Tuesday, February 24, 2015

Stock Purchase: Baxter International Inc. (NYSE: BAX)

Quick update of my recent stock purchase of BAX.

On 02/18/15, I bought 30 shares BAX at $68/share. Details are as following:-

At the same time, I also wrote a Mar 20 puts with BAX, at striking price $62.50. I got net premium $28.90, and will purchase 100 shares BAX if assigned, at net cost per share $62.21.

What do you think of BAX?  Do you think it's a good opportunity to add some shares before its spin-off in the mid of 2015?

Thursday, February 19, 2015

Let's look at stock splits of KO and PEP

The Coca-Cola Company (NYSE: KO) recently reported fourth quarter and full-year 2014 operating results.  Here in SA, there are a lot of analyses about the bearish or bullish views on this stock.  While I was doing my piece of homework, KO's stock split history draw a lot of attention from me.

This impressive chart is from Coca-Cola Company's website.  Based on the closing price at 07/09/12, value of one share purchased for $40 in 1919 has become $359,332 per share, which is up 8,983 times of original investment.  Approximate value of the same share with dividends reinvested annually is $10.3 million.  These data are amazing. I am prompted to dig more on this aspect of the company, and try to understand what it means for a dividend growth investor.  Also, curiosity made me to pull in Pepsi's stock split history for reference and comparison.

KO & PEP Stock Split History Since 1965

(Source: Yahoo.com)

Since May, 1965, KO has experienced 8 stock splits, 7 of which were 2:1 splits, and 1 was 3:1 split.  If 1 share was bought before the stock split date in 1965, it would have become 384 shares in September 2012.

Pepsi started the stock split race since 1977.  PEP experienced 4 stock splits since then.  This company offered even more aggressive splits at 3:1 for 3 out of 4.  

Since 1977, Coca-Cola offered two more stock splits than Pepsi. One in 1992, and the other one in 2012.  For comparison, if one share was bought before May, 1977, KO's 1 share would become 96 shares up to date, while PEP's 1 share would become 54 shares.

 Now let's look at the closing prices before and after stock splits.
(Source: Yahoo.com)

For KO, when share prices bounced to $70-$80 range, a stock split would usually occur.  The purpose was to bring stock prices back to around $40, either through 2:1 or 3:1 splits.

For PEP, when share prices rose to $70-$90 range, a stock split would bring the share price back to $25-$35 level.  Recently PEP market price has raised to about $100. Considering the stock split absence since 1996, we suspect a new stock split might be around the corner, assuming Pepsi management maintains the same strategy.

The awesome thing about these quality company is that, after the stock prices were cut down in half or even one third due to stock splits, market prices would raise once again to the before stock split level within as short as 2 years, or as long as 16 years, when a new stock split would usually happen. Thus continues the virtuous cycle.
Stock split's effect on dividends

First, let's only look at KO in a longer perspective.

Assume one share was bought in 1962 at price $100.  To simplify the calculation, dividend re-investment isn't considered here.  (If dividend re-investment is considered, the result will be much more magnified.)  You may refer to this spreadsheet for the calculation details.

After 53 years from 1962 to the end of 2014, 1 share became 384 shares. Total dividends amounted to $3004.05, and this equaled to 6.70% compound annual growth rate (CAGR).  You may think this dividend amount is not so impressive.  However, if you look at the inflation rate in the same period, you'd see the dividends were much higher than inflation ($3004.05 vs $783.89, CAGR 6.70% vs 4%).  Based on current market price $42/ share, total market value of this share will become $16,128, and the CAGR is 15%.

Now let's compare KO and PEP in the period from 1977 till the end of 2014.

Above chart shows total accumulative dividends for KO's 96 shares would be $750.83 (CAGR 6.08%), and for PEP's 54 shares totaled at $1,296.57 (CAGR 7.99%.)  Again, no dividend re-investment is considered.

KO's 1 share market value would become $4,032, based on current market price $42. CAGR was 10.9% upon original 1 share price $80. PEP's market value would be $5,400 based on current market price $100 (CAGR 12.15%, upon 1 share price $70.)  For details, please see this spreadsheet.

