Recent Buy

I’m confounded lately. The S&P closed at an all-time high this past Friday – finishing at 1,759.77. An incredible run so far in 2013 has the index up 23.4 percent YTD. Although the broader market’s valuation doesn’t necessarily impact my investment decisions directly, a rising market has a way of lifting all boats within the tide. So I’m faced with a portfolio of high quality assets that are currently trading for prices a bit frothier than what I’d be willing to pay if I had to buy them today. I’m glad I started investing in 2010!

However, back to my state of mind. I’m confounded because while I’m a bit leery of investing any fresh capital right now due to my cautious outlook in light of where the broader market is at, I’m also confronted with the fact that my overarching goal of achieving financial independence by 40 years puts me in a position where I’m inclined to keep purchasing high quality equities as often as I can which keeps my compounding snowball of wealth rolling downhill at the fastest pace I can muster.

And so I recently chose to add just a little snow to that fairly substantial snowball. A broader market pullback may melt a little off the top, but I’ll just pack in fresh snow flakes and keep on rolling. Besides, the larger the snowball gets the more snow showers I can expect in the future via dividend income; bring on the clouds!

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 20 shares of Baxter International Inc. (BAX) on 10/25/13 for $65.22 per share.

This purchase comes not long after I initiated a position in Baxter at the end of September – for $66.60 per share. The fact that BAX declined a bit since I initiated that position even while the S&P 500 is up gave me a nice chance to average down and add to my burgeoning position with this global healthcare company.

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.

Not much has changed since I initially invested in Baxter. The company released third quarter results on October 17 (read the transcript here), and it was a nice quarter from where I’m standing. Earnings were adjusted downward because of a $0.20 charge for costs related to the acquisition of Gambro AB. Factoring that out, EPS was $1.19 – up from $1.06 a year earlier. Sales rose 9%, in line with expectations.

I can’t figure out why the market continues to punish BAX, but I’m glad it’s occurring. Factoring in dividends, BAX is basically flat for the year. When you have a high quality, diversified and global health care company underperforming the market by a margin that wide the value investor in me is sure to take notice.

Fundamentally, the company remains extremely sound. From 2003-2012, revenue has grown by a compounded annual rate of 5.3%, while EPS has a CAGR of 11.9%. The dividend has also grown in spectacular fashion, and BAX sports a 5-year dividend growth rate of 16.4%. Not too shabby. On top of that, BAX is also committed to returning value to shareholders via the share buyback program: they spent $1.5 billion on shares in 2012. The balance sheet also looks good, with a debt/equity ratio of 0.8.

I think BAX stands to do well from here. The fact that many of their products focus on life-threatening and chronic medical concerns means that demand should remain strong for what the company manufactures, even as healthcare reform takes hold. Demographic changes also provides a tailwind for the company, as does continued international exposure. Overall, I’m quite pleased with being able to pick up additional shares in BAX at today’s prices – especially in light of the otherwise lack of value in the market. Of course, risks include potential liability from malfunctioning products and increased competition.

BAX currently trades for a P/E ratio of 16.55. Looking at the future growth of the company, I think today’s price represents fairly decent value. S&P Capital IQ predicts a three-year compounded annual growth rate of EPS to be 8%. I valued the shares using my typical Dividend Discount Model analysis and used a 10% discount rate and a 7% long-term dividend growth rate. This gave me a fair value of $69.91. I’m happy receiving a small margin of safety on a low-risk company with an outstanding track record.

The dividend appears to be sustainable with a payout ratio of 49.5%, and I anticipate the company will continue growing it from here. The entry yield on my purchase is 3%.

This purchase adds $39.20 to my annual dividend income based on the current quarterly payout of $0.49.

My portfolio still has 42 positions, as this was an addition to an existing investment.

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 $74.30.

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

Full Disclosure: Long BAX

How about you? Deploying any capital in today’s expensive market?

Thanks for reading.

Photo Credit: Stuart Miles/FreeDigitalPhotos.net

Comments

  1. Anonymous says

    Hi DM,
    I was thinking the same the other day – glad I started investing 2 years ago. The Norwegian Sovereign Fund (one of the largest with $500bn assets) is not purchasing further equities as they believe a market correction is due.

    However, I did purchase IBM last week at a near 52 week low. Do you have any thought’s on Nestle ? Its the largest holing in the Norwegian Sovereign fund at $40bn of shares !

    Reg, Jon, London

    • says

      Jon,

      Thanks for stopping by.

