Some investors may cite the S&P 500’s monstrous run in 2013 – up some 29.6% – as a reason to build up cash right now and stop deploying fresh capital in the stock market. The reasoning here is that because of the index’s best run since 1997 surely stocks have nowhere to go but down. Luckily, I base my investment decisions around the prices of individual stocks because as a dividend growth investor I’m investing in individual companies. And because of this I still continue to find reasonably priced stocks for long-term investments, even though I also remain cautious about overall valuations.
There’s a few key terms I used in the above paragraph. Notice I used the words “long-term” and “reasonable”.
I think about the long term. When I invest in companies I think of myself as a business partner – a part-owner in the company, because as a shareholder that’s exactly what I am. I don’t invest in the The Coca-Cola Company (KO) at $40, then wait for it to pop to $42 and sell. No, I invest in Coke because I think over the next 20, 30 or 40 years they’re going to sell ever more product to ever more people and likewise grow the top line and bottom line numbers exponentially, which will in turn mean the dividends (as a piece of the profits) they can pay me will increase in turn.
And when I say reasonable, I’m not saying any of the stocks I’m going to list below are “steals” or “cheap”. While I don’t use the broader market’s valuation as a determiner of whether or not I should invest money, it does behoove one to know whether the stock prices of the individual companies they’re looking to invest in are priced higher or lower than the historical norms. And painting with a rather broad brush here, I’m finding that many of the stocks in the dividend growth universe that naturally attract my attention are trading at the upper end of their historical valuations. So when I say I’m trying to find reasonable opportunities, I’m looking for stocks that are trading closer to historical norms in an otherwise expensive market.
With that all said, below are three long-term, reasonably priced opportunities I’m looking at right now:
Target is priced at a P/E ratio of 16.80 right now, which is higher than when I first wrote about Target back in November. Yet, the price has fallen from the mid-$66 area to the mid-$62s. How did the price fall and the P/E rise? Well, because Target reported a rough third quarter just days after my article came out, on EPS of just $0.54 per share – off considerably from the $0.96 they reported in Q3 2013. The company also trimmed its full-year guidance to an adjusted EPS of $4.59 to $4.69 – off from earlier forecasts of $4.70 to $4.90. Furthermore, they were stung by a massive breach of security as the company has reported that up to 70 million customers had their credit and debit card information stolen, in addition to their names, addresses and phone numbers.
Obviously, this is a huge problem. As a consumer who shopped at Target during the time period in question I’ve been watching my credit card statements very closely. However, I don’t think that over the time horizon of the next few decades will this be a problem for Target, nor will it result in a massive exodus in shoppers. Online shopping is dangerous as well, and credit card data theft is not new nor is it a Target-specific issue. From the data I’ve read, this appears to be a problem with the technology that we in the U.S. use to process credit card transactions, as well as the credit cards themselves.
In my opinion, with a yield of 2.75% this is a very reasonable price point at which to accumulate shares in Target. TGT has a significant record of dividend growth at 46 years and counting, with a 18.6% 10-year dividend growth rate. A manageable balance sheet, growth domestically through CityTarget and abroad through Canadian expansion, a solid dividend payout ratio at 43% (on lower earnings) and an upscale, exciting shopping atmosphere bodes well for long-term shareholders in this company. When earnings return to normal the share price should likewise increase, along with dividends. However, the ride in the meantime may be a bit bumpy.
TGT is up just a little over 4% over the last 52 weeks, which is obviously considerable underperformance against the S&P 500. Luckily, I don’t compare my results to this index and I don’t have to report to anyone. I have decades to ride out an investment, and I’m confident that Target will endure. Right now, S&P Capital IQ is predicting a 3-year EPS compound annual growth rate of 8%. Combine that with an entry yield near 3% and you’re looking at pretty satisfactory returns here.
Unilever Plc (UL) (ADR)
This is another company I mentioned I was interested in a few months ago, and the share price hasn’t really gone anywhere since then. I’m quite pleased with that!
This multinational consumer goods company is a dynamo. They own over 400 brands; I repeat 400. They’re the world’s largest ice cream manufacturer, with ice cream brands like Heartbrand, Klondike, Ben & Jerry’s and Breyers. In addition, they have a stable of brands in beverages, cleaning products and personal care products. Brands like Axe, Dove, Knorr, Lipton, Hellmans, Surf, Sunsilk, I Can’t Believe It’s Not Butter and Slim-Fast ensures the enduring economic moat and pricing power this company enjoys.
