I try to view the stock market like a store; a store filled with merchandise in the form of stocks. And some of these stocks might be near the front window draped over a well-shaped mannequin with a hefty sticker hanging off the bottom. I instead tend to drift to the back of the store near the clearance rack where the crowds are few and the deals are easier to spot.
While I’ll admit the clearance rack gets a bit lighter when the entire store is expensively priced based on historical averages (as it is now), that doesn’t stop me from shopping. It just means I need to look a little harder. Be a bit more diligent with my capital. Take an extra look at all the opportunities available.
So I’ve been making my list and checking it twice, as I now have a decent chunk of capital available to me after my monthly commission check from my day job cleared the bank today. I might just have enough cash to make two purchases this month, and it’s highly likely that at least one of the equity investments will involve one of the companies listed below.
General Electric Company (GE)
General Electric is a diversified energy infrastructure, financial services, and industrial products company. They serve customers in more than 100 countries.
I continue to view GE as a strong play for 2014. With a P/E ratio of 17.56, it’s not particularly expensive. It has a strong yield of 3.4%, and the recent history of dividend growth is impressive with a raise of 15.8% coming at the end of last year. With a payout ratio of 59.5%, there is still room for dividend growth roughly in line with earnings growth. Meanwhile, the company continues to work through a record $ 200+ billion backlog, which should ensure strong earnings growth for the foreseeable future. They’ve been making great moves for shareholders by divesting non-core businesses like NBCUniversal, and they’ll soon be selling off a large portion of GE Capital. In the process, they’ve freed up cash and improved the balance sheet.
I initially invested in General Electric in June of last year for $ 23.41 per share. I thought it was attractively priced then, and I think it’s still attractively priced now. The company is incredibly diversified between operating segments, and after a shocking dividend cut during the Great Recession, the company is well-positioned to make up for past mistakes and continue rewarding shareholders. S&P Capital IQ predicts a 3-year compound annual growth rate in EPS of 7%. However, I think there’s a decent chance GE can outstrip this growth rate over the next few years. GE remains very high on my watch list, and I’m willing to buy up to $ 27, depending on what other opportunities present themselves.
Orchids Paper Products Company (TIS)
Orchids Paper Products is an integrated manufacturer of tissue products. Its products are sold under customers’ private label brands or under its own value brands like My Size, Velvet, and Linen Soft.
I initially discussed my interest in this company back in December, and my interest actually grows as time marches on. With a market cap of $ 271.2 million, this isn’t the usual type of company I invest in. However, I think my portfolio that’s been built almost exclusively with stable, mature dividend growth companies can handle a little risk here with this one.
The company reported an extremely strong 4Q 2013, which closed out a great year. Although the company may appear a bit expensive here with a P/E ratio of 20.19, it’s actually not that expensive considering the growth this company has already experienced and the growth potential it possesses. Since 2008, EPS has grown at a compound annual rate of 16.15%, and the dividend has more than tripled since being initiated in 2011. It was $ 0.10 per share quarterly in 2011, and it’s now $ 0.35. With a yield of 4.14%, it’s a value stock, growth stock, and a high-yielding stock all in one. They remain well-managed with an attractive balance sheet and coming from a low base, I think strong growth is set to continue. The payout ratio is a bit higher than I like to typically see, at 84%, but it appears management has been targeting a high payout ratio. And with strong continued growth this should be manageable assuming the company continues to execute. There are special risks with an extremely small company like this, but I’m interested in buying shares here.
AT&T Inc. (T)
AT&T is a telecommunications company, providing telecommunication services in the United States and worldwide.
AT&T isn’t a sexy pick, but it’s a nice play for income here. Shares in T currently pay out $ 0.46 per share quarterly, which amounts to a 5.73% yield. And with a P/E ratio of 9.44, I think it’s hard to overpay for T here. I like the idea of boosting my overall portfolio yield, which allows me to reinvest the hefty income from T into other holdings that perhaps offer lower current yield but higher growth profiles. I like to think of higher yielding plays like T as the initial rocket that gets my portfolio into outer space before the lower yielding engines take over after years of heady growth. The payout ratio currently stands at 54.1%, which allows for plenty of future dividend growth. And with 30 years of dividend growth under its belt I see no reason this won’t continue. However, it look as though T is sticking to a one cent annual dividend raise for the foreseeable future. That’s a shame, because earnings growth has actually been rather strong with T, if a bit bumpy. Earnings have a CAGR of 9.48% since 2004, and S&P Capital IQ predicts a 3-year EPS CAGR of 7%.
While the price seems right and the yield is very attractive, the drawback with AT&T is the extremely competitive business landscape it operates in, which typically doesn’t allow for a lot of growth. In addition, the company basically provides a commodity which provides for no real brand strength or customer loyalty. So they’re neither a low-cost provider, nor do they offer a particular brand name strength. In light of that, it’s difficult for me to add to my small position in T here. However, if the price continues to stay weak I may pick up some additional shares for the income they provide. I like to think of telecommunication companies as essentially utilities because they typically operate with a large amount of debt due to huge infrastructure, but also provide a service that people require. And so I keep my utility exposure light and replace that exposure with telecoms.
Although I didn’t highlight them here, I’m also interested in Bank of Nova Scotia (BNS) andUnilver Plc (UL). Furthermore, I actually think Philip Morris International, Inc. (PM) andKinder Morgan Inc. (PM)represent two of the best possible opportunities in the market, but I am already heavily allocated to both of them which is why I decided not to target them for possible purchases in March. However, if you are not as heavily allocated to these companies I think they represent pretty solid value here.
So that’s my list for March. I’m hoping for slightly better prices over the next few days, but I’m not going to try and time the market. If I think the valuation makes sense, and I do with the above companies, then I’ll likely pull the trigger even though the S&P 500 continues to break new records seemingly every couple days.
Full Disclosure: Long GE, T, BNS, PM, KMI
How about you? What’s on your watch list for March? Any particular equities have your eye?
Thanks for reading.
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Trying to retire by 40 by investing in dividend growth stocks and living frugally, valuing time over money.