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Two Stocks On My Watch List For June 2014

May 29, 2014 | About:

The elusive broader stock market pullback. It’s coming any day now, right? Well, I’ve been hearing such a forecast for more than a year now.

Now, I can’t predict the future. As such, I don’t know when or if the stock market is going to come crashing down tomorrow or the next day. However, it doesn’t really matter anyhow. I’ve always proclaimed myself a long-term investor. I’m investing with the next 20-30 years in mind, not the next 3-6 months. It always troubles me when people are worried about what’s going to happen to the stock market in the short term if they’re truly investing for the long haul.

As long as I can find attractively valued individual stocks based on all known information I have access toand I have free capital, I’m going to buy stocks. Raining outside? I’m buying stocks. I’m not feeling well today? I’m still buying stocks. Some crazy warlord halfway across the world drawing new borders? Yep, buying. You get the gist.

So on that note, I’m looking at two companies in particular for my next stock purchase in June. After not buying any stocks at all in May, I found myself not adding to my portfolio for only the second time in over four years. So I’m excited to get back on the horse in June and add some equity in a high-quality company or two.

I believe shares in the following two companies are currently attractively valued, and I’m interested in purchasing stock in at least one of these companies in June, assuming the valuation stays similar and the capital is present.

Baxter International Inc. (BAX)

Baxter International Inc. is a global, diversified healthcare company that develops, manufactures, and markets products that save and sustain the lives of people with life-threatening conditions like: hemophilia, immune disorders, infectious diseases, kidney disease, trauma, and other chronic conditions. The company operates in two segments: Medical Products and BioScience.

I’m happy to own equity in this great healthcare company. Growth over the last 10 years has been robust. Earnings per share is up from $0.62 in 2004 to $3.66 in 2013. This is a compound annual growth rate of21.81% over the past decade, however growth over the last few years has slowed. Revenue has grown, but not as fast. Up from $9.509 billion to $15.259 billion over the same time frame, this is a CAGR of 5.4%. S&P Capital IQ predicts CAGR in EPS at 7% over the next three years, which is strong.

Shareholders stand to do very well over the next 12-24 months as the company plans to spin off its BioScience division into an independent, publicly traded company in 2015. Much like what we saw withAbbott Laboratories (ABT) when they announced a similar move, and then completed it in January 2013, shares in BAX stand to run much higher from here. And while I’m not in this for the capital gains, I am interested in buying shares before they become more pricey.

Dividend growth has been solid, with a seven consecutive years of dividend growth and a five-year dividend growth rate of 16.4%. A payout ratio of 56.5% means there’s plenty of room for further dividend growth, and I think future dividend raises should be sizable since earnings are suppressed due to special items – management is guiding for EPS in the $5.05 to $5.25 range for 2014, which is helped by the Gambro acquisition. The current yield is 2.80%, which is rather attractive in this market.

Shares in Baxter might appear a bit pricey here, with a current P/E ratio of 20.21, however if EPS is being guided correctly, the P/E ratio will either compress significantly over the coming year or the price in shares will rise sharply. Furthermore, continued anticipation of the spin-off should serve as a catalyst for the share price from here.

I valued shares using a Dividend Discount Model, with a 10% discount rate and a 7% long-term growth rate. This gives me a fair value on shares of $74.19, which is in line with where BAX is priced at right now. While this leaves no apparent margin of safety, I think shares still represent a solid buy with all the exciting moves the company is making. Furthermore, I’m always interested in increasing my exposure to the healthcare sector, as I believe an aging domestic population and rising middle classes in developing markets bode well for companies like Baxter.

Southside Bancshares, Inc. (SBSI)

Southside Bancshares, Inc. is a financial institution based out of Tyler, Texas. They currently operate 50 community-banking facilities in Texas, with approximately $3.4 billion in assets.

This small bank is a business I initially invested in back in April 2012. And I’ve been a happy shareholder ever since. With a healthy yield, special dividends every December, and annual stock dividends, this bank exemplifies shareholder returns. However, with that said keep in mind this is a very small bank – the market cap is just over $507 million. So keep in mind there are special risks present here.

Lately, Mr. Market hasn’t been enamored with SBSI, and it’s down some 15.76% over the last month. However, shares are down just 1.46% YTD. This performance as of late is apparently due to an announced merger between SBSI and OmniAmerican Bancorp, Inc. (OABC) -expected to close in the fourth quarter of 2014. I’m not familiar with OmniAmerican Bancorp, and to be honest even full-time analysts find difficulty in analyzing banks, but I’m trusting management to make the right call here. For reference, OmniAmerican Bancorp is a small bank based out of Forth Worth, Texas. They operate 14 full-service branches in the Dallas/Forth Worth Metroplex, with over $1 billion in assets. The announced merger will create the ninth-largest bank by deposits headquartered in Texas. At first look, the merger makes sense to me as it creates greater local scale for SBSI, although a cursory look at OABC shows us less attractive metrics when compared against SBSI, with much lower return on equity and return on assets.

Net income and EPS are both roughly flat over the last five years, but SBSI did a much better job at managing itself through the financial crisis than the big banks across the U.S. that came close to extinction and had to cut dividend payouts. SBSI boasts a 19-year streak of raising dividends, with a 10-year dividend growth rate of 14.2%. And a payout ratio of just 39.6% should allow continued dividend growth for the foreseeable future, although the merged bank will invariably change forecasts. The entry yield on shares right now is 3.27%, which is particularly attractive when compared to most U.S. banks.

Shares are trading hands for a P/E ratio of 12.09, which is in line with what most small and big banks alike trade at right now. However, I went ahead and valued shares independently using a Dividend Discount Model, with a 10% discount rate and a 6% long-term growth rate. It’s possible they could grow faster than that, but I wanted to use a lower rate due to the flattish earnings over the last five years, and the most recent dividend raise of just 5%. However, this model totally ignores the annual special dividend in December and the stock dividends. The DDM gives me a fair value on shares of $22.26, which is below where shares are priced at right now. Again, I think shares are probably pretty close to fairly valued based on the possibility of greater growth, special dividends, and stock dividends. Of course, there is also the uncertainty regarding the potential of the bank moving forward after the merger completes later this year.

All in all, I view both of the companies above as fairly valued with healthy yields, solid growth prospects moving forward, strong shareholder return policies, and low overall risk. Furthermore, my personal portfolio has room for both companies as my exposure to both is relatively small. It’s quite possible that BAX will perform better over the next 12-24 months based on the spin-off, but I feel both are solid opportunities for the next 10-20 years based on all known current knowledge. I’ll likely be investing in at least one of the above companies in the coming weeks, dependent on capital and assuming the prices don’t spike tremendously in the interim.

Full Disclosure: Long BAX and SBSI.

How about you? Think either company is an attractive opportunity here?

Thanks for reading.

About the author:

Dividend Mantra
Trying to retire by 40 by investing in dividend growth stocks and living frugally, valuing time over money.

Visit Dividend Mantra's Website


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