June Recap

The last stock market correction was two years ago.  I find myself wanting to hone my skills as an income investor and that means not panicking when stock prices sour.  I need a test, some practice, just to make sure I'm at peace with my chosen strategy.  I don't check my accounts at all except to buy new shares or track dividend payments on personal spreadsheets.  Even then I intentionally avert my eyes from the part of the computer screen that displays portfolio value.   I calculate portfolio values once per month when I do monthly recaps though it's for my readers not for me.  In my head I remind myself the value of my stocks do not matter, only the income stream it produces.  I do whatever I can to keep myself in the correct state of mind and focus on what's truly important (replacing employment income with dividend income).  Mental tricks.  Hopefully I will have trained myself by the time the markets inevitably correct.  I need a test; I feel rusty.

LTC Properties became the second holding to pay over $1,000 dividend income.  Next up is Philip Morris perhaps as soon as January next year. The only other thought worth noting is that June was the second commission free month in a row.  That streak will end in July when I do a purchase in my ROTH IRA account.

DOW: 16,827 /// S&P 500: 1,960 /// 10-YR BOND: 2.52%

New Purchases:
1) 3 shares DE at $91.32: $7.20 annual income
2) 4 shares BAX at $73.68: $8.32
3) 3 shares DE at $90.21: $7.20
4) 4 shares BAX at $73.74: $8.32
5) 3 shares DE at $91.17: $7.20
6) 5 shares PG at $78.69: $12.88
7) FRIP: 2 shares GE: $1.76

Sales:
none

Dividends Received: $617.93
ConocoPhillips (COP) $53.82
Walmart (WMT) $15.36
Southside Bancshares (SBSI) $15.84
iShares Emer Mkt Bnd (EMB) $2.46
Southern Company (SO) $33.60
Chevron (CVX) $60.99
Emerson Electric (EMR) $23.65
Exxon Mobil (XOM) $11.73
Johnson & Johnson (JNJ) $42.00
Lorillard (LO) $51.67
Norfolk Southern (NSC) $30.78
Target (TGT) $27.95
Unilever (UL) $8.55
Avista (AVA) $49.85
McDonald's (MCD) $49.41
Realty Income (O) $15.69
Realty Income Series F (O-PF) $6.76
BP (BP) $5.85
LTC Properties (LTC) $28.58
Owens & Minor (OMI) $25.75
Pepsi (PEP) $57.64

Dividend Increases:
1) O: $.1824792 to $.1827917 per month: $.36 annual income*
2) TGT: $.43 to $.52 per quarter: $23.40
3) WPC: $.895 to $.90 per quarter: $.44*
*: second increase this year

New Deposits:
$1,700 to taxable account, $100 to lending club

Lending Club Interest:
$14.82

Recent Buys

5 shares PG, 3.27% yield, $12.88 annual income

I think PG is decent buy right now for long term investors.  Awesome company.  In fact this company is so awesome it has increased dividends the past 58 years.  Go ahead, start a corporation from scratch right now and try to match that feat.  You probably have betters odds of winning the lottery...  Procter & Gamble was able to achieve greatness because of branding, innovation, and catering to consumer needs.  Huge moat.

A 3.27% yield for PG is pretty solid in my opinion.  I bought shares in June 2011 for a little over 65 bucks a share.  Guess what the yield was when I did the purchase...  3.20%.  Then I bought more in July 2011 on a nice dip and scored a 3.38% starting yield.  The current yield is nothing to sneeze at especially in comparison to other dividend growth stocks which are obviously over valued.  The only thing about PG as an income source is that its payout ratio crept up in recent years.  I'll have to monitor that, but dividends are by no means in danger at this point.  Worst case scenario is that dividend growth slows down a bit.

PG now has a dividend weight of 3.76% for me.  I'll consider adding more at these levels until it gets over 4%.  I want core stocks (PG, PEP, KO, JNJ, CVX, MCD, PM) to have dividend weights of 3-4%.  I'm underweight JNJ and overweight PM, other than that it looks good.

3 shares DE, 2.63% yield, $7.20 annual income
4 shares BAX, 2.82% yield, $8.32
1 share GE, 3.27% yield, $.88 (FRIP purchase)

With these purchases GE now has a dividend weight of 0.78%, 0.71% for DE, and 1.77% for BAX.