      I can’t disagree with what that sovereign wealth fund is doing. Holding off on equities right now isn’t a bad idea. However, it’s a bit different when you have billions at your disposal – I have just a couple thousand. I’m a bit confounded, as I alluded to above. It’s tough to buy anything right now, but I’ve only got about 9 years to build up enough income to live off of.

      Nice buy on IBM. I was looking at it strongly, and considering adding. However, it didn’t drop enough below my purchase price to compel me to add. I was looking for it to drop below $170, and then I was going to pounce. It never did.

      I’m a big fan of Nestle. Like most consumer companies, it’s pricey right now. I hope to be a shareholder one day. However, for U.S. investors there are drawbacks like the annual dividend and heavy dividend tax withholding.

      By $40 bn did you mean kroner? That would equate to around $5 billion U.S. dollars, correct? A pretty big position.

      Best wishes!

    • Anonymous says

      Hi DM,
      Schwab told me that the Nestle ADR shares attract a 15% withholding tax on dividends. I checked this out because the 35% tax is too steep for me. Ticker symbol is NSRGY:US. Your correct, the Norwegian fund holds 40bn Kronos of Nestlé.
      Reg, Jon

  2. says

    DM,

    Like the BAX purchase. I brought it up to about a 2.5% weight so I could probably add a bit more since I feel it’s one of the better values that’s out there. Honestly I thought it was closer to a 3-3.5% weight. I’m sitting on a decent amount of capital right now and I’m thinking of picking up some shares in PEP next week to establish a position even though it’s not at the greatest of values and then look to average down at better prices. WMT is another but I’d like to see it closer to $74. I’m getting antsy to make a few moves so we’ll see what happens. I’ll probably pick up a few shares in something next week.

    I missed out on having free capital before the government issues by about 3 days so I couldn’t buy anything. I kept hoping that we’d see some kind of pullback in the week leading up to the deadline but I guess people are starting to realize this is business as usual for our fearless leaders.

    • says

      Pursuit,

      Thanks. I’m glad you agree with me in regards to the valuation on BAX. I think it’s relatively attractive, especially after the closing of the Gambro acquisition. They can move forward and I think the business looks strong.

      I wouldn’t mind buying more WMT, however like you I’d like to see it a bit lower than where it’s at now. $74 or less would be a nice spot.

      We’ll see what the rest of the year brings us. I still can’t believe the S&P 500 is up so much this year. It’s really insane when you think about those numbers against long-term averages. It really just can’t continue from here. Whether it just flattens out for a while or corrects aggressively is really the question. History would say it corrects aggressively because humans tend to overreact to the upside and the downside.

      Best regards.

    • says

      FFdividend,

      Nice buy on ARCP. I really like it. It was actually one I was thinking about, but then it popped after the COLE announcement. I like the $1 dividend idea! My YOC is rising quite quickly with this one.

      Take care!

  3. says

    Hi DM,
    The broad market looks a bit frothy for sure. The thing I can’t figure out is why everyone is so bullish…..at least everyone else I know. I’m sticking to strong brands that I preceive to be shareholder friendly. The most recent stocks I bought we IBM (at $175) and Coke (around $38), but I’m keeping lots of powder. Someday we’ll be rejoicing the correction…..someday
    -Bryan

    • says

      Bryan,

      I agree with you. I’m also not sure why everyone is so bullish. As soon as tapering hits we’ll see who’s swimming naked.

      I remember writing an article a little while back expounding on why I recommend caution right now and there were many people calling me crazy. While I still enjoy purchasing high quality equities regularly because my asset accumulation phase is likely going to be short, that doesn’t mean that I’m at all condoning what’s going on right now. I’m actually being a little more aggressive than I had planned to be, and that’s only because I spot the occasional value.

      Nice buys on IBM and Coca-Cola. Solid brand names with great assets. They’re not going anywhere. I was watching IBM closely and thought it might teeter to $170, but it didn’t happen. If it falls a bit more and gets close to that $173 mark I might get really interested again. CSCO is also on my watch list in tech.

      I certainly hope we see a correction. Like I said above, the market really can’t go much higher than here based on corporate earnings. You’d have to have a massive P/E expansion which would create a bubble. Those never end well. I don’t know what’s going to happen because people like to create hysteria and panic.

      We shall see!

      Best regards.

  4. says

    The market is going incredibly bonkers right now. I don’t even know what to think when watching things continue to just keep going up, up, up. This year will definitely be a year we look back on well down the road.

    As for the purchase, I think you are getting a solid and stable company with room to continue growing distributions quite strongly. I wouldn’t anticipate 16% a year, but 8-10% is certainly reasonable given the revenue and EPS growth.

