Monday, October 6, 2014

CVX Stock Analysis -- Chevron Corporation

Chevron is a popular company among dividend investors.  Dividend Growth Investor did an excellent detailed analysis at seekingalpha. Here I try to organize my thoughts on this company and calculate my entry point.

Financial fundamental


The overall finance of CVX is sound and safe.  Please see above chart and see MU remarks for my comments.  One highlight is about free cash flow per share.  In 2009 and 2013, the figures were negative.  For the years with positive data, the amounts of free cash flow were all higher than dividend payout in the same year.  However, I am afraid the negative years would eat out cash preserve and force the company to raise bond to cater to dividend payout.

Dividend history growth

I reviewed Chevron's dividend payment history.  From 1970 onwards, in 38 years, there was one dividend cut in 1973.  there were four years without dividend year-over-year increase (1971, 1975, 1986, and 1987.)  From this history, I deduct that in the near future, dividend cut is an event with very low possibility. There might be one or two years without dividend growth.  However, since I have confidence in the prospect of oil industry, I won't worry too much when this actually happen.  Instead, I'll regard it as an opportunity to purchase more.

CVX dividend history and growth rate
CVX current dividend is $4.28, with annual yield at 3.6%.  The most recent 5-year average annual growth rate is 9.08%, and the 10-year rate is 10.60%, while the overall average rate covering the whole 37 years is 9.71%.  Let's take 9.08% as the conservative long-term growth rate,  according to below 10 by 10 table, it will take around 12.5 years to achieve 10% annual profit return rate.  My goal is to purchase those stocks that are able to achieve 10% yearly return rate within 15 years.  So CVX fulfill this criteria generously.

The most recent dividend growth was in April, 2014. Quarterly dividend has a 7% increase to $1.07/share.


Entry point


 Morning star valuates CVX at $132, while Yahoo 1-year target price is $135.76.  S&P intrinsic value is $124.70, and 1-year target price is $142.  My entry point based on forward PE and earnings forecast is at around $113.  When stock price falls at $113, I might initiate my position.  Considering the free cash flow risk, I'll seriously take action when the stock price falls under $110.

Disclosure:  No positions for now.  Will take action to purchase shares at $110.

Wednesday, September 17, 2014

Cheat sheet of bond yield, bond price, and interest rate

1. Bond price vs bond yield

Yield is a figure that shows the return you get on a bond. The simplest version of yield is calculated using the following formula: yield = coupon amount/price. When you buy a bond at par, yield is equal to the interest rate. When the price changes, so does the yield.

Let's demonstrate this with an example. If you buy a bond with a 10% coupon at its $1,000 par value, the yield is 10% ($100/$1,000). Pretty simple stuff. But if the price goes down to $800, then the yield goes up to 12.5%. This happens because you are getting the same guaranteed $100 on an asset that is worth $800 ($100/$800). Conversely, if the bond goes up in price to $1,200, the yield shrinks to 8.33% ($100/$1,200).

2. Bond price vs. interest rate

An easy way to grasp why bond prices move opposite to interest rates is to consider zero-coupon bonds, which don't pay coupons but derive their value from the difference between the purchase price and the par value paid at maturity.

For instance, if a zero-coupon bond is trading at $950 and has a par value of $1,000 (paid at maturity in one year), the bond's rate of return at the present time is approximately 5.26% ((1000-950) / 950 = 5.26%).

For a person to pay $950 for this bond, he or she must be happy with receiving a 5.26% return. But his or her satisfaction with this return depends on what else is happening in the bond market. Bond investors, like all investors, typically try to get the best return possible. If current interest rates were to rise, giving newly issued bonds a yield of 10%, then the zero-coupon bond yielding 5.26% would not only be less attractive, it wouldn't be in demand at all. Who wants a 5.26% yield when they can get 10%? To attract demand, the price of the pre-existing zero-coupon bond would have to decrease enough to match the same return yielded by prevailing interest rates. In this instance, the bond's price would drop from $950 (which gives a 5.26% yield) to $909 (which gives a 10% yield).

 
Sources:
1) Bond basics: yield, price, and other confusion
 

Real estate investment vs. dividend stock investment



Both RE and dividend investments are good tools to accumulate passive income and asset appreciation.   They are both my favorite investment tools.


Both of them offer stable passive monthly income.  Stock passive income is achieved by monthly or quarterly dividend income; RE one is through monthly rental.


Both of them provide very good asset/principle appreciation potential.  Stock investment is via the invested company value upward potential, while RE investment is through house/land value appreciation.


Since both of them are doing well in asset appreciation, they are both excellent choices to hedge against inflation.  We expect inflation will shoot up high in the near future, so to adopt some proactive approaches are absolutely necessary. 


