Saturday, May 3, 2014

May Shopping List

Does this bull market have no end?

Even with the S&P 500 sitting at all time highs I must invest my idle cash.  No choice in the matter.  You see, the only way for me to achieve my financial goals is to invest the money I save into income paying securities.  I already know I must average $1,600/mo in savings the rest of the year and then invest it into securities with an average yield of 3.25%.  That's exactly what needs to be done.  No more.  No less.  The only thing left is to execute and I'm not going to let stock prices get in the way!

●Owens & Minor (OMI) 3.10% yield, 18 year streak, 57.1% payout ratio
Owens & Minor offers a very nice yield at current prices.  I believe this company should be worth $34 per share, leaving a small margin of safety on the table.  Morningstar assigns it a $30 fair value as a comparison.  Anyways I haven't added OMI in a couple years and would be delighted to pick up some shares here.  OMI has been paying dividends since 1930.  That's almost 85 years!  With a history that rich, it's one of only a handful of stocks that I wouldn't mind holding during a dividend freeze.

Oh by the way, this stock is trading at 52 week lows right now.  That's tough to find in today's market...  I listened to last week's conference call in an attempt to figure out what's going on.  Basically OMI had a flat quarter.  Management cites weather and costs associated with setting up a couple large new customers as the cause.  I can live with that, no reason to think this business is in trouble.  Occasional hiccups don't concern me, especially because forward earnings guidance didn't change.

Procter & Gamble (PG) 3.15% yield, 58 year streak, 68.5% payout ratio
First of all, PG's payout ratio isn't as bad as it looks at first glance.  The number listed above is based on earnings that include all kinds of one off items.  You know, the kind of one time events that will not affect the business moving forward.  It has a slightly better payout ratio of 63.4% if adjusted earnings are instead used.  Considering PG raised dividends just last month, that's not bad at all.  At any rate, PG is trading right at my fair value of $82.  Morningstar thinks it ought be worth $89.  I consider it fairly valued, and paying fair value for a company this awesome is never a bad idea.  PG is one of the highest quality stocks in world.  If I had to pick one stock that best embodied "sleep well at night," I'd choose PG.

●General Electric (GE) 3.30% yield, 4 year streak, 72.1% payout ratio
Just like PG, earnings and therefore the payout ratio is skewed here.  A 55.7% payout ratio is a more realistic number, and it happens to leave a lot more room for future dividend growth.  At any rate, I continue to be a fan of General Electric as it sheds risky financial businesses.  I'm on board with the makeover and believe the streamlined company will perform great.  At a minimum, GE gains sleep well at night properties and becomes easier to understand.  Less moving parts.

While I'd rather pick up GE shares closer to $25, I do think think its worth $27.50.  Morningstar stamps it with a $29 fair value.

●BP plc (BP) 4.60% yield, 3 year streak, 31.7% payout ratio
Guess what?  BP doesn't really have a 32% payout ratio.  It's more like 59%.  You see, earnings and payout ratios can be skewed the other way too.  Even then, the stock still looks cheap.  I'm of the opinion that BP should be worth $57 to which Morningstar agrees. BP is one of the cheapest stocks I own right now (not that it's THAT cheap imo) which compels me to want to buy more.  If only the market would quit bidding up prices!


  1. Good list there! I recently added some PG. Like you, I believe they are fairly valued/slightly over valued, but my position wasn't as large as I would like, so I took another bite!

    I have been studying GE for a while now and may end up adding to it.

    Thanks for bringing up OMI, I am interested in more healthcare and they look like they may fit nicely in my portfolio.

    Take care!

    1. Nice grab with PG! If I had a say in the matter I'd prefer it under $80, but can only purchase companies at prices currently available. I'm 99% sure those shares will treat you well over the years. PG is pretty much the definition of what a sleep well at night dividend growth stock should be. They should add it to PG's wikipedia page.

  2. GE, BP and PG. I love those three. GE is planning a stock spin off pretty soon of their financial division. GE's PE is a little high. It had a pretty nice run up the past couple of months. BP always an attractive pick as well and since they resumed their dividends have been increasing them annually.

    1. GE's p/e indeed looks high at 21.9, however it has a forward p/e of 14.6. How can that be? Will a company that large really grow that fast? Is is possible? The answer to the question lies is one time non-recurring events mucking up the trailing earnings and therefore the p/e and payout ratios.

      It's not as bad as it seems, though I like the stock more at $25.

      Talk to you later

  3. My list is UVV, ABBV, STX and CLX. Payout ratio over 65 is too high.

    1. Agreed, that's why I like those stocks right now. PG is just over 60% which I can live with because it raised its dividend just last month!