Recent Buy

After my recent purchase of shares in BP plc (BP), you might have thought I was done for the month. I would have too. But I was able to sneak in one more purchase before September comes to a close.

I actually haven’t put that much new capital to work this month, as the BP purchase was solely funded by the sale of more than half of my position in Intel Corporation (INTC). Before that, I had only added to my position in Realty Income Corp. (O) earlier in the month at what I felt was an opportune price.

I was compelled to further add to the portfolio after a stock that had only recently found its way onto my radar dropped by more than 6% in one day. Although a precipitous drop like that isn’t particularly telling by itself, because a stock that is overvalued by 20% dropping by 6% is still overvalued, this particular company wasn’t overtly expensive before the drop and actually fell into what could be deemed a fair price to pay for an otherwise high quality company.

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 Baxter International Inc. (BAX) on 9/26/13 for $66.60 per share.

Baxter is a diversified, global healthcare company. It manufactures and markets medical products for hemophelia, immune disorders, kidney disease, infectious diseases and other conditions. They operate in two segments: BioScience and Medical Products. The BioScience segment accounted for 44% of sales in 2012, while the rest was attributed to Medical Products. They sell products in over 100 countries which are used by hospitals, nursing homes, rehab centers, kidney dialysis centers, research centers, etc,. and continue to focus on medically necessary products and therapies.

Baxter has seen fairly regular and strong demand for its products over the last decade. From 2003-2012, revenue has grown by a compounded annual rate of 5.3%, while EPS has a CAGR of 11.9%. Likewise, dividend have also seen robust growth. The annual dividend was $0.58 per share in 2003. It’s now $1.96 per share. Baxter has been growing the dividend for seven years now, with a 5-year dividend growth rate of 16.4%. BAX is also aggressively buying back shares, amounting to a total of $1.5 billion during 2012. The balance sheet looks fairly healthy, with a debt/equity ratio of 0.8.

This was an attractive purchase for me. My portfolio doesn’t have as much exposure to the healthcare sector as I’d really like it to have, so when I saw BAX take a tumble last week I was more than happy to scoop up some shares at what I felt was an attractive long-term price. I don’t really know why it dropped so aggressively, as there was just minor news regarding an analyst downgrade and a recent minor recall. I’m more than happy to be a buyer when everyone wants to sell a piece of a high quality business like this, especially when the valuation makes sense.

I was anxious to increase my exposure to the healthcare sector, and especially to a medical device maker for a number of reasons. First, the demographics makes sense. Our population is growing older, and older people increasingly have need for medical care and products. In addition, these types of products inevitably find their way to developing economies as healthcare improves across the globe. The other fantastic aspect of a company like Baxter is that its products, once used, must be replaced for the most part. That creates recurring revenue, which explains the relatively smooth growth of their numbers over the last decade.

BAX currently trades for a P/E ratio of 16.5. While not particularly cheap, I think today’s price represents a good time for me to build a position in the company and see where the price of shares go from here. The entry yield on my purchase equates to 2.94%, which is fairly attractive. I’m hoping for further growth of the dividend, and a moderate payout ratio of 49% ensures room to grow the payout.

I valued the shares using a Dividend Discount Model analysis, with a 10% discount rate and a 7% long-term growth rate. This gives me a fair value of $69.91, which allows for a rather small margin of safety. I would have liked to buy even cheaper, but I felt after the significant drop in share price I would enter into an ownership position with a high quality healthcare company that is paying a healthy dividend and shows great potential for growth going forward.

This purchase will add $49.00 to my annual dividend income based on the current payout.

This is the 41st position in my portfolio. I’m on my way to 50, at which point I’ll have to strongly consider whether I want to add any more companies.

Some current analyst opinions on my recent purchase:

*Morningstar rates BAX as a 4/5 star valuation with a fair value estimate of $80.00.
*S&P Capital IQ rates BAX as a 4/5 star Buy with a fair value calculation of $73.50.

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

Full Disclosure: Long BP, INTC, O, BAX

How about you? Notice the big drop for BAX last week? Adding at these prices? 

Thanks for reading.

Edit: Corrected grammar in eighth paragraph.

Comments

  1. says

    Good work DM. Healthcare is a great sector to get some exposure, especially given the demographics in the US, Japan, and Europe. I didn’t notice the move in BAX, but I am hopeful we will finally get to see some volatility in the equity markets. I’m looking to add to IBM, CLMS, AFL and the emerging market ETF I like. As a result of your BP purchase, I have added it to my watchlist. Thanks for the idea!

    You mentioned slowing the diversification at 50 companies. This makes sense and I completely agree, but I was curious if 50 held any special significance. I’ve always been of the opinion that my “40th best investment idea” wouldn’t be as good as my “5th best investment idea”. Therefore I have personally wrestled with the degree to which my holdings should be diversified.

    -Bryan
    fastletter.blogspot.com

    • says

      Bryan,

      Thanks. I’m more than happy to increase my exposure to healthcare. I’d like to expose myself even more from here given the proper opportunities.