It makes sense to add these stocks are current levels not only because of weightings, but also because they appear slightly (BAX, GE) to moderately (DE) undervalued.  GE is creeping down towards $26.  Gotta love that, but it would obviously be better closer to $25.  DE is hanging around $90-92, which I appreciate since I plan to add more.  BAX's stock price went down since I bought it the other week.  Good news for accumulators.

I'm looking to increase ownership in these businesses next month if Mr. Market continues playing nice.  We'll see what unfolds.

Weekly Purchase - DE

3 shares DE, 2.66% yield, $7.20 annual income

I continue to see value with Deere.  Between today's purchase and TGT's improved dividend rate, my portfolio is set to pay $6,267.72 on an annualized basis or $522 per month.  Deere dividends make up 0.59% of that amount which I intend to just about triple.  I have to hope DE's share price keeps falling so I could acquire more shares (and therefore more income) for the same amount of invested capital.   Worst case scenario DE's share price goes up forcing me to look elsewhere.  I want lower prices during active accumulation and it's a shame the stock market hasn't really cooperated the past few years.

Other than Deere, I'm also considering BAX, GE, PG, and TGT for potential purchases.  I should gain a new GE share tomorrow through Scottrade's FRIP program.

I will away from home without access to blogger the next week and a half or so.  I plan to continue buying income securities as usual, but will have to post the transactions at a later date.

I hope you all have an awesome week!

Which Household Products Stock Is Most Attractive?

CL, CLX, KMB, PG, UL.  Titans of dividend growth investing.

Key Brands

Long term investors are attracted to companies with brand power that sell every day products consumers have to buy whether the economy is reaching new heights or we're stuck in the middle of a recession.  While I don't know which brand of smart phones consumers will favor 20 years from now, or what social media site will be all the rage.  I can tell you with certainty we will still brush our teeth, do laundry, wash our hair, and clean are homes.  Companies that sell these types of products are boring and will not make you rich over night.  In fact they usually command a higher than average valuation, which makes sense because the stock market loves certainty. 

What sets these companies apart from other consumer staples stocks (in my my mind) is the very nature of the products sold.  With cigarettes (MO, PM, LO) you have to deal with declining smoking rates and draconian government interference.  Sodas (KO, PEP) seem to face headwinds as consumers become more health conscious and move away from sugary beverages.  Staples retailers such as WMT appear to be doing well right now, but the industry is littered with failing businesses (K-Mart anyone?).  Look at the products and brands these household products companies sell.  If you're looking for a high quality company to hold the next 2-3 decades, here are some ideas:

Colgate-Palmolive (CL): Colgate, Palmolive, Softsoap, Fabuloso, Irish Spring, Speed Stick.
Clorox (CLX): Clorox, Pine-sol, Liquid Plumr, Kingsford, Glad, Brita, K.C. Masterpiece, Hidden Valley.

Kimberly-Clark (KMB): Kleenex, Scott, Huggies, Kotex, Depend, Poise, Viva, Cottonelle.  KMB has a professional division which include products such as napkins you might find at a food court and also has a healthcare business it plans to spin off into a separate company.

Procter & Gamble (PG): Tide, Gillette, Duracell, Crest, Pantene, Old Spice, Ivory, Charmin, Tampax, Pampers, Mr. Clean, Bounty, Swiffer, Febreze, Dawn, Cascade, Ariel, Gain, Pepto Bismal, Scope, Oral-B, Metamucil, Vicks, Bounce, Head & Shoulders, Herbal Essences, Cover Girl, Olay.  PG recently sold its Iams pet food business in an attempt to improve margins.

Unilever (UN/UL): Dove, Axe, Lux, Ponds, St. Ives, Surf, Tressemme, Vaseline, VO5, Ben & Jerry's, Bertolli, Hellman's, Knorr, Lipton.  Unilever is moving away from foods.  It is currently selling Ragu spaghetti sauce and sold Skippy peanut butter last year.

Valuation

CL: 20.6 times forward earnings

CLX: 20.1 

KMB: 16.8 

PG: 17.6 

UL: 18.5 

Colgate and Clorox are clearly the most expensive from the group based on current prices and forward earnings guidance.  I don't follow CLX and I'm actually really surprised to see it's almost as expensive as Colgate!  KMB stock should provide the most earnings per invested dollar.  Always important.