Some people prefer dividend income to rental income because: 1)  RE investment requires big amount of money up front for the down payment.  Usually down payment is 20-25% of the purchase price.  If the house is bought at $30K, down payment will be $6K, additional costs include closing cost, insurance, tax, and sometimes HOA. 2) Another obvious reason hindering most investors from RE investment is because it requires dealing with tenants.  No one likes to be bothered by a mid-night phone call from tenant to report a broken toilet.


These disadvantages aside, I prefer RE investment to dividend investment with the main reason of leverage


1) Real estate is a few places that you can only pay a fraction (around 20%) of the purchasing prices to get a house.  By using financing from banks, you can buy more properties, which will produce you much higher income than you could by paying in all cash. For example, if you had $150,000 to invest, you could buy a duplex for all cash (no loan) that produces $12,000 a year in income.  However, if you take the same $150,000 and use leverage, you can buy property valued at as much as $750,000.  If the bigger property generates $6,000 a month in income and you subtract the loan payment of $4,000, you would make $2,000 a month.  That is double what you would have made without using financing.


2) Another beauty of RE investment is, besides time value same as in stock investment, mortgage principle is paid quietly without consideration in regular ROI calculation.  For example, if a house's value is $300K.  You pay the down payment $60K and other fees $5K, with the total out of pocket money at $65K.  Let's say the house is rented out, and after deducting monthly mortgage, insurance, and tax, the monthly net return is $300.  The return rate is usually calculated to be 5.5% (=($300 x 12) / $65K).  However, from the first monthly payment, mortgage principle is paid around $300 (increasing monthly), which isn't included in the calculation.  If the amount is included, the actual return rate will be double at 11%.

Monday, August 4, 2014

Recent purchase: McDonald's (MCD) & General Mills (GIS)

Here is the list of my recent purchase:-

-- 25 shares MCD at $95.41;
-- 50 shares MCD at $94.05.
-- 50 shares GIS at $50.76.

McDonald's annual dividend is $3.24 with yield rate 3.2%.  With 75 shares, my forward annual  dividend is around $243.  General Mill's annual yield rate is $1.64 with yield rate 3%.  With 50 shares, my forward annual dividend is about $82.  In total, these two companies offer me $325 in a year.

Market is getting more volatile these days (hopefully) towards the direction of correction.  I'm going to be patient and wait till September to see if there are opportunities for more purchase.  Currently these stocks are on my radar:-

PG -- entry price $75.80;
T    -- entry price $33.00;
GE -- entry price $24.00.

(Note: these entry prices are flexible though.)

I didn't do much work these days because my focus was on somewhere else.  Anyway, I'll keep on searching and updating my watch list.


Happy accumulating your dividend, everyone!

Thursday, July 3, 2014

ED Stock Analysis -- Consolidated Edison, Inc.

ED is a slow and steady growing utilities company.  Without doubt, it has massive competitive moat, and also shares the common features of utilities companies.  This article gave thorough analysis of this company and I can't agree more.  I thus won't go detail of this company.

As a dividend growth investor, I am more concerned about a company's annual dividend, payout ratio, and potential dividend growth rate.  ED's annual dividend is currently at $2.52.  Its payout ratio is 60%.  Both are decent and meet my criteria.  But its super low dividend annual growth rate prevents me from taking action of purchasing at current market price dip.

 


 (Yahoo data)

From above charts, In history since 1970, ED has 3 years dividend cut.  This is very respectable.  However, it is also obvious that ED's annual growth rate is too low.  Since 1992 till now, about 20 years, its annual dividend growth rate has maintained at lower than 3%. Recent 10-year moving average rate is even lower at 0.9%.  Even thought its current yield rate is high at 4.40%, with annual dividend growth rate crawling at 0.9%, it takes forever to reach annual return rate at 10%.

Another highlight is regarding capital expenditure.  From its financial report, annual cap spending is growing.  During the company's annual meeting held last week on May 19 it was noted that the company's aging New York infrastructure alone requires $10 billion of repair work. The statement tallies with the data from annual reports.


(Morningstar data)

Free cash flow has been improved in recent 10 years, turning negative to positive, but still remain at a low level and lower than dividend payments. (One of my criteria is free cash flow is higher than dividends.) Free cash flow is low because operating cash flow is flat in growth while capital spending goes high.  This will deserve further study.  But I think it's related to the nature of utilities industry.

In summary, considering its massive competitive moat and guaranteed stable customers, I'll consider to initiate a small portion if the price drops to $50.40 (yield rate at around 5%.)  If it really drops to mid-40's, as this article hopes, I'll purchase more shares.


Full disclosure: I don't own shares of ED.


Friday, May 23, 2014

Recent purchase: Target (TGT)

I bought 50 shares at $56.07 on 05/22/14.
 
Target's market price was low in recent quarters due to data breach and Canadian sales. As a dividend investor, I still have confidence in TGT in the long run. So I took action and bought some shares into my portfolio.