    • says

      w2r,

      It’s been an incredible year. Obviously, these numbers are way above the long-term average so it has to end at some point. When the ride ends, it could get bumpy. I’m just trying to hold off from being too aggressive with fresh capital so that I can take advantage of whatever downturn we might see.

      I agree with you. I don’t think we’ll see dividend growth in that range because it has outstripped earnings growth, but I think high single-digit growth combined with a nice entry yield should make for 10% returns or more.

      Best wishes!

  5. says

    DM, it looks like a great buy. I just read about BAX on another blog and thought that it could be a great addition to my portfolio and here we go, you purchased it.

    What do you think about the market? I recently read the market will see next 5 years of bull run before the next recession comes. Seems very optimistic to me.

    • says

      Martin,

      BAX has been flying under the radar for a while now, and still does to some degree. I think the growth and valuation make sense here, but of course a strong broader market correction could bring shares down even further.

      I think the broader market is modestly overvalued here. I don’t think it’s in any kind of bubble territory, but I think a 10% correction or so would be quite healthy and bring valuations down to reasonable levels. Whether or not we’ll actually get that remains to be seen. I think tapering will likely be the first catalyst for such an event. Corporate earnings have been strong coming out of the Great Recession, but certainly that’s been helped by increasing margins and cutting costs. That can only go so long before you need real growth. It should be an interesting 2014. I think there’s a lot to be excited about: all-time high earnings, growing middle class around the world, energy renaissance here in the U.S., etc. However, you also have this market propped up by easy money, so the capitalist in me would prefer a fair marketplace. We’ll see what we get.

      Cheers!

  6. says

    Good post Dividend Mantra. The markets are doing good right now which is easy on the mind with the portfolio balance going up and up. On the flip side it makes it more difficult to find good dividend paying companies trading at attractive yields, but not impossible. The S&P 500 is up over 80% in 5 years and up over 20% YTD. I am currently building up my cash position waiting for some type of pullback.

    • says

      Investing Pursuits,

      Haha. You’re right. It’s easy to become complacent right now and pat yourself on the back. Anyone can be a great investor when the market is up almost 25% YTD.

      I can’t blame you for building a cash position. I have a small cash position that I could use if we get a severe correction, but the nice thing about living frugally is that the spread between income and expenses allows a cash position to be rebuilt quite quickly.

      Best of luck out there!

      Take care.

    • Anonymous says

      Yep but then again for example KMB was up in $106 in April, went down to $92 in September but it’s now back over $106…maybe that was the “correction” everyone was waiting for! Road is clear for +$150 :)

    • Steve says

      I agree. Look at the charts. Most everything was down through September/October and is now heading up again. Although we didn’t get an extreme pullback, we did get a discount of about 4% on the S&P. Some stocks went lower and some didn’t. I think holding cash hoping for a pull back is generally a losing proposition. It is an attempt to time the market hoping to catch the “big one.” The challenge is predicting when it will come. I just continue my buying program each month. Sometimes I buy when stocks are rich (like now) and sometimes I catch the dips (as I did a few weeks ago). Either way, it averages out and is generally the best strategy for the accumulation phase of DGI.

    • says

      Anonymous,

      I like TGT. I think it’s a great retailer. I remember looking at it not long ago and the numbers looked great. They’ve had some difficulty competing up in Canada and the expansion of grocery has hit margins. But, overall, I think the chic retailer fills a nice niche and should do well over the long haul.

      Best regards!

  7. Anonymous says

    Why double down your position in BAX? Why not double down on your position in IBM? Should other investors also stay away from IBM right now? Your insight would be appreciated. Thanks!

    • says

      Anonymous,

      Great question there.

      I was looking at IBM quite strongly. It actually came down to IBM or BAX for me. I was waiting for IBM to break near $170, but it never did. I didn’t chose IBM only because I’m not quite sure I want to increase my exposure to tech. I’m simply naturally a bit shy around tech, and I don’t want to have a large exposure to the sector in general. I chose BAX because I want to increase my exposure to healthcare, the company has had healthier revenue growth, a product line I can get behind and a larger entry yield. IBM is still on the list and if it shows continued weakness I may just go ahead and buy a little more next month. However, I still don’t want IBM to be much more than maybe 2% or so of the portfolio. It’s a great company, but I’m just not a fan of tech in general. I think I’d like tech to comprise about 5% or so of my portfolio over the long haul.

      Best wishes.