      I like your list. IBM was a recent buy for me, and I think it’s attractively valued here. AFL is one of my biggest holdings right now, and although I’m not adding I really see the appeal with this company.

      Regarding your question on diversification, I look at diversification from an income standpoint. I always hear that “best idea” argument (most notably from Buffett), but I don’t necessarily agree. I have 41 companies already and I can name at least 10 right off the top of my head that I think are high quality and I’d love to own a piece of. I know for a fact that there are more than 41 high quality companies in the world that have strong economic moats and have a history of rewarding shareholders generously. I don’t even own dividend growth stalwarts like UL, KMB, BDX, TGT, WAG, NSRGY, GIS, or XOM yet. So, for me I guess I just have quite a few “great ideas”. I don’t think that it’s in order of “first best idea” or this is my “15th best idea”. I just think you want to diversify yourself for income purposes, so that if one investment doesn’t turn out as expected and cuts the dividend your income is still safe and growing. At 50 positions, assuming equal weight, I’d see a 2% cut in my income if one company cut the dividend. Reality is a bit different from that due to different weightings and growth from the remaining holdings, but you get the picture.

      Take care!

    • says

      Jason,
      I thought that was what you were thinking. I totally understand. I’d be careful about KMB and WAG though. Both have disturbing debt trends and although Walgreens is a great company, historically it’s expensive at the moment. I’m looking to buy GIS around $44, although it obviously has quite a bit of commodity risk. Thanks for answering my question. Have a great week.
      -Bryan

  2. says

    I like BAX here and am hoping it can pull back to the low $65 or $64 area to add to my position. Like you mentioned healthcare should be a great placev to invest given the demographics alone. I had picked some up last week just a bit early though.

    • says

      Pursuit,

      I’m with you. The demographic change here in the U.S. allows me to remain pretty positive about healthcare companies in general. Like you, I like the diversified medical companies (like a JNJ) and medical device/product companies (MDT, BAX) more than the drug companies (ABBV, GSK, PFZ).

      I hope BAX serves us well. :)

      Cheers!

  3. Spoonman says

    BP looks like an excellent buy. If I wasn’t so well allocated in the energy sector I would buy it in a heartbeat. However, If the market continues to be richly valued I think I will pursue BP. I may allow my portfolio allocation to go beyond 10% for the energy sector because it’s difficult to go wrong with companies in that sector.

    • says

      Spoonman,

      BP has been range bound for quite some time now. If you’re interested, I don’t expect the shares to run away from you anytime soon. I think BP represents solid value here with a cheap P/E, worldwide exposure, solid dividend and a catalyst (the eventual end of litigation).

      Best regards!

  4. says

    These days it seems hard to find stocks at bargain prices, that’s for sure. I never checked out Baxter, but as some people point out, BP seems cheap. I would say that some of the giant oil & gas companies seems to be fairly low priced at the moment. If you however run out of ideas you can check in my Watch List at
    here, it covers some great companies in Europe.
    You don’t seem to be a fan of European companies, but there is still some at good value out there.

    Keep up the good work!

    • says

      Symphony Investor,

      I don’t mind European companies at all. I’m currently long VOD, BD and RDS.B, which are all based overseas. And, most of the companies I invest in have global operations anyway. I look at the quality of a business and the valuation of shares rather than where it’s based. However, I do try to avoid owning companies based in historically difficult areas politically.

      Thanks for stopping by!

      Take care.

  5. says

    That sounds like a great buy. I think any company in the healthcare sector is a decent buy for the long-term future. The industry has a lot of opportunity in the next 5-10 years. Good luck with the buy!

    • says

      Jake,

      Hard to go wrong owning high quality businesses in the healthcare sector. An aging population and further penetration into developing economies ensures companies like BAX growth for the foreseeable future. :)

      Best wishes!

  6. Anonymous says

    I think 50 stocks is more than enough to keep up with different industries any more and it owns you trying watch it all the time keep buying more of the same what have is a mini mutual fund.Pretty soon that 49.00 income increase will be $52.00 and on and on it goes

    • says

      Anonymous,

      I agree. 50 stocks is about as many as I want to try and track. Even though many of the companies I invest in require little more than a quarterly check-up and the reading of annual reports, extrapolating that out over 50 different positions is time consuming.

      Best regards.

  7. Anonymous says

    DM,

    I enjoy your blog.

    I recently transferred all my investment accounts to Merrilledge where I receive 30 free trades by having balance at $50,000 +. I believe it will save you some bucks.

    Keep it up.

    Best Regards,

    Paul

    • says

      Paul,

      Thanks for stopping by. Glad you enjoy the blog. I’m here to inspire and share, and in the process hopefully learn from others as much as I educate.

      I’ll have to take a look at Merilledge. I do have to diversify brokerages here sooner rather than later, and that’s a name that will definitely be in the mix! Thanks for the suggestion.

      Cheers!

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