On March 1st Warren Buffett, CEO of Berkshire Hathaway, released his annual stockholder letter. If you haven't read it, I suggest you do. It's a very well written, easy to understand piece. It gives you a peak into the mind of one of the most successful investors in history. http://www.berkshirehathaway.com/reports.html
On monday 3/3/2014 I bought:
13 Shares BRK.B @ $116.16
Why now? Warren Buffett said it himself: The intrinsic value of Berkshire Hathaway shares exceeds 120% of book value by a meaningful amount.
A quick calculation, using numbers from the annual report, puts the value of BRK.B shares at $107.98. I basically picked up some shares at 129% book value ($116.16 a share) which is probably a good deal is 120% of book value is cheap.
This buy will not give me dividends. I think it's highly likely BRK.B will start paying a dividend in the future, it may be 5 years, it may take 10 or 25 years. When Berkshire grows bigger and bigger, it will become exponentially harder for the director's to find good use with the incoming cash, to the point it starts to make sense to send a piece of the profits to shareholders.
Berkshire doesn't grow, or even pay a dividend, but its ability to pay out a dividend grows over time.
Buffett passing away doesn't scare me too much. Berkshire is a very decentralized business where every manager is focusing on his specific area of expertize. If Buffett passes away you still have the dozens of high quality, privately held businesses, hand picked by Buffett, bringing in cash to the headquarters. Buffett has two capital allocators working for him. Todd Combs and Ted Wescher, who actually outperformed Buffett's portfolio by a wide margin.
Berkshire is a great collection of businesses, there are very talented people in charge and the price seems good too. It's great to finally be a shareholder of Berkshire Hathaway.
Antoher month gone, another dividend update, my favorite type of post. It shows you the cold, hard cash a dividend portfolio can produce. I added some Coca-Cola beginning this month. Only a few weeks later the Board announced a healthy increase in the dividend! Long term shareholders of great businesses get rewarded with a dividend raise.
Without further ado, the dividends for February 2014:
The stock market is having a nice pullback! Coca-Cola hit a 3% dividend yield, I couldn't pass that up. Better yet, this month Coca-Cola will announce a dividend raise, just like it did the last 51 years.
Today's buy:
40 Shares KO @ $37.31
This purchase will add $44.80 to my yearly income. This is based on the $0.28 dividend KO pays every quarter, but like I said, they will announce a raise very soon. My total position in Coca-Cola is now 76 shares.
I purchased some Coca-Cola stock earlier in december 2013, where I talked a bit about the company.
Coca-Cola is the first stock that comes to mind when someone asks me what a good dividend growth stock is. It is a must have for every dividend growth investor in my opinion.
I found a fun article a while back. Charlie munger is explaining Coca-cola's strategy how to become a 2 Trillion dollar company in 150 years. A very good read.
The first month of 2014 is over. And what a month it was, for the first time in a while the soaring stock market took a breather. I have not bought anything yet, but my trigger finger is itchy. A lot of things look nice now. KO, PM, CVX, WMT all had decent pullbacks and are in the buy range for me. Problem is, I can't buy them all because I don't have the funds! I only have enough for one, I have more ideas than money at the moment. Without further ado, the dividends for January 2014:
Dividends Received
WMT: $9.87
DPS: $25.84
PM: $33.84
MO: $16.80
GE: $14.52
Total dividend income for January: $100.87
I set my new dividend goal for 2014 at $1500. So far I'm 6.7% of the way there, my progress is tracked here. Will I make it? Whatever the total dividends I will receive this year, I'm proud where I am in live and the portfolio I have build.
The end of the year is when many investors reevaluate how they did during the previous year. Dividend growth investing is an investing strategy where the investor buys stocks of companies that consistently pay and grow their dividends, then reinvesting those dividends to compound the income stream.
My primary goal as an investor is to build a well diversified stock portfolio that produces a sustainable and rising income stream. Below I will review the changes that happened to my portfolio in 2013. Purchases
I started the year with 15 stocks, this reflects purchases I made in 2011, 2012 and one spin-off (ABT spun off ABBV). During the course of the year I made the following purchases:
For a grand total of $19,608.35. Most of this money came from deposits, but about $1000 came from dividends my stocks paid. The portfolio ended with 23 different positions.
Sales
I'm a buy and hold investor. I plan on holding my positions for decades, enjoying the dividends they pay me every three months. It's not a buy and forget strategy though, you have to monitor your positions, to make sure the fundamentals remain excellent and the dividends keep growing. This year I sold one company:
The reason for the sale was the dividend freeze. I felt uneasy holding onto this Tech company and bought a beverage company with the proceeds.
Dividends
I received $1,068.62 in dividends from my portfolio. This is an amazing 55.31% increase compared to 2012 income, $688.06.
Dividend Growth
Below a table of the amount my current holdings paid in 2012 and in 2013:
Some observations.
I took ABT and ABBV together, ABBV didn't pay a dividend in 2012 and ABT lowered its dividend. When you take both stocks together, you get a healty raise of almost 8% compared to 2012. ABBV paid out 5 quarters the same amount, I have to investigate this further.
MasterCard knocked it out of the park with a 90% increase. I'm expecting this to continue for the mid term. I expect MA to expand its payout ratio and pump the dividend in the foreseeable future. It's a shame the shares trade at a high valuation, I'd like to add more. For now I just hold the 3 shares.
PSX only paid out twice in 2012, that explains the 195% increase.