Dividend Analysis



Key points:-

1) From 1983 onwards, Target has been paying dividend quarterly.

2) Dividend has been growing year after year and never fails.  It never has dividend cut or even remain stagnant. It's lowest year-over-year dividend growth rate is 3.58%.

3) Average annual dividend growth is 10%.

4) With its current dividend yield at 3%, annual dividend growth at 10%, it will take around 13 years to reach 10% annual return goal.

From Q1'14 Earnings Call

According the recent quarterly transcript, Target interim CEO expressed below strategy priorities, including dividend.  As a dividend investor, I'd love to hear they will continue support the dividend and build on their record of more than 40 years of annual dividend increases.

Finally, our point of view on capital deployment remains the same. This has always been a Board level discussion and we continue to be aligned with them on the following priorities; invest everything appropriate in our core business on projects that will support Target's growth and generate superior returns; support the dividend and build on our record of more than 40 years of annual dividend increases. And beyond those first two uses, return cash through share repurchase when we have room within our middle A credit ratings. 
Also from their quarterly meeting, they listed out three priorities to boost their sales and regain customers.  I can feel their courage and determination. That's why I have confidence in their long-run prosperity.
As we look ahead to the second quarter and beyond, the Board and our team are aligned on three priorities. 
...The first is growing traffic and sales in our U.S.
...Second, we must improve our Canadian segment performance.

...Finally, we need to accelerate our digital transformation and become a leading Omni-channel retailer. 
Entry Points

My entry point is around $56.  I'll probably buy more when market price goes deeper at around $54.  However, I'll limit my total shares of Target at 100 shares.

Stay tuned.


Monday, May 19, 2014

PG Stock Analysis -- The Procter & Gamble Company

The Procter & Gamble Company is also one of the companies that belong to both lists of dividend champion and dividend aristocrat.

Sound financial fundamental

  (From Morningstar.com)

Key points:-

1) Shares are maintained at around 3,000 mil. There is slight down trend in recent years, but not much. I like it because if shares don't change much over time, earnings per share are more solid data to reflect net income.  +

2) Free cash flow are positive and kind of stable.  +

3) Dividends increase year over year.  +

4) Payout ratio increase in recent years.  It would be preferred to maintain it within 60%.

I read this company's recent quarterly conference script.  The company's focus is more on organizational efficiency to save cost. 

Overall, this company is sound and performance is mainly affected by macro consumer market.

Annual dividend review 




Key points:-

1) In the past 43 years, only one year dividend decrease (2003) from previous year, which is because a sudden dividend increase at 55% in year 2002 from 2001.

2) Dividend growth rate is pretty stable at 10% year over year.  

3) With current initial yield at 3.2%, and annual dividend growth at 10%, it will take around 13 years to make a 10% annual return.  Pretty awesome!


Entry point

 My entry point is set at $76.  I plan to purchase 50 shares when market price dips around my target entry point.

Tuesday, May 6, 2014

MCD Stock Analysis -- McDonald's Corp.

McDonald's is one of the companies which belongs to both lists of dividend champion and dividend aristocrat.

Sound financial fundamental


(Data source: Morningstar)

Key points:-
1) Earnings per share increases year after year.

2) Shares decreases over the last ten years, which is good because it seems that value per share increases.  Earnings per share is a tricky indicator sometimes since some companies buy back stock shares which makes their EPS increase annually.  This is not the case for McDonald's.  If the same shares qty at 1,274 is used for all past 10 years, its EPS is still in a uptrend.

3) Dividend grows year after year, and its payout ratio is within manageable range (less than 60%).

4) Free Cash Flow Per Share increases annually, and the the annual data covers dividend very well.  This is a good indicator to show organic growth.

5) ROE and ROIC are both increasing, even in those difficult years 2007-2010.  ROIC is higher than 12% too.

Annual dividend review 

Key points:-

1) In the past 37 years, average year-after-year dividend growth rate is 24.39%;  Average annual dividend growth rate in the past 10 years is 23.74%; and the 5-year average is 14.10%.
2) In the past 37 years, McDonald's increased its dividend every single year, which is pretty impressive.
3) Based on the 10 by 10 form, take 3% as the initial yield, and annual dividend growth rate at 14%, it will take around 9 years to reach annual 10% return.  This is pretty cool.  It is why I like this stock and give it a rating of 5 stars.

Entry point


Entry point is a very subjective topic.  I usually consider factors such as one year target prices at Yahoo and Scottrade, PE ratio, 52-week high low prices, and current yield. My entry point thus I believe is rather conservative in a long run and leaves me with some cushion. The entry point for McDonald's is $94.

Disclosure:  Long MCD.  Waiting for market price to fall to my entry point for purchasing some shares.