October 2019 Buy Candidates

The Q3 reporting season will really get underway in mid-October. I’m always looking forward to this exciting time. First of all, you get an update on the business performance of the companies you own. Secondly, there’s always a good business underperforming relative to the short-term oriented market expectations which create attractive buy opportunities.

Last year, there was a fantastic opportunity to pick up a great company like Starbucks (SBUX) for a price around $50, which was equal to a P/E of 20 and a dividend yield of 2.70% at that time. Right now, it trades around $90, a P/E of 31 and a dvidend yield of 1.60%. I was able to benefit from the opportuinty in October last year, because I had some dry powder to invest in SBUX.

There’s no doubt about the strength of the U.S. economy at the moment, especially relative to the economies in Europe. But we also see some signs of a slowing economy for several quarters in a row. It’s very likely that some companies will report a large revenues and/or earning miss with current market conditions; and by that just scaring the hell out of this market. That’s why I’m considering to wait for the earnings season and buy stocks of companies that reported an unexpected miss.

Stocks which look attractive to me at this moment are Johnson & Johnson (JNJ), Altria (MO) and Simon Properties Group (SPG). Since yesterday I have a subscription to FastGraphs so I decided to post some screenshots. I’m planning to use these screenshots more frequently on my blog.

Johnson & Johnson (JNJ)

I just initiated a position in this company and am very eager to buy more shares. You can read more about this purchase right here. The price has stayed in the price range $127-132 in the last two weeks which comes down to a forward P/E of 15 and a dividend yield of 2.95%. Based on their average P/E ratio over 10 years the company is fairly valued. The average dividend growth rate over 10 years is 7%. That means a nice double of their dividend in 10 years using the 72-rule. Still, their dividend payout ratio remains attractively low at 44%. Oh yes, before I forget: J&J has increased their dividend for 56 following years which makes the company a true Dividend King.

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Altria (MO)

My position in this tobacco stock is already meaningful in comparison with my other stock positions. I currently own 97 shares for an average buy price of $53.88. It trades around $40 at the moment; that’s 25% lower and therefor an interesting buy candidate. MO has a streak of 49 years increasing their dividend, just year after year. The P/E ratio is less than 10 and a dividend yield of more than 8.3%! This means the business is historically very cheap and the market isn’t expecting anything good from this company right now.

The tobacco industry has had some negative media attention, because people have died from severe lung illnesses linked to vaping. Some questions still remain to be answered regarding these deaths though. I think the political and media pressure isn’t likely to go away any time soon. But hey, if there’s one company that knows how to deal with laws and regulations and find a workable solution for all parties (well, except for the addicted individuals maybe…) it’s Altria. Besides let’s not forget the government is reaping financial gains of the tobacco industry, whether it’s the traditional cigarretes or vaping products.

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Simon Properties Group (SPG)

This high-quality REIT is here for another turn, just like in September it’s also a potential buy in October. They offer a 5.3% dividend yield and trade at an historically low AFFO of 14.5. Their dividend growth rate over 10 years sits around 10%. During the Great Recession SPG lowered its dividend in 2009 and 2010 though. They’ve already acquired the status of a Dividend Contender again. Their AFFO dividend payout ratio has increased from 67% to 71% over 10 years. This shows what a quality business this is. I’m not worried about their debt as SPG is able to refinance their debt at even lower interest rates than right now.

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These are my ideas for October if I’m mentally not strong enough to wait for the next earnings reports ☺️. What are you thinking of? Do you plan to save any extras to take advantage of price declines in the upcoming earnings round mid-October? Do you like the screenshots of FastGraphs?

Thanks for reading and please feel free to comment.

Happy investing!

Yes, I Finally Bought This Dividend King 👊🤘🏾🥂

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That’s how excited I felt when I bought shares of this fantastic business two weeks ago. It was somehow inevitable to buy shares of this dividend king and own it for a very, very long time. For three years I’ve watched the share price going up and down. But finally I laid my hands on this one. I’m talking about Johnson & Johnson (JNJ). The company with 135,000 employees who serve more than 1 billion patients each day.

I bought 9 stocks of Johnson & Johnson at a price of $128.22. At this price the stock yields 2.98%. They’re paying me $0.95 per quarter. So 9 shares equals a yearly $34.20. That’s certainly a nice yield and amount to begin with. It’s below my preferred step-in-yield of 4%, but J&J screams quality all over the place. So a lower yield is fine with me.

Their EPS (ttm) was $6.02 which means I bought the stock at a P/E (ttm) of 21.3 which seems on the high side. But J&J is also trading at approximately 15 times FY2019 earnings estimates of $8.60 per share. That’s more like a reasonable P/E.

They’ve increased their dividends for 57 in a row, which makes them a true dividend king. Another fun fact: JNJ has a streak of 35 consecutive years of adjusted operational earnings growth. Man, this is a high-quality business! In fact, the company is one of the only two companies with a AAA credit rating, the other one being Microsoft (MSFT). Their latest dividend raise was still a nice 5.6%. The 5-year yield on cost of JNJ sits around 3.85% according to GuruFocus.

The dividend payout ratio based on analysts consensus of earnings of $8.60 in 2019 and a ftm dividend of $3.80 comes down to 44%. This gives the company enough opportunities to continue increasing their dividends in the future. Over 20 years, they’ve managed to only increase their payout ratio about 10 percentage points. Talking about value creation and capital allocation! Many large and old corporations get inefficient along the way; they miss the boat, because they took things for granted for too long. But not with this giant: 25% of sales come from products launched in the past 5 years. That’s quite an achievement for such an established company.

GuruFocus states that the current return on capital (Joel Greenblatt) was 110.35%. This means the management of JNJ creates tremendous value for its shareholders. Their RoC is even ranked higher than 95% of the 1011 companies in the Drug Manufacturers industry. That is beyond comprehension, especially for such a large corporation. As a dividend growth investor I like dividend reliability and dividend growth. But, I also like to buy shares of better-than-average companies trading at below-average valuations. Buying JNJ at a forward P/E of 15, a RoC above 100% and a dividend yield of 3% means we’re into something good, folks.

In December 2018 the Board of Directors also announced they had authorized the repurchase of up to $5 billion of the company’s common stock.

I’m very excited about this purchase. It’s a new position for me and I will be watching the stock price closely to buy even more shares. The earnings streams are durable, reliable and stable because of their business diversification. Just like you want with a recession coming our way. J&J has been around for more than 130 years, so they weathered a countless number of economic and market cycles. I’m confident they will also ride this one brilliantly.

What did you buy lately and have you considered buying shares of JNJ?

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