  8. says

    “Recent Buy” – my two favorite words on the Dividend Mantra blog. Way to go keeping the purchases going. I’m in a similar spot to you, prices are high but still picking up those equities which are relative values (and even a few that are not since the buying can never stop). It’s all about adding to that snowball as it compounds! Wishing you a super weekend.
    Best,
    Ian

    • says

      PPC Ian,

      Ha! Glad you like the ‘Recent Buy’ posts. They’re some of my favorites to write. These and the ‘Dividend Income Update’ posts are my favorites because they show that compounding snowball rolling downhill ever faster. :)

      I’m having a nice weekend, even though I had to work yesterday. :(

      Hope you enjoyed your weekend as well!

      Best regards.

  9. Julian says

    I’ve been looking at IBM, TGT, and BAX during the past two weeks. After more research, I eventually eliminated IBM and as of this past Friday I had my heart set on starting a position in TGT. Unfortunately, this post came along and now you’ve got me flip-flopping again. ;)

    At the same time, I’ve been starting to wonder if now is a good time to be investing at all. Granted, the general wisdom is that it’s impossible to time the market. Still, QE is bound to end at some point, right? And isn’t it also true that a correction in the broader market will take down ALL stocks regardless of fundamentals, given that short-term share prices are dominated by fear and emotion? If this is the case, I’m thinking it might be smarter to sit pretty and save our capital so we can deploy it when the Fed’s done injecting steroids into the market.

    Love the blog. Interested in your thoughts.

    • says

      Julian,

      TGT also looks good. As I commented above, there are some things to like as they have a history of operational excellence and a dividend growth record to envy. Unfortunately, they seem to be having issues being competitive up in Canada and the expanding grocery business is having a negative effect on margins.

      As far as holding vs. deploying capital this is always tough. It’s especially difficult in today’s environment because you have the Fed artificially inflating the market with cheap money. The capitalist in me cries foul, but what am I supposed to do? Not buying means I can’t increase my dividend income, and I can’t continue compounding my growth, but also means I have spare capital for the day *when* the market declines on tapering news. But the *when* may take quite a while, and the market has a habit of reacting in strange ways.

      My recommendation is to buy less aggressively right now, and only buy when the valuation makes sense even when factoring in a 10% drop or so. This way you’re still increasing your dividend income and your ability to compound your portfolio, but still have a little cash on the table for better opportunities that should eventually come.

      I hope that helps!

      Take care.

  10. says

    Solid purchase, I see some value left with Baxter. I believe BAX still has a double digit margin of safety which is pretty rare right now. I’m finished putting new capital to work this month, but am looking at TGT, ABT, and WMT as potential November purchases. I hope those particular stocks drop a couple bucks, but who knows right? I’ve been waiting for that elusive correction all year…

    • says

      Compounding Income,

      I hope those names drop a little bit as well! It’d be nice to see things cool down a little and see where the dust finally settles. I don’t know what we’re getting, but I anticipate our best shot at cheap stocks again will be when tapering begins at a substantial rate.

      Happy shopping! :)

      Take care.

    • says

      FabSavings,

      It seems TGT is quite popular! I like TGT as well. It would make a nice compliment to my WMT holdings.

      It’s tough to know what to do with inflated equity prices, but I just can’t help but stick to what I know best. I set up a plan of attack a few years ago and vowed to stick to it, and so far I have.

      Best wishes!

    • Steve says

      Although WMT has the edge as a company, I prefer TGT management style. Walmart has lost sight of its founding principles. Now it sells cheap junk, treats their employees horribly and seems unconcerned with customer satisfaction. Last year they cut employee hours to cut costs but found money to pay the CEO a 2 mil. bonus. The only reason they are still doing well is their overwhelming control of the market and the fact that most middle class Americans can’t afford to shop at places like Target and Publiks. I’ll choose TGT over WMT for my portfolio any day of the week.

    • says

      Steve,

      I don’t know if I’d classify what WMT sells as “cheap junk”. They sell essentials, and they sell a ton of merchandise. Some of it is going to be of higher quality, and some of it not. The fact that they are cheap is what lends itself to its dominance. I think anyone can appreciate quality food, electronics, housewares, etc. for a low price. Conversely, I don’t think everything sold at Target is somehow superior to what’s sold at WMT. I think they’re just different. I think TGT tends to sell stylish cheap stuff and WMT is just aiming to sell you the cheapest good in that category. That’s just my take on it.

