Recent Additions To Existing Positions (Part 2)

This is Part 2 of an article covering trades I executed last week. With these trades, I'm adding shares to existing DivGro positions rather than opening new positions.

Part 1 presented two Consumer Staples stocks, CVS Health (CVS) and Walgreens Boots Alliance (WBA). These stocks are trading well below my fair value estimates, yet both have good growth prospects and offer extremely safe dividends.

In Part 2, I'm presenting a high-yielding REIT and an Energy sector stock. Finally, Part 3 will present two Information Technology stocks with solid growth prospects.

Valero Energy (VLO) – Added 8 shares of VLO @ $75.23 per share

Founded in 1955 and based in San Antonio, Texas, VLO is an independent petroleum refining and marketing company operating in the United States, Canada, the Caribbean, the United Kingdom, and Ireland. VLO’s refineries produce conventional and premium gasoline, including gasoline meeting the specifications of the California Air Resources Board.

This buy adds 8 shares to the 172 shares of VLO I already own. My average cost basis is $62.17 per share, and the average yield on cost is 4.5%. I'm adding $22.40 to DivGro's PADI with this buy.

Based on my most recent fair value estimates (as reported in September's DivGro Pulse), VLO is trading about 12% below my fair value estimate of $86.

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 $72.00 and S&P Capital IQ's fair value calculation is $96.10. According to TipRanks, based on 6 ranked analysts offering 12-month price targets for VLO in the last three months, the average price target is $79.50.

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 VLO is $75.66, implying a downside of about 2%.

Finally, the following earnings and price correlated F.A.S.T. Graphs chart for a 13-year period indicates an estimated price of $90.74 for the Normal P/E Ratio of 17.2 for VLO.


Excluding the highest and lowest of these estimates and using the average of the remaining values, I get a fair value of $82.98, which is a little lower than my fair value estimate of $86 per share.

In my September DivGro Pulse article, VLO is ranked #12 out of 50 DivGro stocks and earned five stars in my 7-star rating system:

Valero Energy (VLO)

• discount 12%

• rank #12 • ★★★★★☆☆

The following table presents ratings of VLO from several sources, for comparison to my rating:
 

DARS Rating Neutral (2.5 to 3.4) Rating for Stocks:  ★★★☆☆ STARS Ranking:      Quality Ranking: B Quant Rating: Analyst Consensus: (6 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.

VLO briefly cut its dividend in 2010. Normally, that is a no-no for dividend growth investors, but VLO quickly turned things around. The stock now looks like a solid dividend growth stock, yielding 3.6% and boasting a very high dividend growth rate of over 30%. Of course, maintaining that dividend growth rate is highly unlikely, but I'd be happy with increases in line with VLO's earnings growth rate, especially given the attractive dividend yield. With the economy improving and energy refiners experiencing some tailwinds, VLO could soon reach $90 per share.

Omega Healthcare Investors (OHI) – Added 100 shares of OHI @ $31.90 per share

Founded in 1992 and based in Hunt Valley, Maryland, OHI is a self-administered that invests in income-producing healthcare facilities in the United States and the United Kingdom. The company provides long-term leases or mortgage financing to healthcare operating facilities. OHI secures funding through loans, revolving credit, equity securities, and secured indebtedness. 

I added 100 shares to increase my holding to 400 shares. The average cost basis is $36.03 per share, while the average yield on cost is 7.11%. This buy adds $256 to DivGro's PADI.

OHI is trading about 3% above my fair value estimate of $31.
For comparison, Morningstar's fair value estimate is $31.22. According to TipRanks, based on 3 ranked analysts offering 12-month price targets for OHI in the last three months, the average price target is $33.33.

According to finbox.io, the average fair value of OHI is $26.32, implying a downside of about 16%.

Here is F.A.S.T. Graphs chart showing a 13-year correlation between adjusted funds from operations (AFFO) and price. Considering future estimates, we can estimate a fair value price of $37.09 for OHI.


Excluding the highest and lowest of these estimates and using the average of the remaining values, I get a fair value of $31.85, just a little above my own estimate of $31.

I don't have a rating for OHI that I'm comfortable sharing. The reason is my rating system currently does not take into account the unique characteristics of REITs. As such, the three REITs in DivGro are ranked #48 through #50 out of 50 stocks:

     rank #48 • National Retail Properties (NNN)     
     rank #49 • Omega Healthcare Investors (OHI)    
     rank #50 • Realty Income (O)

I'm fairly confident these quality REITs are not the 3 "worst" holdings in DivGro. In time, I'll rework my rating system to properly assess REITs relative to regular dividend growth stocks.

The following table presents ratings of OHI from other sources, for information:

DARS Rating Neutral (2.5 to 3.4) Rating for Stocks:  ★★★☆☆ STARS Ranking:      Quality Ranking: B+ Quant Rating: Analyst Consensus: (3 Analysts) Rank and Style Scores:   2-Buy    †VGM Style:

†VGM Style:  Value   Growth   Momentum  and  combined VGM  score

I like OHI for its yield (obviously!) and consistent dividend growth rate of about 8-9% for 10-years running. The REIT is a Dividend Contender with a streak of 15 years of higher dividend payments. Furthermore, OHI has increased its dividend every quarter for 20 straight quarters. On the flip side, investing in OHI comes with some risks, including rising interest rates and heavy reliance on the continuation of Medicaid and Medicare to fund skilled nursing facilities (OHI's primary tenants).

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 (covered in Part 1) and VLO and OHI covered here.

Part 3 will present the final pair of additions, two technology stocks with great growth prospects.

Thanks for reading! Please let me know what you think of VLO and OHI in the comments below. Do you own either of these stocks? If so, are you looking to add to your positions? If not, are you interested in buying shares?