Above chart illustrates the KO & PEP annual dividends of 1 share purchased in 1977.  From the picture we'll see that stock split is an accelerator for dividend increase, which usually double or triple annual dividends income.  So for these excellent companies like KO & PEP, annual dividend growth is no doubt very important, but from the long run, stock split matters even more for a persistent investor.

Final thought

Persistence is an important character for Dividend Growth Investors in the road to pursue financial freedom.  This virtue is even more important for investing in legendary companies such as Coca-Cola and Pepsi.  When think about purchasing shares in KO or PEP,  we should have a longer-than-normal perspective, say 20-30 years into the future. The longer, the merrier.  In the long run, we'll happily harvest in the extra multiple shares because of stock splits.  Otherwise, if we only confine us into a particular short time period, we might stuck in the Cautionary Tale.

My strategy for KO is to write puts with striking price at $40.50.  This is the current entry price that would offer me 3% annual dividend yield.  If the puts were executed, I'd be happy to hold the stock forever and may write covered calls to generate some extra moderate income.  Otherwise, I'll keep on writing puts at the 3% yield threshold.

For Pepsi, as mentioned above, I suspect a new stock split might occur soon, thus I would like to purchase some shares and hold forever to garner the benefit of possible new stock split while happily collecting dividends.

Disclosure: None.

Monday, February 16, 2015

Stock Purchase (2): JNJ

On 02/12/15, I bought 20 shares JNJ at the average price $97.97. 

As reported before, I bought the first 20 shares JNJ on 01/30/15 with average price $100.5.

The new addition averaged down my purchase price to $99.44/share (net after commission fee deduction.) These 40 JNJ shares provide me $112 dividend annually, which is 2.82% yield on cost.  I felt good about it. and will add more shares if there is further stock price drop.

At the same time, I sold (1) Jan 2016 puts @ $85 on 02/06/15.

The premium is $2.91. So my annual return rate is 3.68% (after $6.10 commission net). If this put were excised upon expiration, my net cost per share would be $82.15.

I know I am very conservative at this puts writing, with such a low striking price and such a long expiration period. Considering the annual return rate is higher than JNJ's dividend yield return, and my idle cash has been put into good use to cover these puts, I am comfortable with my move.

A lot of fellow DGI investors have use puts writing as a strategy to generate extra income, and reading their articles is an elevating experience to me:-
Financial Velociraptor wrote an article to proof that Writing Options On Quality Companies At Fair Valuations Pays Well .

Average Dividend Yield uses puts writing as the way to buy quality dividend paying companies' stocks.

All about interest gave it a good point that selling puts against sold blue chip companies is a win-win.

Ong Kang Wei uses puts writing as a good strategy to put good use of his idle cash base.

How do you think about options?  Do you use puts writing as an alternative to buy quality stocks at your desired price?

Disclosure: Long JNJ.

Wednesday, February 4, 2015

Stock Purchase: JNJ

On 01/30/15, I purchased 20 shares of JNJ at $100.50.

Johnson & Johnson is one of the largest and most diversified health care firms, with products spanning across the pharmaceutical (43.5% of 2014 sales) and medical device industries (37.0%).  The company is also a major participant in the global consumer products business (19.5%).  Johnson & Johnson has over 250 operating companies selling products across the world. Despite its size, JNJ is highly innovative and seeks to maintain leadership positions by aggressively funding new product development.

Purchase criteria check list

JNJ is one of the Dividend Champions, with 52 consecutive years of higher dividends.

S&P Capital IQ rating is A+ for this company.  S&P analysts' risk rating for this company is LOW, with these comments, "Our risk assessment for JNJ reflects our belief that its products are largely immune from economic cycles, that it does not rely on any single product category or customer for sustained growth, and that it enjoys competitive advantages owing to its substantial financial resources, business scale and global sales capabilities."  Morning Star granted it a 3-star rating.

JNJ's dividend yield is 2.80% (annual dividend payment is $2.80, and the calculation is based on my purchase price at $100.50.)  This dividend yield 2.80% is lower than the 3% criterion. But considering its reasonable to high annual dividend growth rate, I give it a pass to this stock.

