).

      Take care!

    • says

      $25000 dividends,

      Nice buys there. I noticed BNS. It’s about 10% below the price I paid, so I’m actively looking at buying more. I love the bank and their diverse operations. Just so many names out there right now I’m looking at! :)

      Keep up the good work shopping for quality on sale!

      Best regards.

  9. Chad says

    Great buy. Like I said in the comments on your Radar article, I love the stock and it’s one of my biggest holdings. I’m looking at APD, BP, and AFL for my end of the month purchse. Though if GE has another week of falling like it did this week, GE might be my purchase and push my allocation of it to over 6%.

    • says

      Chad,

      Thanks!

      Nice list there. I think BP is a good buy here if you’re okay with the risk. I was actually looking at BP before ultimately settling on GE. I like BP, and it’s very cheap here. However, RDS.B is similarly valued with none of the litigation hangover. I really like all the oil majors. Next month I’d love to pick up shares of XOM, RDS.B and maybe some BP. I can’t make up my mind. :)

      Good luck out there!

      Best wishes.

    • says

      Wallet Engineers,

      Nice buys there. Those are a couple of my favorites.

      I’m also very bullish on PM (and KMI, for that matter), but it’s already my largest position right now with 100 shares so I can’t really allocate any more capital to the company right now. Once it comes down to about 5% or so of my portfolio I’d like to revisit the idea. For a while there all I wanted to buy was PM and I loaded up!

      Take care!

  10. Scott says

    Thank you DM your blog helps me be patient and wait for a good entry.
    Pulled the trigger on PM yesterday in my daughters Roth. Someday she will thank me.

    • says

      Scott,

      Nice buy there. As I mentioned above, I’m very bullish on PM. It’s a cash cow. I definitely agree with you. Your daughter will thank you someday! :)

      Best regards.

  11. says

    Sounds like a great buy. 3.5% starting yield with emphasis in dividend growth? Sounds good to me. I think we all knew a market correction was coming, we’ll just have to see if this is a little more long term or if it’s just a blip.

    • says

      Jake,

      Hard to say what the market is going to do from here. Many are watching interest rates. I’m watching companies and the prices of shares against intrinsic value – basically another way of saying I’m not changing anything. :)

      Take care!

  12. says

    Good buy. GE was actually my last buy! I really liked how GE Capital strengthened their fundamentals in the recent years. Like you said, GE’s revenues are very diversified. In my view, you’re basically buying an industrial index fund.

    Stocks I find appealing right now are the big oil majors, XOM, CVX and Shell.

    I also like Dr Pepper! They’ve been raising their dividend since they’ve gone public in 2008, I like their brand names, the business is returning 100% of the profits to the stockholders through dividends and buybacks, no Europe exposure, so they have a lot of expansion possibilities in Europe. And last, but not least, it’s one of the few consumer staples that’s trading at reasonable PE ratio.

    I think I will initiate a position in this one in the near future.

    Take care!

    • says

      Exponential Dividends,

      Glad to see we’re on the same page with GE! :)

      I’m with you on the oil majors. BP and XOM were vying for my attention before I settled on GE after it dipped below $23.50 in the afternoon. That was the price I was looking for, so I acted on it.

      I’ll have to take a look at Dr. Pepper! Thanks for the info.

      Best wishes.

  13. says

    Thanks for the great post DM ! As a true follower I just bought Fiday 5 minutes before the close O Realty Income. I am slow to decide myself. As to GE I’ve set my mind to try to buy them even lower than 21. Might have them at 19 would be happier. Best thoughts.

    • says

      Aspenhawk,

      Haha! You’re a true follower there! Not long after my late Friday purchase, but you got in at a much better price than I did. The yield is sitting at about 5.25% here. If it dips below $40 I think I’ll have to add. Compelling name there.

      Good luck with the price on GE. If it goes that low I have a feeling I’ll be loading up, as many others will likely be as well.

      Take care!

  14. Anonymous says

    Hey Mr. Mantra!
    Nice buy at a good time!
    Since you ask,I bought for the last 3 days straight, during the carnage. I had been waiting for a slight pullback to average down into some positions if possible. I bought 2 lumps of GE. One I bought on price action into the ex-div date, and caught the dividend at a perfect time. The 2nd buys was the nest day 2.2 percent lower. I was prepared to buy it all at once, but decided, correctly, to split up the purchase. I also bought more RDS-B yesterday in the 55′s. I actually swapped out of KO for part of the purchase. KO and the like, in my opinion are on the way down due to the interest rate structure and our current place in the economic cycle. I should have sold KO much earlier, but you cant win them all. My reasearch shows that RDS is a good buy at my price to hold, and it most likely will move several percent higher in the next month due to buildup into the ex-div date.
    -also, I replied to your post on a book pertaining to Warren Buffet about 2 days ago,and my post has not shown up?
    Just my 2 cents…
    Dave

