Thursday, January 30, 2020

Recent Buys

Yesterday, I reported two recent sells.

I closed my positions in NestlĂ© SA (NSRGY) and Stanley Black & Decker (SWK), two positions I identified as weaker positions based on their Chowder Numbers [CDNs]. Both stocks have low current yields and their 5-year dividend growth rates [DGRs] just do not merit continued investment.

I used some of the proceeds to increase two of my current positions. These replacements are high-quality dividend growth [DG] stocks with favorable CDNs. This article details the new buys.

Background


I've adopted the DVK quality scoring system as the primary way to assess the quality of DG stocks. Additionally, I'm using CDNs to guide my investment decisions. Doing so should increase the likelihood of producing annualized returns of at least 8%.

Recapping from yesterday's article, stocks likely to deliver annualized returns of 8% are those with a CDN ≥ 12 (for yields ≥ 3%), CDN ≥ 15 (for yields < 3%) and CDN ≥ 8 (for Utility stocks yielding at least 4%). In my ranking tables, I color these favorable CDNs green. 

Assessment


In looking to replace NSRGY and SWK, I focused on current DivGro positions with smaller-than-average position sizes, high quality scores (20-25), and favorable CDNs. (I consider a full position to be about 1% of total portfolio value).

Below is a summary of high-quality DivGro stocks with smaller-than-average position sizes and favorable CDNs:

Rank Ticker Company Yrs VL
Safety
Rank
VL
Fin. 
Stren.
M*
Econ.
Moat
S&P
Credit
Rating
SSD
Divi.
Safety
Qual Yield 5-Yr
DGR
CDN Fair
Val.
Price (Disc.)
Prem.
7VVisa121A++WideAA-99250.59%20.1%  21  189204.629%
8ADPAutomatic Data Processing441A++WideAA97252.12%13.4%  16  165172.024%
9ORCLOracle111A++WideA+99241.79%13.6%  15  5853.50(8%)
11MAMastercard91A++WideA+99240.50%24.6%  25  300321.277%
22UNPUnion Pacific131A++WideA-88242.12%15.4%  18  186183.38(1%)
36ITWIllinois Tool Works451A++NarrowA+81232.42%18.5%  21  162176.659%
47SBUXStarbucks101A++WideBBB+67221.90%22.1%  24  8986.45(3%)
48IBMInternational Business Machines241A++NarrowA65224.66%8.6%  13  167139.03(17%)
49SNASnap-On102A+NarrowA-99212.61%16.3%  19  179165.54(7%)
55ICEIntercontinental Exchange72AWideA89211.11%16.2%  17  9399.447%
56CMCSAComcast122AWideA-89211.93%13.5%  15  5743.61(23%)
57JPMJPMorgan Chase92A+WideA-79212.66%16.2%  19  153135.24(12%)
62HRLHormel Foods532ANarrowA99201.96%16.0%  18  4247.3612%
64PSAPublic Storage01A+NoneA96203.58%9.2%  13  211223.326%

The table provides quality indicators and quality scores along with key metrics of interest to DG investors, including years of consecutive dividend increases, the dividend  Yield for a recent stock Price, and the 5-year compound annual dividend growth rate (>5-Yr DGR).

I also provide a fair value estimate (Fair Val.) to help identify stocks that trade at favorable valuations. The last column shows the discount (Disc.) or premium (Prem.) of a recent price to my fair value estimate.

Oracle (ORCL)


ORCL is trading about 8% below my fair value estimate of $58 per share, so it appears to be a good candidate. It happens to be the top-ranked stock in my list of 10 Dividend Growth Stocks for January 2020, which focused on high-quality stocks with qualifying Chowder numbers trading at discounted valuations.



Since June 2009, ORCL has returned 11.2% on an annualized basis (including dividends) versus the S&P 500's return of 14% over the same time frame. ORCL's growth is soft although the company is optimistic about the growth prospects of its EPM (enterprise performance management) and HCM (human capital management) cloud products.

My current position stands at 0.82% of total portfolio value, leaving enough room to add about 30 shares to reach a full position. I decided to add 35 shares instead, increasing my position to 175 shares:

2020-01-27 Bought 35 shares of ORCL at $53.08 per share: $ 1,857.70

My initial Yield on Cost [YoC] is 1.81% and the buy adds $33.60 to DivGro's projected annual dividend income [PADI]. In all, my 175 ORCL shares will deliver annual dividends totaling $168.

My average cost basis is $54.58 and the average YoC is 1.76%.

Illinois Tool Works (ITW)


ITW has a quality score of 23, making it one of the highest-quality stocks in my portfolio. I don't actually mind paying a premium price for stocks with quality scores of 23 or higher, so the fact that ITW is trading about 9% above my fair value estimate is not such a big concern. My view is a long-term view, and I think the stock will do just fine!



Since January 2010, ITW has returned 15.1% on an annualized basis (including dividends) versus the S&P 500's return of 12.4% over the same time frame. ITW is a Dividend Champion with 45 consecutive years of higher dividend payments. The stock yields 2.43% at $175.86 per share and has an impressive 5-year DGR of 18%:


I decided to add 22 shares and increase my position in ITW to 60 shares, which now represents about a full position:

2020-01-27 Bought 22 shares of ITW at $175.12 per share: $ 3,852.64

My initial Yield on Cost [YoC] is 2.44% and the buy adds $94.16 to DivGro's projected annual dividend income [PADI]. In all, my 60 ITW shares will deliver annual dividends totaling $256.80.

My average cost basis is $150.34 and the average YoC is 2.85%.

Concluding Remarks


After selling NSRGY and SWK, I used some of the proceeds to increase my ORCL and ITW positions to full positions. With about $4,100 of the proceeds remaining, I'll soon consider some of the other stocks in my portfolio with favorable CDNs for additional investment.

In summary, I replaced NSRGY (quality score 25) and SWK (quality score 20) with ORCL (quality score 24) and ITW (quality score 23), slightly improving the overall quality of my portfolio as measured by the DVK quality scoring system. And since ORCL and ITW have favorable CDNs, I believe I improved the chances that DivGro will perform better in the future.


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2 comments :

  1. ORCL looks interesting. I like the business but never invested in it. I'm hoping to trim back my positions some to get a more concentrated portfolio, not extremely concentrated just more than it is now.

    ReplyDelete
    Replies
    1. Thanks for your note, PIP -- I'm slowly doing the same, really just to see if I can move to a portfolio that delivers higher total returns. I have a sense that higher DGR stocks perform better in the long term. We'll see how it goes!

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