JNJ's 10-year DGR averaged at 9.53%.  Its average DGR in the past 45 years (1970 - 2014) is 15%.  JNJ tends to have some faster DGR years at double digits growth rates and then followed with some single digit DGRs.  For example, its last 10-year DGR average is around 10%, while the pace has been slowed since 2009, with recent 5-year average at 7.42%.

The Chowder number is based on the sum of current yield and (5-year) dividend growth rate, so JNJ's number is lower than 12% criterion, due to above mentioned slower DGR in recent years.

JNJ's EPS & FCF are absolutely healthy and uptrend.  JNJ has plenty of free cash, and in some years, its FCF is even higher than EPS.  Consequently, JNJ's debt to equity ratio is very low, at 18%.  I like the stable but uptrend pace that JNJ grows its dividend.  Investors have a whole lot of confidence in the management of this company.  Not like Helmerich & Payne, Inc., whose sudden jerk of dividend growth kind of worried investors.

JNJ's fair price is $110. I bought at $100.50, with 8.6% price discount.  For references, S&P Capital IQ calculated JNJ's fair value at $100.80, with 12-month target price at $112.  Yahoo finance gave it 1-year target at $109.72.

Disclosure:  Long JNJ.  Plan to write puts on this company.  Will update later if the puts go through.

Tuesday, February 3, 2015

Stock Analysis: Helmerich & Payne, Inc. (NYSE: HP)

Helmerich & Payne, Inc. is the holding company for Helmerich & Payne International
Drilling Company, an international drilling contractor with land and offshore operations in the United
States, Ecuador, Colombia, Argentina, Tunisia, Bahrain and United Arab Emirates. It specializes in deep
drilling in major gas producing basins of the U.S., and in drilling for oil and gas in remote international areas.
Contract drilling operations comprise nearly all of the company's revenue base (99.6% of FY 14 (Sep.)
revenues). The remaining 0.4% of FY 14 revenues was derived mainly from real estate operations. HP generated about 56% of FY 14 consolidated revenues from its 10 largest customers, including BHP Billiton, Devon Energy Production Co. LP and Occidental Oil and Gas Corporation.

The company's contract drilling operations are principally comprised of three operating segments -- the
U.S. Land segment (84% of total FY 14 operating revenues, 91% of FY 14 segment operating income), the Offshore segment (6.8%, 6.2%), and the International Land segment (9.6%, 3.2%).

Purchase Criteria Check List

  • HP is one of dividend champions with 42 years of dividend payment increase.  
  • It has S&P Capital IQ rating at B+, and Morningstar.com gives it 4-star rating. 
  • Dividend yield is above 5%, and payout ratio is below 40%.  
  • 10-year EPS average is around $4.00.  HP's EPS trend looks sound and healthy.
  • Debt to equity rate is only 1%, which leaves large room for HP to maneuver.
However, after re-consideration, I put a question mark on its 10-year dividend growth rate.  HP's 10-year average DGR is at 32.04%, which is outstanding as far as this percentage is concerned.  But I got worried when I dug through the data further.

Please see below dividend history chart.  HP's dividends only took off since year 2013.  Before 2013, its annual dividend growth rate is merely at 3%.  In 2013, its dividend increased from $0.28 to $0.87 annually, about 211% increase.  Again in 2014, its dividend increased to $2.44, which is 180% increase.  Accordingly, HP's payout ratio shot up from 5.3% (2012), to 13.1% (2013), and to 37.7% (2014).  Considering the highly cyclical character of oil&gas drilling industry, I really doubt this company will sustain the high dividend growth, especially for current period when oil industry is in deep turbulence. In this article, the author argued that, "I believe the company will be able to sustain its 42 year history of raising dividends, but this stock remains a speculation play as long as oil is under $50 per barrel."  I agree with him to a high degree.

Now let's look at HP's EPS, dividend, and FCF history in last 10 years.  I like the performance of EPS.  Looks terrific year over year.  But the FCF performance isn't so decent.  FCF is far below EPS, and most of the time FCF is even below dividend payment.  With its super low debt to equity ratio, I believe that it's easy for HP to acquire borrowed fund though.  So the FCF might not be a red light to purchase this stock.

Disclosure: None. Will buy some shares if HP share price drop to lower $50s.