In this current environment, I am starting to deviate slightly from my entry criteria on a more consistent basis. I usually avoid paying over 20 times earnings for a company for which I expect earnings and dividend growth, and which I could see holding on for the next 20 years. However, I am willing to bend the rules on consecutive dividend increases or minimum yield requirements. Over the past five years, I have increasingly come to realize that buying a quality company as a long term investment at a reasonable valuation is more important than simply purchasing a company that fits a certain set of quantitative criteria.
Over the past week, I purchased stock in eleven businesses. I have outlined these businesses below. Some of these purchases represented additions to existing positions, although a few represented new positions.
Aflac Incorporated (AFL), through its subsidiary, American Family Life Assurance Company of Columbus, provides supplemental health and life insurance products. Aflac has managed to boost dividends for 30 years in a row, and has a ten year dividend growth rate of 19.30%/annum. The company is really cheap at 9.70 times earnings, but has the capacity to grow profits in the foreseeable future through strategic partnerships in Japan and US markets and increasing number of sales associates. One of the opportunities for growth could be US, which accounts for roughly only a quarter of revenues. It is amazing that a company deriving 70-75% of revenues from Japan could achieve such astounding growth over the past 30 years. Currently, the stock trades at 9.70 times earnings and yields 2.30%. Check my analysis of Aflac.
American Realty Capital Properties, Inc. (ARCP) owns and acquires single tenant, freestanding commercial real estate that is net leased on a medium-term basis, primarily to investment grade credit rated and other creditworthy tenants. I like the fact that management is aggressively purchasing assets, acquiring companies and working towards increasing Funds from Operations for shareholder distributions. I can easily view this REIT becoming the next Realty Income in a few years. The risk of course is that they overpay for acquisitions, and this ends up costing existing shareholders big time. The REIT has raised dividends since going public in 2011. This REIT currently yields 6.20%.
ConocoPhillips (COP) explores for, produces, transports, and markets crude oil, bitumen, natural gas, liquefied natural gas, and natural gas liquids on a worldwide basis. I am attracted to the above average yield on ConocoPhillips, in comparison to Exxon and Chevron. Unfortunately Chevron is already one of my highest weighted positions, which is why ConocoPhillips was the second US oil choice. I am building my position in the stock with this purchase. The company is extremely well run, has a history of disposing out of non-core assets such as Lukoil stock (LUKOY) and Kashagan Project, and sending cash to shareholders in the process. The company has increased dividends for 13 years in a row, and has managed to boost them by 15.10%/year over the past decade. Currently, the stock trades at 10.70 times earnings and yields 4.20%. Check my analysis of ConocoPhillips.
Dr Pepper Snapple Group, Inc. (DPS) operates as a brand owner, manufacturer, and distributor of non-alcoholic beverages in the United States, Canada, Mexico, and the Caribbean. The company has a portfolio of strong brands in North America, and is cheaper than its two larger rivals. The opportunities involved are gaining back international distribution rights to its name and expanding non carbonated products. Even if it doesn't do these things, the company can easily repurchase of stock each year, grow earnings in the low single digits and pay a 3% dividend, for a total return of high single digits or low double digits. Currently, the stock trades at 15.60 times earnings and yields 3.30%.
International Business Machines Corporation (IBM) provides information technology (IT) products and services worldwide. I like this global technology juggernaut, the ability to consistently repurchase shares, raise dividends for 16 years and its vision to earn $20/share by 2015. The company has increased dividends for 18 years in a row, and has managed to boost them by 18.80%/year over the past decade. Currently, the stock trades at 14 times earnings and yields 1.90%. Check my analysis of IBM.