UL currently trades hands with a P/E ratio of 18, which is right about its 5-year average. I enjoy investing in global juggernauts like Unilever (they operate in over 100 countries) at prices that aren’t a premium to historical norms, and that’s what we have here with UL. The yield is very attractive at 3.51%, which is great considering there are no foreign dividend withholding taxes since we have a tax treaty with the U.K., and UL are the british shares in this anglo-dutch company. (It’s dual listed.)
This is one of those companies that you can sleep well at night knowing they’re out they’re selling products to billions of people every single day. S&P Capital IQ is forecasting a 7% EPS CAGR growth rate over the next 3 years, which is fairly solid. The payout ratio stands at 67%, which is a bit high but I’m hopeful growth continues to propel this consumer goods giant. The company remains committed to growing the dividend, and I think shareholders should do well over the long haul here. From 2003-2012, EPS has grown at a compounded annual rate of 7.53%, which is in line with what is being predicted for the company over the next 3 years. The balance sheet is solid, the yield is attractive, the valuation makes reasonable sense and the brand names are strong. Not much to dislike here, folks.
General Mills, Inc. (GIS)
General Mills is a company I’ve been watching for some time now and just have never been able to buy shares in for one reason or another. I was actually researching the company for a potential purchase last year right before the news came out that H.J. Heinz Company (HNZ) was being bought out by Berkshire Hathaway Inc. (BRK.B) and 3G Capital. After this news became public knowledge many food-related companies like GIS seen their stock rise substantially. And so I felt priced out after I seen shares rise 5% or so right in front of my eyes. Dismayed, I passed on buying. I wish instead I would have just sucked it up and bought shares anyhow because they’ve risen even more substantially since then.
GIS shares have a P/E ratio of 18.32. Not overly cheap, but reasonable here considering the market we’re in. The stock is bolstered by a yield just above the 3% mark. And like UL, this company walks the walk when it comes to brands. Cereal brands galore that dot your local grocery store owned by GIS include: Cheerios, Cinnamon Toast Crunch, Lucky Charms and Oatmeal Crisp among many others. In addition, this company can brag about owning brands like Pillsbury, Betty Crocker, Progresso, Bisquick, Green Giant, Hamburger Helper, Chex Mix and Fiber One. Try to go to a grocery store and not buy something manufactured by General Mills.
Operating in more than 100 countries, you have to like not only the brand and pricing power but the geographical reach and diversification here. The balance sheet is attractive with a debt/equity ratio of 1.0. The 10-year dividend growth rate stands at 9.9%, so with growth like that and a yield north of 3% shareholders stand to see pretty strong returns over the long haul. The payout ratio stands at 56%, so the dividend is well-covered. Furthermore, General Mills has been rewarding shareholders with 10 straight years of dividend growth. S&P Capital IQ predicts a 3-year EPS CAGR of 7% – similar to UL. Overall, it just doesn’t seem like you can really go wrong buying a high quality company like General Mills at a reasonable valuation like you see today. GIS was able to grow EPS by a CAGR of 8.14% from 2004-2013, so I think the predictions for future growth are probably fairly accurate. GIS has actually been a strong performer over the last year (unlike UL and TGT), but shares still remain reasonable here.
In conclusion, I like all three stocks. I’m long Target right now, but hope to add UL and GIS to the Freedom Fund very soon. There’s few things I like more in life than collecting dividends from high quality companies that sell brand name products to people all over the globe. That’s a win-win I can get behind!
Although I chose to highlight only a few stocks here, some other reasonably priced stocks that I’m also considering here are The Coca-Cola Company (KO), Realty Income Corp (O), HCP, Inc. (HCP) and Philip Morris International Inc. (PM). The REITs are a bit less attractive after the pop this past Friday, but they’re still very reasonably priced for the long haul. O is currently trading below my cost basis, so I’m anxious to pick up more shares here. I think Philip Morris in particular offers a unique opportunity of both yield and growth, and shares are sitting at their 52-week low. However, it’s already one of my largest positions so I’m hesitant to add more. But if I didn’t have such a large weighting to that company right now I’d be very interested in buying shares hand over fist.
Full Disclosure: Long TGT, KO, O, PM
How about you? Finding any reasonably priced stocks in the market right now?
Thanks for reading.
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