New Purchase - BAX

The newest addition to my income portfolio is a company that has been sitting on my watch list for a long time: Baxter International.  BAX doesn't seem to be very popular among dividend investors, not sure why.  It is my belief that Baxter is one of the better options in the medical device industry along the likes of JNJ, ABT, BDX, and MDT.  Perhaps the fact that this company is only a dividend challenger without decades and decades of dividend growth keeps investors away?

I am always looking to increase healthcare exposure without delving into pure pharmaceutical stocks.  I believe healthcare companies are poised to perform well the next few decades as the US population ages and average life expectancy increases.  The longer people live, the more healthcare products they should consume.  Baxter sells medical devices and treatments for medical conditions such as kidney disease, hemophilia, infectious disease, and burns & shock. It also produces vaccines and anaesthesia. In fact the small pox shot I received before deploying to Kuwait was produced by Baxter. It's right there in my medical record. 

Personally I think this company has a lot going for it. At this purchase price it yields 2.89% with 7 straight years of dividend growth.  7 consecutive years is not particularly impressive, but I would note that BAX has been paying uninterrupted dividends since at least 1980 (that's as far back as it goes on the Baxter web page).  Less than a week ago a 8.9% increase was announced.  The payout ratio is under 50%, analysts expect solid future EPS growth around 9%, the buyback program is retiring shares, and the dividend is well covered by cashflow.  BAX does a lot of business internationally with sales of 58% outside the US.  I expect that percentage to increase over time.  Debt is a tad high, but inline with peers such as BDX and ABT.  It does have a large cash holding on its balance sheet to help quell debt concerns.  Overall the numbers look very positive.

My calculated fair value for this company is $70.50, leading me to believe I was able to get in at or slightly under FV.  Obviously I would prefer a little higher margin of safety, but right now that is hard to find.  I'm done accumulating cash.  I will be investing every single dollar hitting my account from dividends and deposits regardless of the heated stock market.  I do not need more dry powder.  Anyways my calculated FV was close to both morningstar and FAST Graphs.  The p/e is currently a reasonable 16.6 with an attractive 12.7 forward p/e.  While I do not think I over paid, only time will tell.

I had to make a quick decision here.  Baxter stock took a noticable hit when one of its pipeline treatments failed to improve Alzheimer patients.  I decided to pull to the trigger.  If BAX can grow dividends at 7% per year, I will be a happy shareholder.  That is all I need to see from a stock yielding about 3%. 

Learning From Mistakes

Major mistakes I've made and what I've learned.


●Chasing Yield:
An income investor, such as myself, buys assets (stocks & bonds) with the intent of building a passive income stream.  So the higher the yield the better right?  Not always.  Focusing solely on yield is a recipe for disaster.  It's just a matter of time.  Ask any PBI, FTR, EXC, CLF, or TEF investor how the dividends turned out.  All of these companies cut dividends significantly within the past few years in case you haven't heard of them. 

So what were the warning signs?  High yield!!!  Yep.  When you see a stock yielding 10%, you have to ask yourself why.  Why was PBI yielding 10%?  Why weren't people snatching up shares boosting the stock price which brings the yield back down.  Hint:  The yields were high because the market expected a dividend cut.  That lowers the price, but increases the yield until the cut actually happens.  So when I see a stock with a yield that seems too good to be true, caution and extra research is in order.  Please note that some industries (MLPs and REITs) are built for high yield.  Seeing an MLP with a yield of 7% is not a cause for concern.  Seeing an utility with a 7% yield definitely is.

Other than high yield itself, I look for frozen dividends or dividend growth increasing at a pace well below inflation.  Some other things to look for are cash flows and the debt load.  If debt becomes too high, some companies (AVP) cut the dividend to relieve pressure.

An example of me chasing yield before I fully solidified my strategy:

Ok it is true that I have made money with Boardwalk.  Pretty much only because it yields 7%.  On the surface my BWP purchase 20DEC2010 doesn't look so bad.  But what did I pass up?  On that very same day I could have bought MCD @ $76.92, KO @ $32.66, PM @ $59.57, or LO @ $27.36!  The opportunity costs were high!  Whoops!

