Monday, October 2, 2017

Recent Additions To Existing Positions (Part 1)

In September's DivGro Pulse article, I identified several existing DivGro positions that I wanted to increase. This article (in three parts) presents a summary of trades I executed last week to boost these positions.

Part 1 presents two Consumer Staples stocks that have been impacted by Amazon's buying of Whole Foods and speculation that the e-commerce titan might be looking into launching a drug delivery and online pharmacy business.

Part 2 will present two more additions, one high-yielding REIT, and one Energy sector. Finally, Part 3 will present two Information Technology stocks with great growth prospects.

Except for the high-yielding REIT, these buys have a relatively small impact on DivGro's projected dividend income. But every bit helps!

I've already exceeded my 2017 goal of increasing DivGro's projected annual dividend income (PADI) to $14,400. After these buys (and some new buys I'll report on later), DivGro's PADI now stands at $16,665.

CVS Health (CVS) – Added 10 shares of CVS @ $81.52 per share


CVS provides integrated pharmacy health care services. The company advises patients on medications at CVS Pharmacy locations; provides cost control programs through CVS Caremark; delivers care to patients through CVS Specialty; and provides pharmacy care for seniors through Omnicare. CVS was founded in 1892 and is headquartered in Woonsocket, Rhode Island.


I already own 40 shares of CVS, so this buy increases my CVS position to 50 shares. With this buy, my average cost basis increases to $78.76 per share, and the average yield on cost is 2.54%. The buy adds $20 to DivGro's PADI.

Based on my most recent fair value estimates (as reported in September's DivGro Pulse), CVS is trading about 19% below my fair value estimate of $101.

I use a multi-stage DDM (dividend discount model) with proprietary adjustments to determine fair value. I set a required rate of return of 10% and use estimates of the annual EPS growth rate for the next five years. After that, I taper growth to a constant rate of 3% after ten years. I adjust the calculated fair value based on various factors, including an assessment of dividend safety.

For comparison, Morningstar's fair value estimate is $109.00 and S&P Capital IQ's fair value calculation is $228.00. According to TipRanks, based on 10 ranked analysts offering 12-month price targets for CVS in the last three months, the average price target is $88.50.

The fundamental analysis tools available at finbox.io provide a comprehensive list of stock valuation models and a quick way to view the average fair value estimate with default settings. According to finbox.io, the average fair value of CVS is $94.11, implying an upside of about 16%.


Finally, the following earnings and price correlated F.A.S.T. Graphs chart for a 13-year period indicates an estimated price of about $103.64 for the Normal P/E Ratio of 16.3 for CVS.


Excluding the highest and lowest of these estimates and using the average of the remaining values, I get a fair value of $101.93, which is pretty close to my own valuation of $101.

In my September DivGro Pulse article, CVS is ranked #2 out of 50 DivGro stocks and earned six stars in my 7-star rating system:

CVS Health (CVS) • discount 19% • rank #2 • ★★★★★

CVS also featured in the September edition of my monthly top 10 ranked dividend growth stocks. CVS was ranked #9, down from its #5 rank in August:



The following table presents rankings and ratings of CVS from other sources, for comparison to my own:

DARS Rating
Neutral (2.5 to 3.4)
Rating for Stocks:
 ★★★★☆
STARS Ranking:
    Quality Ranking: A+
Quant Rating:
   
Analyst Consensus:
(10 Analysts)
Rating and Rank:
  Financial Strength:   Safety:
Rank and Style Scores:
  3-Hold   †VGM Style:
†VGM Style:  Value   Growth   Momentum  and  combined VGM  score

For a description of the various stock ratings referenced in the table, please see my Ratings page.

Sentiment remains negative on CVS despite decent Q2 earnings. However, I think the stock has good upside potential and share the bullish outlook of one Seeking Alpha author who thinks CVS is going back to $100 per share. CVS has a Dividend Safety Score of 99 from Simply Safe Dividends, suggesting that the company's dividend is extremely safe.

Walgreens Boots Alliance (WBA) – Added 36 shares of WBA @ $79.00 per share


WBA operates a network of drugstores in the United States. The company sells prescription and non-prescription drugs as well as general merchandise products, including household items, convenience and fresh foods, personal and beauty care products, and photofinishing services. WBA was founded in 1901 and is based in Deerfield, Illinois.


I added 36 shares to my existing position of 44 shares, so now I own 80 shares of WBA at an average cost basis of $66.71. The average yield on cost is 2.40%. The buy adds $57.60 to DivGro's PADI.

WBA is trading about 15% below my fair value estimate of $93.

For comparison, Morningstar's fair value estimate is $73.00 and S&P Capital IQ's fair value calculation is $171.51. According to TipRanks, based on 11 ranked analysts offering 12-month price targets for CVS in the last three months, the average price target is $93.30.

According to finbox.io, the average fair value of CVS is $100.73, implying an upside of about 32%.


Finally, the following earnings and price correlated F.A.S.T. Graphs chart for a 13-year period indicates an estimated price of $103.32 for the Normal P/E Ratio of 17.2 for CVS.


Excluding the highest and lowest of these estimates and using the average of the remaining values, I get a fair value of $97.59, somewhat higher than my own valuation of $93.

WBA ranked #9 out of 50 DivGro stocks in the September edition of my monthly top 10 ranked dividend growth stocks, and earned five stars in my 7-star rating system:

Walgreens Boots Alliance (WBA) • discount 15% • rank #9 • ★★★★★

The following table presents rankings and ratings of WBA from other sources, for comparison to my own:

DARS Rating
Neutral (2.5 to 3.4)
Rating for Stocks:
 ★★★☆☆
STARS Ranking:
    Quality Ranking: A-
Analyst Consensus:
(11 Analysts)
Rating and Rank:
  Financial Strength:   Safety:
Rank and Style Scores:
  4-Sell   †VGM Style:
†VGM Style:  Value   Growth   Momentum  and  combined VGM  score

I like WBA as a solid dividend growth stock, especially now that the company's acquisition of more than 1,900 Rite Aid stores has received final approval. The stock is a Dividend Champion with a streak of 42 years of higher dividend payments. WBA also is one of only 51 Dividend Aristocrats. The stock has a Dividend Safety Score of 100, indicating that WBA's dividend is extremely safe.

Conclusion


With my monthly Pulse articles, I identify existing DivGro positions suitable for additional investment. Recently I added shares to six DivGro positions, including CVS and WBA, two Consumer Staples stocks that are trading well below my fair value estimates, yet have good growth prospects and extremely safe dividends.

Parts 2 and 3 will present four more buys.

Thanks for reading! Please let me know what you think of CVS and WBA in the comments below. Do you own either of these stocks? If so, are you looking to add to your positions? 

2 comments :

  1. CVS and WBA both cross over a bit into the health care sector so they are not pure consumer staples.

    I like these moves.

    I'm a big fan of CVS and am watching it closely right now.

    ReplyDelete
    Replies
    1. Yes, the do cross over a little into the health care sector with their prescription drug services.

      We'll see how these stocks perform. The Amazon thing is an unknown, but regulatory approval may take a while if, in fact, Amazon wants to get into this space.

      Delete

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