The Coca-Cola Company (KO), a beverage company, engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide. The company is a global drink giant, responsible for 1.8 billion drink servings to the world every single day. There is a strong brand name, a global distribution network and opportunity for growth in emerging markets. While I really like the company, I had not added to the stock for a while until 2012, which resulted in much lower allocation to this quality company. I am trying to rectify that, and if Coke ever sells at 15 times earnings, I would be a buyer. The company has increased dividends for 51 years in a row, and has managed to boost them by 9.80%/year over the past decade. Currently, the stock trades at 19.40 times 2013 earnings and yields 2.80%. Check my analysis of Coca-Cola.
McDonald’s Corporation (MCD) franchises and operates McDonald's restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, and Latin America. The golden arches is another stock, which is priced attractively here today, and which can deliver plenty of value over the next 20 years. It is a globally recognized brand, has pricing power, and has continually managed to reinvent itself. With its “Plan to Win” strategy, the company targets 3-5% growth in annual sales and 6-7% growth in operating earnings. Add in a 3% yield, and a 2% reduction in stock through share repurchases, and you can easily expect very good results over time. The company has increased dividends for 36 years in a row, and has managed to boost them by 28.40%/year over the past decade. Currently, the stock trades at 18.20 times earnings and yields 3.10%. Check my analysis of McDonald’s.
Realty Income Corporation (O) is a publicly traded real estate investment trust. It invests in the real estate markets of the United States. I slightly overpayed for this REIT, since I locked in an entry yield below 5%. However, I believe that the company is well managed, and like the distributions which are paid monthly, and regularly increased. Existing management has a strong track record of acquiring quality assets, looks at developing expertise in areas where not many competitors are looking, and tries to increase profits for shareholders. The company has increased dividends for 19 years in a row, and has managed to boost them by 4.20%/year over the past decade. Currently, the REIT yields 4.90%. Check my analysis of Realty Income.
Target Corporation (TGT) operates general merchandise stores in the United States. I like the perceived quality of Target relative to Wal-Mart. The stores look more upscale than the Wal-Marts of the world, and target customers with higher incomes. In addition, the company is much smaller, and just starting to expand internationally. I view this as an opportunity. Management is trying to earn $8/share by 2017, which would make shares purchased today even cheaper. The company has increased dividends for 46 years in a row, and has managed to boost them by 18.60%/year over the past decade. Currently, the stock trades at 16.80 times earnings and yields 2.40%. Check my analysis of Target.
Wells Fargo & Company (WFC) provides retail, commercial, and corporate banking services. The bank cut dividends in 2009, after receiving $25 billion from US Treasury. Since 2011 however, it has started increasing distributions, which are slightly less than the highs reached in 2008. When I last analyzed Wells-Fargo in May, I was not very happy about the company, because of near term weakness. However, I came to realize a few weeks later that I was deviating from my mantra of investing for the next 20 years, rather than for the next one. I sold some naked puts, and last week I initiated a small position in the bank. Currently, the stock trades at 11.80 times earnings and yields 2.80%. Check my analysis of Wells Fargo.
Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. This is the largest retailer in the world, which has a tremendous scale of operations and immense pricing power. The company’s bright spot include its international operations, which could easily reach domestic ones in 10 – 15 years. I like the low valuation, which is pricing very low growth in earnings per share over the next decade. The company has increased dividends for 39 years in a row, and has managed to boost them by 18.10%/year over the past decade. Currently, the stock trades at 15.40 times earnings and yields 2.40%. Check my analysis of Wal-Mart.
These shares are not purchased at the low valuations I took for granted up until the days of early 2013. However, most of the companies listed above are having some of the lowest valuations that you can find today. The positions in American Realty Capital Properties Dr Pepper Snapple Group and Wells Fargo have not raised dividends for at least ten years in a row, however I believe these franchises offer compelling long-term potential to achieve that. IBM does not yield much to fit my entry criteria, but has a low P/E, excellent growth and a consistent history of share repurchases.
Full Disclosure: Long AFL, ARCP, COP, DPS, IBM, KO, MCD, O, TGT, WFC, WMT, KMB, CL ,CVX