      As far as compensation and what not, I never in my life thought that working at McDonald’s at the front counter or stocking groceries at WMT was the path to riches, and those that do are sorely mistaken. I certainly feel bad for those that can’t make enough to live off of, but at the same time life is all about choices. If your employer isn’t paying you enough, then it’s probably time to move on out.

      Best wishes!

    • says

      I have found one has to be selective in purchasing at WalMart. They do sell things like “bargain” versions of products, even from well known brands (making deals with these companies to produce Walmart-specific items that cost less than the vendor’s typical products), and these items can turn out to only be bargains in the short term, before they wear out. Alternatively, there is also plenty of stuff sold there that is exactly the same product sold everywhere else, and at a lower price.

      I do shop at Walmart occasionally, but the shopping experience often has enough negatives (items out of stock, store messy, slow checkout lines) that I will usually opt for a competitor like Amazon, Wegmans, Target, or Costco.

    • says

      Unknown,

      Interesting thoughts there. I agree with you in regards to being selective. Although I would say that one must be selective from most retailers in general.

      I’ve found that the Wal-Marts I visit are actually usually quite clean. I especially find this true at the Supercenters. Some of the older, smaller Wal-Marts appear to be particularly guilty when it comes to messy stores and unkempt shelves. But these are few and far between in all the places I’ve lived. Of course, this is just anecdotal evidence. However, I think the operating results bare some truth.

      I don’t think retailing is a zero-sum game. There are more and more people born every single day and there is still plenty of growth ahead. I don’t see TGT as WMT’s big worry. I rather see Amazon and the dollar stores as being dangerous for different reasons.

      Best regards.

    • says

      AAI,

      BDX is a great company. I missed it in the mid-$70s and I regret that. BDX makes a nice addition for me, as it compliments MDT and JNJ nicely. I hope to eventually own BDX and round out the portfolio.

      Best regards.

  11. says

    Nice purchase. I glanced at BAX last month and your purchase triggered me to do more research. I might have some funds ready this month to make a purchase and want to initiatie a position to increase/start my exposure in the healthcare sector.

    • says

      Dividend Dream,

      I’m glad my post inspired you. BAX looks pretty solid here. I’m happy initiating a position and watching it from here. I think the company is poised to do well over the long haul. We shall see. :)

      Cheers!

  12. Brandon says

    Hello, I’m curious as to how you find out what the Morningstar/S&P Capitol IQ fair value ratings are. Do you subscribe to the paid “premium” services these sites offer or is there a way to find out their fair value ratings that the general public would have access to? Thanks!

    • says

      Brandon,

      Morningstar’s fair value assessment is available to the public through the ‘Industry Peers’ tab at the main quote screen.

      S&P Capital IQ is available to me through my brokerage (Scottrade). I’m not sure if the public can access it or not, but it’s free of charge for me through the research tools.

      I hope this helps!

      Best wishes.

    • Brandon says

      Thanks for that info. Do you think any of those paid services are worth it? I did notice that Dividend Growth Investor seems to post fast graphs when he makes a purchase. Do you use those or are you familiar with them?

    • says

      Brandon,

      I think the paid services can certainly fill a role. I hear nothing but great things about the F.A.S.T Graph services, and that’s something I would personally consider. I haven’t yet used it, but it seems to do a great job at visually displaying valuation and earnings history, among other great stats. In the end, it would just be one more tool in the toolbox.

      Best regards.

  13. Anonymous says

    I know it “feels” like the market is over valued. But there are plenty of indications that its actually “fairly valued” at its present point. I’m not saying go nuts on a buying spree but don’t let your free cash sit there and languish either. As a DGI i enjoy buying on the pullbacks and corrections but have run into instances where i’ve let cash sit there “expecting” a pullback that never came. I think you have the right approach focusing on valuation of individual companies and thinking “long term” so to speak.

    See the recent S&P chart in this article if you were curious:
    http://www.fastgraphs.com/_blog/Research_Articles/post/2013-10-17-chuck-carnevale-trying-to-beat-the-market/

    • says

      Anonymous,

      Thanks for stopping by. I appreciate your thoughts!

      I would never go by “feeling”, but rather I think the market is modestly overvalued based on a number of different metrics. I typically use Shiller P/E and total market cap-to-GNP, which both show, on a historical basis, we’re a bit high here. Again, as stated above I don’t think we’re in any type of bubble territory, but I see more downside than upside, generally speaking.

      However, I don’t invest in the entire market; I buy individual securities and value them based on individual merit. Some are pricier than others, but I don’t see any that are particularly “cheap” right now. That being said, I think there are about a million worse places you can put your money than in stocks.

      Cheers!

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