I already reduced my BWP stake and might do another round of sales if the distribution doesn't increase within the next 6-12 months.  The value investor in me compelled me to hold on to the rest of this stake.  I feel this company is currently at fair value.

Going forward I'm more interested in quality and dividend growth than rolling the dice with high yield.  I may let the high yielders I already own ride if I feel future prospects are positive.

●Basing Purchases Solely on Numbers:
Running a screen or using some 10x10 chart off seeking alpha is not a good enough reason to make a purchase.  Numbers aren't everything; investing is as much an art as it is a science.  Usually when I run I screen, it will be chocked full of a bunch of companies I've never heard of.  We're talking small caps, ADRs, foreign pink sheet stocks, and everything in between.  Stock screens are a great place to look for ideas and helps to cut down on research.  I need to look at more than just numbers.  What is the story?  What do they sell?  Can I understand what they do?  Do I think they'll be in business 20 years from now?  What is the growth plan?  Can they still sell products/services in a recession?  A depression?  How has the business performed historically?  Does management make sense on conference calls?  Is management confident?  Is management committed to the dividend? 

I ask myself questions like this.  If I cannot answer these types of basic questions, I either need to dig deeper or start looking at something else.  A 10x10 chart does not give me a clear picture.  Period.

Investors who just look at numbers are forgetting that JNJ is not only a ticker symbol, it is a business.


●Basing Purchases off Price Charts and Graphs:
I don't use technical analysis at all anymore.  I am a long term buy and hold investor, short term price trends do not matter to me.  TA would give me short term answers to long term problems.  It doesn't mesh.  I don't need to buy at the lowest possible price, I just want to be close!  Instead of looking at charts and graphs, I spend time actually valuing the business!  That's how I determine when to buy.  Becoming proficient with DDM, DCF, and other valuation techniques really is a great way to figure out buy prices.  Man, I'll tell you it gives me so much more confidence than a stock chart ever could.  After I figure out buy prices I like to fact check with a comparison to FAST graphs or Morningstar.

Passive Income Pursuit has been kind enough to post a series of articles on valuing stocks.  I recommend checking out his work.  All the information needed to value businesses is free on the internet.  Calculators and all. 

Remember to periodically redo calculations.  EPS and dividends change over time.  There is no reason to use my 2011 buy prices, the information is outdated!


Readers: What mistakes have you made?  What have you learned?

April Recap

The months seem to be flying by.  Soon enough I'll be headed back to the states.  I have been put on orders to an Air Force base.  Looking forward to that, finally have what looks to be an easy assignment.

Anyways deposits and dividend growth were both strong this month.  I am thinking about trimming LTC, we'll see.

DOW: 14,840 /// S&P 500: 1,598 /// 10-YR Bond: 1.67%

New Purchases:
1) 15 shares APD at $84.73: $42.60 annual income
2) 2 shares EMB at $117.32: $10
3) 33 shares BNS at $56.23: $79.20

Sales:
1) 36 shares UNS at $50.624: ($62.64 annual income)

Dividends Received: $243.79
Coca Cola (KO): $31.64
Illinois Tool Works (ITW): $11.02
Kraft Foods (KRFT): $13.50
Philip Morris (PM): $66.30
Corporate Office Properties series L (OFC-PL): $22.58
Exchange Income Corp. (EIFZF): $17.52
iShares Emer Mkt Bond (EMB): $1.65
Realty Income series F (O-PF): $6.76
Bank of Nova Scotia (BNS): $17.06
LTC Properties (LTC): $26.06
Toronto-Dominion Bank (TD): $29.70

Dividend Increases:
1) SO: $.49 to $.5075 per quarter.  $2.04 annual income
2) PG: $.562 to $.6015 per quarter.  $12.32
3) KMI: $.37 to $.38 per quarter.  $4.68
4) CVX: $.90 to $1.00 per quarter.  $11.60
5) JNJ: $.61 to $.66 per quarter.  $12.40
The LINE increase won't hit my account till October.  That's pretty far into the future so I'll add it to my monthly report at that time.  The SBSI split/dividend increase will be listed next month.

