I actually haven't put that much new capital to work this month, as the BP purchase was solely funded by the sale of more than half of my position in Intel Corporation (INTC). Before that, I had only added to my position in Realty Income Corp. (O) earlier in the month at what I felt was an opportune price.
I was compelled to further add to the portfolio after a stock that had only recently found its way onto my radar dropped by more than 6% in one day. Although a precipitous drop like that isn't particularly telling by itself, because a stock that is overvalued by 20% dropping by 6% is still overvalued, this particular company wasn't overtly expensive before the drop and actually fell into what could be deemed a fair price to pay for an otherwise high quality company.
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 25 shares of Baxter International Inc. (BAX) on 9/26/13 for $66.60 per share.
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.
Baxter has seen fairly regular and strong demand for its products over the last decade. From 2003-2012, revenue has grown by a compounded annual rate of 5.3%, while EPS has a CAGR of 11.9%. Likewise, dividend have also seen robust growth. The annual dividend was $0.58 per share in 2003. It's now $1.96 per share. Baxter has been growing the dividend for seven years now, with a 5-year dividend growth rate of16.4%. BAX is also aggressively buying back shares, amounting to a total of $1.5 billion during 2012. The balance sheet looks fairly healthy, with a debt/equity ratio of 0.8.
This was an attractive purchase for me. My portfolio doesn't have as much exposure to the healthcare sector as I'd really like it to have, so when I seen BAX take a tumble last week I was more than happy to scoop up some shares at what I felt was an attractive long-term price. I don't really know why it dropped so aggressively, as there was just minor news regarding an analyst downgrade and a recent minor recall. I'm more than happy to be a buyer when everyone wants to sell a piece of a high quality business like this, especially when the valuation makes sense.
I was anxious to increase my exposure to the healthcare sector, and especially to a medical device maker for a number of reasons. First, the demographics makes sense. Our population is growing older, and older people increasingly have need for medical care and products. In addition, these types of products inevitably find their way to developing economies as healthcare improves across the globe. The other fantastic aspect of a company like Baxter is that its products, once used, must be replaced for the most part. That creates recurring revenue, which explains the relatively smooth growth of their numbers over the last decade.
BAX currently trades for a P/E ratio of 16.5. While not particularly cheap, I think today's price represents a good time for me to build a position in the company and see where the price of shares go from here. The entry yield on my purchase equates to 2.94%, which is fairly attractive. I'm hoping for further growth of the dividend, and a moderate payout ratio of 49% ensures room to grow the payout.
I valued the shares using a Dividend Discount Model analysis, with a 10% discount rate and a 7% long-term growth rate. This gives me a fair value of $69.91, which allows for a rather small margin of safety. I would have liked to buy even cheaper, but I felt after the significant drop in share price I would enter into an ownership position with a high quality healthcare company that is paying a healthy dividend and shows great potential for growth going forward.
This purchase will add $49.00 to my annual dividend income based on the current payout.
This is the 41st position in my portfolio. I'm on my way to 50, at which point I'll have to strongly consider whether I want to add any more companies.
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 $73.50.
I'll update my Freedom Fund in early October to reflect my recent addition.
Full Disclosure: Long BP, INTC, O, BAX
How about you? Notice the big drop for BAX last week? Adding at these prices?