    • Anonymous says

      No Captain.
      The B shares are what we have to buy for that reason. The A shares have foreign taxes withheld. But I believe you can even get that money back too, but not worth the trouble.However, US taxes are a must. As always.
      Contact your tax professional for all the ins and outs though.(disclaimer)
      Dave

    • says

      Dave,

      Great buys there! Sounds like you received pretty solid prices both on your GE and RDS.B shares. I like the purchases.

      RDS.B is one I’ve been looking at. I’ve been concerned about their margins and the heavy investments on gas that haven’t panned out so far, but the valuation is very, very attractive. As is the yield. $65 seems like a great price here. RDS.B is actually valued similarly to BP, but without the ongoing spill litigation.

      And, yes the B shares do not have foreign taxes withheld because of the U.K tax treaty and the B shares being based out of the U.K. The A shares do have foreign taxes withheld. And it’s always a good idea to contact your tax professional!

      Best wishes!

  15. Anonymous says

    Correction to the above post:
    “The 2nd buy was the next day”
    “RDS was in the 65 range”

    I dont know why this computer acts like this,lol
    Dave

  16. says

    Nice work. Own about 130 shares, enough to DRIP GE every quarter.

    Looking at CVX, COP and WFC. I don’t have any money to invest this month, saving for new purchases for next month.

    Mark

    • says

      Mark,

      Nice! I hope to own 130 shares or so myself very soon. I believe in GE’s future.

      I’m also looking at Big Oil for next month. It was a tough call this time, as XOM, RDS.B, BP and CVX were all on my mind. GE won out, but barely. All fine companies, although BP carries some added risk.

      Best wishes!

  17. says

    While you are looking at Big Oil, would you consider looking into some oil pipeline companies at the same time: Enbridge, TransCanada, Inter Pipeline Fund, etc…I see you already have Kinder Morgan – Pipelines are to some extent less sensitive to the price of crude

    Cheers!
    Michael

    • says

      Michael,

      Thanks for stopping by.

      Great thoughts there. One of the great reasons to own a piece of pipeline companies is because they are less sensitive to the price changes in the underlying commodities that they are transporting/storing. I actually am a part-owner of two pipeline companies. I have shares of Kinder Morgan Inc. (KMI) and Oneok Inc. (OKE). I do like the business model.

      Best regards!

    • says

      Anonymous,

      I don’t frame my purchases around share numbers, because shares are all priced differently. Buying 100 shares of Google (GOOG), for instance, would require a capital investment of over $88,000. Instead, I frame my purchases around the amount of capital I have at the time and trying to reduce commission fees as much as possible. Typically, a purchase for me is around $1,500. That brings my commission fee ($7) down to about .4% of the total transaction.

      Hope that helps!

      Best regards.

  18. says

    Nice buy on GE. I feel like its put it setbacks of 2008-2009 behind it and is well positioned in the energy and infrastructure sectors which should power its growth for quite some time. I’ve been buying Coca Cola and Colgate which I now intend to hold forever as core positions in the portfolio.

    • says

      Integrator,

      Thanks for stopping by. I appreciate your support and thoughts on GE. I agree with you. I think while GE has had some tremendous struggles in the past, no doubt exacerbated by the overvaluation they experienced in the late 90′s and early 2000′s, the future looks bright.

      Sounds like you’ve bought into some very high quality companies there. I noticed CL has been a tad weak since the split, but still a little pricey. That is one company I’d love to be a part owner of one day!

      Best wishes.

  19. says

    I am slightly postponing buys because I believe the market will go lower and the prices may fall lower, so I can get better price on some stocks.

    • says

      Martin,

      You could be right on that. I try not to really time the market like that, but rather instead focus on a small subset of companies I’m interested in and try to buy at intrinsic value or less and go from there. I’m happy if I can get a comfortable margin of safety (say 10% or so) below fair value.

      But I do hope you’re right! Cheaper shares are wonderful.

      Take care!

    • says

      Anonymous,

      I don’t. I’m not looking to sell for a profit, but rather to share in the future profits of a company. I can’t do that if I’m constantly looking at the price of my shares and awaiting an opportunity to sell. Besides, one really big reason I don’t have a trailing stop loss on my shares is due to the likelihood of another “flash crash”. One of those with a tight trailing stop loss and I might be completely out of the market.

      Best wishes.

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