New Deposits:
$1,000 to ROTH IRA, $2,000 to taxable account

Lending Club:
Added $100 this month

Options/Bonus:
none

Lineup Change

 



I decided it was time to part ways with the rest of my UNS position.  At $50 UNS no longer looks attractive, plus there is very little incentive to stick around to see if the dividend increases will accelerate.  The current yield dropped to 3.4%.  No thanks, I will pass.  Even if Mr. Market thinks this stock is worth $50, I do not.  The fair value I have in mind is closer to 40.  An overvalued price coupled with atrocious dividend growth made this decision easier than normal.  I might be wrong about the valuation...  Right or wrong, low dividend growth on a stock yielding 3.4% does not fit my strategy.

 

I will still follow this company, although it will get less attention now that is has been demoted to watch list status.  If the dividend growth accelerates and the price drops I am not opposed to rebuilding the position.  It will be interesting to see what the future holds for this company. 

 

I held UNS in both my taxable and ROTH IRA accounts.  That is why I sold in two separate transactions.

 

 

 

With the capital raised with the UNS sale, I purchased 33 shares of BNS.  When I make portfolio changes like this, the goal is to bolster my dividend income and/or expected dividend growth with a stock that has a better valuation.  I'm happy to report that BNS accomplishes all of this.  #1 Immediately my passive income rises.  #2 I expect higher dividend growth #3 I currently see BNS as undervalued. 

 

It's impossible to know how changes like this will turn out or if it was the right move.  I do like my odds though.

 

Unfortunately my 2013 Q2 income will take a small hit since BNS already paid this quarter.  That's really just a small blip of less than 20 bucks.  It certainly won't be on my mind 10 or 20 years from now!

Another Dividend (well distribution) Boost

I don't want to write a post about every single dividend/distribution increase, however I find this one to be pretty intriguing.

Linn Energy (LINE) announced a new distribution policy.  The regular distribution will be maintained this quarter.  Nothing special this was already announced.  Here is where it gets interesting: starting in July, the distribution will be monthly and increased by 6.2%.  A 6.2% boost on something yielding 7% is truly massive!  It's like getting a 14.5% increase on a stock yielding 3% or a 21.7% increase on a stock yielding 2%.

Pretty impressive!

The catch is that this is not sustainable long term.  The distribution itself is covered by cash flow, but I don't think we'll see 6% increases annually for the next 20 years...  That's okay.  I don't need to see large boosts from my high yielders every year.  The monthly distribution showcases Linn's commitment to unit holders and shareholders.  It's pretty rare to see a policy change like this.

It's the investors they have in mind here.  Thanks!

Like Clockwork - Recent Dividend Increases

Johnson & Johnson - 8.2% increase.  51 years of increases

Chevron - 11.1%.  26 years

Kinder Morgan Inc. - 2.7%.  6 straight quarters, IPO in 2011

Procter & Gamble - 7.0%.  57 years

Southern - 3.6%.  12 years


No complaints, all increases meet expectations.

First Stock to Double

REITs have been on a tear the past couple years.  Holy cow!  With the recovering housing market coupled with investors' unquenchable thirst for yield, these types of companies have reached astronomical heights.  REITs are income machines and income machines are exactly what many investors want right now.

Enter LTC Properties.

My original thesis for selecting LTC as a holding in my portfolio was simple: baby boomers are aging.  An aging population should translate into higher demand for nursing homes and assisted living accommodations.  I was specifically looking to add a health care REIT.  LTC Properties (I believe it stands for Long Term Care Properties) does exactly that. 

This is a picture of one of the properties LTC owns in Fort Collins, CO.  Before I joined the US Army, I lived in Fort Collins and used to work out at the gym behind this facility.  Seeing properties in real life helped me understand that this isn't just a ticker symbol, this is a company with real assets!  And I have seen some of them!  I drove past this one more times than I can count. 

There are a number of choices in the health care REIT industry, I choose LTC for reasons stated above plus I liked their conservative debt load and monthly dividend.  I regularly listen to the conference calls and can appreciate the conservative yet focused management.  It probably wouldn't have mattered which REIT I picked in the health care space, they've all done well. 

OK I admit I don't look at my portfolio positions very often and didn't even realize this thing had doubled until today.  I purchased 109 shares 05AUG2011 which is sitting on a 97% unrealized cap gain + another 13% from dividends. 

Not trying to brag here, but this is the first time one of my purchases doubled.  This will be the last pat-me-on-the-back post for a while...