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What Are You Buying?
Posted by: Dividend Mantra (IP Logged)
Date: August 30, 2012 09:02AM
The market appears a bit frothy right now. The Dow Jones Industrial Average is currently north of 13,000 points, while the S&P 500 treads just above 1,400 points. But, as I've stated many times before I believe in purchasing high quality equities at attractive long-term prices on a regular basis. I believe that there are stocks trading for more attractive valuations than the market as whole at almost any given time and I make it a priority to seek out quality on sale.
I try to look at the big picture and stay dedicated to my plan, which involves living well below my means and using excess capital to purchase stocks on a monthly basis. And as another month approaches I'm starting to fill out my shopping list. As the great Warren Buffett likes to say: my trigger finger is getting itchy. I don't have an elephant gun, but my little pistol will still get the job done!
It's been a while since I asked you readers about your watch lists and what you're interested in buying. I haven't been as active in the market as I usually am over the last couple months while I took a breather from blogging and investing in general. The break has given me two wonderful things: renewed focus and a little extra cash. Sweet!
Here's a short list of some equities I'm considering purchasing in early September:
Kinder Morgan Inc (KMI)
Kinder Morgan Inc. owns the general partner, incentive distribution rights, and an approximate 11% interest in the limited partner units outstanding of Kinder Morgan Energy Partners. It also owns a 20% stake in NGPL, a major interstate natural gas pipeline.
I've looked at Kinder Morgan before and I like it just as much as I did back then, except now it's more expensive unfortunately. KMI is a great way to get into the MLP field and get your hands on infrastructure and energy storage/transportation without having to worry about excess tax consequences. I like the higher than average yield at 3.95% and the higher than average dividend growth. KMI has more than doubled its dividend from April of 2011 (the first dividend after it went public) to now, going from $0.14 per share quarterly to the current $0.35 per share payout. That's a 157% increase in just over a year!
The key driver behind KMI's allure as an investment is the IDR (incentive distribution rights) it receives as the general partner in the massive Kinder Morgan Energy Partners Master Limited Partnership. This IDR gives the general partner an increasing piece of the ever-growing pie that KMP has. If you believe Kinder Morgan Energy Partners (KMP) will be very profitable for the foreseeable future, KMI is a great way to invest in the infrastructure without tax consequences and also with higher dividend growth due to the IDR. I think KMI is slightly undervalued at the current price of $35.44. If KMI doesn't rapidly increase in cost, I'm a buyer.
Leggett & Platt, Inc. (LEG)
Leggett & Platt engineers components and products for a variety of uses. Its springs and spring units are used in bedding and chairs. The company also makes headboards, die-cast products for barbecue grills and lighting fixtures, and store displays and shelving. Its Specialized Products segment offers machinery, manufacturing equipment, automotive seating suspensions, control cable systems, and lumbar supports.
You know, I've never been a huge fan of LEG as a company. I find the lack of growth troubling and I've seen no significant catalyst, or change, for that to change in the near future. It's traded at an elevated valuation for a while now, which hasn't helped my opinion. However, I recently re-read Dividend Monk's stock analysis on this company and he may have made a believer out of me, however small. I do like some things about this company. First, it's boring and reliable. It's also easy to understand. I understand springs, beds, shelving and all that it comes with. I can see why people will continue to need these products far into the future, as they have for the last century or so. Man does enjoy a comfortable bed!
The entry yield of 4.89% is pretty enticing, and I've been considering upping my overall portfolio yield of late. The P/E ratio is currently at 21.52, so this stock would have to come down a bit before I'd consider making a purchase. Matt thinks larger growth prospects are ahead for this company, so it could allow for earnings expansion and bringing down the valuation. I'm watching this one. It does have a 40-year dividend growth streak going, albeit with very low growth over the last few years. The payout ratio exceeds 100% using earnings, which is a warning sign, but the dividend is well covered by FCF.
General Dynamics (GD)
Falls Church, Va.-based General Dynamics manufactures ships, armored vehicles, defense-oriented information technology systems, and business jets. The firm gets around 72% of revenue from the Department of Defense, and the rest from foreign sales and Gulfstream business jets. In 2011, the firm generated $32.7 billion in sales and $2.4 billion in earnings with the help of 93,500 employees.
I think GD is attractively valued at today's price of $65.85. The entry yield of 3.10% is very nice and the 21-year dividend growth streak is in no danger of abating anytime soon. GD has a 10-year DGR of 12.8% and it's showing no real signs of slowing. The payout ratio currently stands at 29.7%, which allows for plenty of expansion in the dividend even without much earnings growth. Fantastic! The current P/E ratio of 9.61 is priced right for me. The debt/equity ratio is currently at 0.2, and the balance sheet is very well managed.
Qualitatively, I like the business. It's easy to understand and fairly diversified between aerospace, combat systems, technology and information and marine. Although the large revenue base from the DOD is a bit concerning, I've always believed that there will be continuing need for defense and a strong military. Human nature, and the conflict involved in such, ensures this unfortunately. The price is attractive and the business makes products that continue to be in demand. I'm currently long GD for a price just below what it's currently trading for, so I'm interested in adding to my position if the price stays static or dips slightly.
These are just a few quality dividend growth stocks I'm interested in. I would add ADM to the mix as I think there's a lot of value there. The drought impacts remain to be seen, however. Also the health care has some value in MDT and BDX currently.
What about you? What are you buying?
Full Disclosure: Long GD, MDT
Stocks Discussed: GD, KMI, LEG,