Capital Structure

CL:  80.3% debt / AA credit rating

CLX: 98.0% debt / A- 

KMB: 57.5% debt / A 

PG: 34.4% debt / AA 

UL: 44.5% debt / A+ 

As you can see from the credit ratings, all these companies are high quality and will not be going out of business anytime soon.  PG has the best balance sheet which is also backed by its AA credit rating.  CLX's use of heavy leverage is the reason I don't follow the company.  In general I prefer low leverage since I'm a conservative investor.  That said, if I was going to lever the hell out of a business, it would be something stable like a consumer products or an utility company.  Investors who are more daring might not be as concerned.

Growth (3-5 yr EPS growth estimates)

CL: 8.9%

CLX: 6.4%

KMB: 6.9%

PG: 8.4%

UL: 1.5%

This all important metric is what will fuel higher dividend payments in years to come for income investors like myself.  It will also fuel capital gains/total return for traders & those who plan to fund a retirement with asset sales.  I took the listed numbers from Fidelity.com, but it's important to note analysts are sometimes a bit too optimistic.  I look at it from more a relative basis meaning I would expect CL earnings to grow faster than the others, and UL's earnings to improve at the slowest rate.  With that in mind, analysts aren't terrible and they certainly have more insight than I do!  Anyways Colgate is expected to grow the fastest which might explain the high p/e.  Not looking so good for UL.  Deal breaker.

Dividend Safety

CL: 50.3% payout ratio

CLX: 68.0%

KMB: 58.2%

PG: 63.3%

UL: 66.4%

To calculate payout ratios I didn't use the standard trailing twelve month earnings you'll see plastered all over finance sites.  Those numbers are filled with one time restructuring costs, one time settlements, asset sales, and a bunch of other junk that will not affect a business moving forward.  Basically I don't trust those numbers and I want to use something better.  Instead I used Fidelity's adjusted actuals which strips out the one time events.  For example, Starbucks (SBUX) has a p/e ratio of 381 using the standard GAAP number.  Does that sound reasonable to you?  My way it has a p/e ratio of 30.5  Anyways the same principles work with payout ratios or anything based on trailing EPS. 

Dividends from each of these companies are safe at current levels, but as a whole I expect EPS growth to match or slightly outpace dividend growth from this point forward.  That trend seems to already ready be under way with lackluster increases from KMB and CLX this year.  Colgate has a bit more wiggle room.

Dividend Payments

CL: 2.12% yield / 51 year dividend growth streak

CLX: 3.28% / 37 years

KMB: 3.04% / 42 years

PG: 3.23% / 58 years

UL: 3.46% / 34 years

Since I invest for the sole purpose of building an income stream, I need to get paid!  Overall it's really easy to find a yield over 3% in this industry.  Take your pick with the exception of Colgate.  

A reader (thanks Mark!) emailed me evidence showing Unilever actually has a 34 year streak in British pounds.  Anyways these companies are all dividend champions with crazy streaks compared to average dividend stocks.

Conclusion

At current levels I'm most interested in KMB and PG.  PG most of all.

PG has a reasonable valuation compared to peers, a rock solid balance sheet, decent EPS growth expectations, and a safe dividend paying more than 3%.  I will consider adding additional PG shares to my portfolio if prices remain under $82.  Hopefully under $80... better yet $75.

I think CLX and UL are the worst options given current prices.

Finally valuations and expectations do change over time.  That's why I periodically check up on companies and recalculate fair values.  I did grab some Unilever shares a few months ago when its p/e ratio was lower and growth estimates were more optimistic.  I'm still not impressed with Clorox.  No plans to add it to my portfolio or watch list at this time.  Perhaps another day...

The Most Expensive Stocks I Follow

#1) Automatic Data Processing
ADP looks especially hideous right now.  At 22.8 times forward earnings, it's pretty hard to justify buying new shares of this business. ADP recently lost its AAA credit rating which didn't seem to phase the stock price one bit.  I was hoping the credit downgrade might spook investors into selling (so I could pick up some shares).  Guess I'll have to keep waiting for an opportunity to add this one.  That day may never come...

#2) Colgate
CL is a fantastic company, and you can expect to pay a premium if you want to own shares of this business.  At 20.6 times forward earnings the premium price is getting a bit stretched... even by CL standards.  I already own PG & UL and don't have room for this one anyways.

#3) Aqua America
Man, I'd really really like to grab shares of WTR, but at 19.7 times forward earnings, that dream will not become a reality anytime soon. I'm saving a spot in my portfolio for WTR, and if it declines 10-15% I might get interested.

