|European or U.S. company?|
Lately, I’ve been just as amazed as many of you. I continue to watch the stock market seemingly rise day after day, often breaking new records in the process. That leaves a value-focused dividend growth investor like me scratching my head, wondering how I’m going to put new capital to work when attractive opportunities are few and far between.
First, it should be noted that I believe in dollar cost averaging my way into the stock market and individual positions. I believe that timing the market is useless at best, and harmful at worst. Rather than try to time an entire market, I try to “time” individual investments whereby I invest fresh, available capital in what I believe is the most attractively valued security or securities while also considering portfolio weight and objectives.
When scanning for potential investments I consider my own portfolio to be the best possible screening tool. If I’ve done the research necessary to invest my hard earned cash into a select pool of equities, then I consider a wise decision to revisit that pool as often as possible. However, like the general market many of the companies I’ve already invested in have advanced to the level where I consider them less than attractive. And the few that I do still find relatively attractive, like BP Plc (BP), International Business Machines Corp. (IBM) and Aflac Incorporated (AFL), are already represented at weights I feel comfortable with. I’d rather not overexpose myself to one company and reduce the effects of diversification only in the name of value if I can help it. However, I would consider temporarily increasing the weighting I have to a particular company beyond my normal comfort zone only if I could find no other opportunities. I would then simply prefer to allow the rest of my portfolio to “catch up” and reduce this outsized weighting over time.
So, to broaden my search I’ve decided to look outside my fine pool of equities to see if Mr. Market is offering any decent deals on new investments. Although the two investments I’m going to present below aren’t “steals”, I find both of them attractively valued at today’s prices based on all known quantitative fundamentals and qualitative qualities. I’m likely going to invest in one of the two companies in the coming days, pending either mania or depression from Mr. Market.
Unilever is a global consumer goods company. They operate primarily in four segments: Personal Care, Home Care, Food and Refreshment. They sell products in more than 190 countries. Food and Refreshment accounted for 47% of 2012 sales, while Personal Care and Home Care accounted for 53% of sales.
Unilever is one of those great companies that I haven’t yet been able to get my greedy little DGI claws into yet. I’m not sure how I was able to build a portfolio of 42 positions and not yet include the likes of this company, but that will likely soon be rectified.
This company has fourteen $1 billion brands, some of which include: Dove, Axe, Hellman’s, Lipton and Magnum. They offer a #1 global position in product categories like ice cream, dressings and deodorants.
Growth has been a bit of a mixed bag over the last decade. From 2003-2012, revenue has grown at a compounded rate of 2.23% annually. But while it looks like the Great Recession took its toll on the company, they’ve been strong out of the gate. Revenue has risen from $55.3 billion in 2009 to $65.9 billion in 2012. Earnings per share has a CAGR of 7.53% over the same time period listed above.
Obviously, one item of special interest to me is the dividend. Unilever has paid dividends since 1937, and has an active record of increasing the dividend. UL stated its dividend policy back in 2009 as such: “Unilever’s policy is to seek to pay an attractive, sustainable and growing dividend to shareholders.” They switched from a semi-annual dividend to a quarterly payout when the new dividend policy was announced, and since then the company has been true to its word. The dividend for the UL ADR shares are pegged to the pound sterling, so U.S. dollar payouts fluctuate a bit based on currency conversions, but the 2010 payout totaled $1.13 per share. Based on the last quarterly dividend, the annual payout amounts to $1.47. Fairly impressive growth over such a short period of time. Based on the current payout, shares yield an impressive 3.7%. The dividend is currently well covered by both EPS and FCF.
UL sports an attractive balance sheet with a debt/equity ratio of 0.5, and long-term debt has been sustainable over the last decade. The company is also actively interested in reducing its carbon footprint and improving the life of people around the world, including its customers. You’ll find metrics including greenhouse gasses emitted from production and gallons of water used in addition to the standard numbers like products sold and sales growth.
Shares are currently priced at a P/E ratio of 19. Again, not a steal. However, an investment in UL offers access to many fantastic products like Ben & Jerry’s, Lipton Tea and Axe which are aggressively promoted in emerging markets around the world. Performing a Dividend Discount Model analysis using the current dividend payout and slapping a 10% discount rate and a long-term 7% growth rate gives me a fair value on shares of $52.43. This means I’m looking at a fairly attractive margin of safety on shares here, and the numbers make sense as S&P Capital IQ is predicting a 7% growth in EPS over the next three years.
Target Corporation (TGT)
Target is a retailer that operates in the U.S. and Canada. They operate in two segments: U.S. and Canadian. They’ve paid a dividend every quarter since going public in 1967.
While I’ve always preferred to invest in companies that produce the products that people all over the world purchase, investing in the retailers that provide access to these products also makes sense if the valuation is attractive. Currently, I’m only invested in Wal-Mart Stores, Inc. (WMT) as far as retailers go, but TGT makes sense at today’s prices.
TGT is currently priced at a P/E ratio of 15.75. Shares yield a lowly 2.63% here, but dividend growth has been particularly robust with this merchandiser; they’ve raised dividends for the last 46 years, with a 10-year dividend growth rate of 18.6%.
Revenue has grown by a compounded annual rate of 7.53% from 2003-2012, while EPS has a CAGR of 8.76%. While we can’t make new money off past growth rates, S&P Capital IQ predicts a EPS growth rate of 12% over the next three years. Not too shabby.
Target is looking to aggressively expand in both grocery and Canada. They plan to open 124 stores in Canada during this year. They’ve opened 68 thus far, passing the half-way mark. While for now expansion is reducing margins and EPS expectations due to costs relating to opening new stores and furthering the operations in a lower-margin grocery business, the hope is that these moves will drive above-average EPS growth in the years to come.
TGT remains a good steward of shareholder capital. The balance sheet is attractive with a deb/equity ratio of 0.8. They continue to aggressively buyback shares, purchasing 13.3 million shares in the second quarter of 2013 alone. They also continue to reward loyal shareholders with above-average dividend growth as discussed above.
Target is seen as an upscale competitor to the likes of Wal-Mart and the dollar stores. However, competition remains strong among retailers and this is unlikely to abate anytime soon. Due to this, seeking a margin of safety on shares is imperative. I performed a Dividend Discount Model analysis on shares, and used a 10% discount rate and a 8% growth rate (to account for the higher expected growth) and received a fair value on shares of $92.88. I think it’s fair to say that paying today’s prices of ~$65 per share offers a long-term investor an attractive entry point, although only with the knowledge that EPS growth may slow in the short-term due to aggressive expansion into grocery and Canada.
These are a couple of new investments that look attractive to me at today’s prices. I’m considering one of the two companies (possibly even both) based on what prices do from here over the next few days or so. I think both would fit well within my portfolio and offer me further diversification and exposure to great companies with rich histories of rewarding shareholders. Furthermore, both companies have vastly underperformed the S&P 500 over the course of 2013; UL is up some 2.69% YTD and TGT is up 10.6% YTD vs. the S&P 500’s +24% YTD performance.
How about you? Considering either of the above companies, or any others at today’s prices?
Full Disclosure: Long BP, IBM, AFL, WMT.
Thanks for reading.
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