#4) American States Water
This company is slightly cheaper than WTR with a 19.6 forward p/e, but then you have to consider its PEG ratio is an absolutely terrible 20.6.  That's outrageously bad.  Apparently water utilities will have to be put on hold for a while.  Yuck!

#5) Sysco
A 19.5 forward p/e for SYY?  No thanks.  The only saving grace here is that it does have a juicy yield of 3.1%, unfortunately that's really low by Sysco standards.

#6) Air Products & Chemicals (APD) 19.4 times forward earnings
#7) Walgreens (WAG) 19.1 times forward earnings.  Does have a PEG ratio of 1.5 to make up for it.
#8) Compass Minerals (CMP) 18.7 times forward earnings
#9) Dominion Resources (D) 18.7 times forward earnings
#10) Coca-Cola (KO) 18.3 times forward earnings

I didn't include REITS or MLPs in this list.

Weekly Purchase - BAX

4 shares BAX, 2.82% yield, $8.32 annual income

Picked up some new Baxter shares this week.  BAX trades for a very reasonable 14.3 times forward earnings and will contribute to my passive income stream with a healthy yield above 2.8%.  Unfortunately BAX went ex June 4th so this batch of shares won't start paying till Q4. That's okay because I believe shares of the business should be worth $80.  Therefore a small discount might be available right now. Calculating fair values isn't an exact science, but I do prefer to accumulate shares that appear discounted when possible.

Baxter plans to spinoff its biopharmeceutical business into a separate company next year.  The rationale is that two separate companies will be more profitable long term than if they remained as one.  Ok... Maybe they will be better off as two, or maybe not.  I'm buying shares of Baxter as a business right now, not because I think I'll make out like a bandit because of a spinoff.  That said, recent spinoffs (COP/PSX, ABT/ABBV) worked out well.  I ended up selling PSX and ABBV.  I don't regret selling Abbvie with its looming patent cliff at all.  Certainly not a sleep well at night stock.  But boy do I ever regret selling PSX!  Huge mistake on my part.

BAX now has a 1.65% income weight.  I'm not opposed to adding more shares.

Today's purchase was commission free.  I currently have 8 free trades left and plan to use 4 during June / 4 during July.

Symbol: BAX
Core Position: No
Speculative Position: No
Expectations: Steady income; 7% (average) annual dividend growth
Automatic Sell: Dividend cut (post spinoff), frozen dividend (post spinoff)
Consider Selling:  Business fundamentally changes, management becomes untrustworthy, fundamentals deteriorate, wildly over valued stock price, or position fails to meet expectations

1 share GE, 3.29% yield, $.88 annual income (FRIP purchase from last week)

Weekly Purchase - DE

3 shares DE, 2.63% yield, $7.20 annual income

I purchased new Deere shares today being very impressed with last week's dividend boost.  DE trades at 11.9 times forward earnings which is pretty darn cheap on an absolute basis.  It comes standard with a very attractive yield of 2.6%, especially when you consider that over the past 5 years Deere's yield averaged only 2.0%.

I calculate shares to be worth approximately $103.50.

The catch is that DE is highly cyclical.  Earnings are actually supposed to decline the next few years.  During the past twelve months EPS was a solid $9.15 per share.  However DE is expected to earn $8.51 in fiscal year '14, then $7.69 in fiscal year '15.  That being said, I really like this business as a long term investment.  The fact is the world's population and standard of living will only rise over time.  A nice tailwind for farm equipment manufacturers like John Deere.  You'd have to think they'll be selling more tractors 20 years from now.  I could be wrong, but it's hard for me to imagine a different scenario.

Anyways Deere maintains a very low payout ratio because it places more emphasis on stock buybacks and because earnings fluctuate so much.  Management isn't stupid, this business doesn't sell steady demand products such as toothbrushes and toilet paper.  I expect dividends will continue to grow over time, but I'm prepared for sporadic intervals which I wouldn't tolerate from other holdings.

DE now has an income weight of only 0.48% for me.

Symbol: DE
Core Position: No
Speculative Position: No
Expectations: Steady income; 8% (average) annual dividend growth
Automatic Sell: Dividend cut
Consider Selling:  Frozen dividend, business fundamentally changes, management becomes untrustworthy, fundamentals deteriorate, wildly over valued stock price, or position fails to meet expectations