Wells fargo is increasing its payout ratio after it got permission from the FED to do so. This dividend growth rate will not continue. I'm hoping for 10% increases the coming years, until the payout ratio is about 60%, management's target.
The average dividend growth rate is 23.65%. If we take out the 3 big ones (PSX, MA and WFC). The average is 9.94%. This is very nice. If I reinvest dividends, at a 3% yield, I'm looking at about 13% organic income growth. Meaning, if I wouldn't make deposits and just reinvest dividends, my income would grow at a 13% annual clip.
Portfolio
The paper value of my portfolio has grown considerably in 2013. Jan 1st, 2013 The value of my portfolio was $20,795.26. I ended the year with a portfolio worth $46,565.43. This represents an increase of 123.92% As I said above, about $19,600 from the raise in value came from new purchases, the rest, about $6,000 came from stock price appreciation.
Conclusion
2013 was a great year for me. My dividend income grew considerably, the value of my portfolio grew more than a 100% and I deposited more than I could dream of. Last but not least I overshot my goal for $1,000 in dividends!
Right before the ending of the year I decided to buy some shares of this beverage behemoth.
Today's buy:
36 Shares KO @ $41.35
This purchase will add $40.32 to my yearly income. This is based on the $0.28 dividend KO pays every quarter, I'm expecting a dividend raise in February, so the real income amount is higher.
This company needs no introduction. It's the biggest beverage company on the planet. As far as I know, you can get a Coke in every country on the planet (except North-Korea). Coca-Cola is an invaluable brand name and the distribution network is irreplaceable. In the coming years, 700 million people will enter the middle class all around the world, this is where Coke's growth opportunities are.
The stock is a classic dividend growth stock, it has paid a dividend since 1919 and raised it dividend for more than 50 years. You can almost say, there are three things certain in this world, death, taxes and Coca-Cola's dividend every quarter.
The stock isn't cheap at 21x earnings, but in the last 15 years its price moved out of the stratosphere, in 1998 investors paid more than 40x earnings for a share of KO!
2013 is over. It was a great year for me. It was my 2nd full year of investing. My passive income was great. It's amazing how my passive income grows. Looking back to my first few months of investing, I was getting $25 a month. Now I pull in $100 regularly. Without further a do, here is the last income update for this year.
The main focus of my portfolio is to purchase stocks that raise their dividends in the future. The stream of dividend will grow over time due to reinvested dividends, investing fresh capital and companies raising their dividend. This week three of my companies raised their distributions to their loyal shareholders.
AT&T (T) - Announced that its board of Directors voted to increase AT&T's s regular quarterly dividend by 2.2% to $0.46 per common share versus the previous rate of $0.45 per common share.
General Electric (GE) - Announced a 16% dividend hike. The Board of Directors agreed to raise the company's quarterly dividend to $0.22 per common share up from $0.19 a share.
Mastercard Inc (MA) - Announced on Tuesday that its Board of Directors declared a quarterly dividend of $1.10 per share, reflecting a $0.50 or whopping 83% raise over the previous quarter. On top of that, the Board of Directors also approved a new share repurchase program of $3.5 billion in share repurchases. This buyback program will kick in once the $514M remaining on an existing $2B authorization is used up.
With shares trading almost at $800 a share the company announced a 10:1 stock split. For every 1 share of MA I hold, I'll receive 9 extra. The dividend post split will be $0.11 dollar per quarter.
In the month November I opened a new position in TGT. I expected T to announce a dividend hike but it didn't came yet, any day now. After I bought TGT it pulled back some more, I'm contemplating buying more, it's one of the few stocks that seem fairly valued to me.
As I mentioned in my latest dividend update, I had some capital to work with. So I decided to initiate a new position today in a big retailer, Target Corporation.
Today's buy:
23 shares of Target Corporation (TGT) @ $65.50
This purchase will add $39.56 to my annual dividend income.
Target Corporation is a retailer, it sells health beauty and household essentials, electronics, food and pet supplies and furniture. This dividend champion has increased dividend payments for 46 years in a row. In 2012 it generated $72 billion dollar in sales and $4.52 in EPS. Target is focusing on their "Long-Range plan": generating $100 billion in sales and $8.00 in EPS in 2017.
They hope achieving that goal by focusing on expanding same store sales and renovating existing stores, rather than opening a bunch of new stores. Future growth can be realized by increased penetration of the red card. This decreases expenses related for transactions processing other credit cards. Target is targeting middle and upper class consumers. These groups are more focused on quality and diversity of products. That's how Target differentiate itself from Wal-Mart. The company is on track to open 125 stores in Canada this year.
The stock trades for 15-16x earnings which I think is a fair deal. I mean the company raised dividends for 46 years, that means it's a great business and management is doing something right. I'm happy with owning shares and won't mind adding more if the stock drops significantly.
In the month October I added to my DPS position. Phillips 66 (25%), Aflac (5.7%), Kinder Morgan Inc. (2.5%, 13.9% YOY) and Abbott Laboratories (57.1%) announced a dividend hike. Things are going according to plan. I have enough money for one purchase. I'm not sure what I'm gonna buy yet, but it's probably going to be an oil major.
I'm 100% sure I will meet this goal and already thinking about setting a goal for 2014. Last month I was thinking about about $1500 in dividends for 2014, but I'm thinking I could do more.
Today I put some capital to work. The last time I bought something was back in July. The market pulled back the last few sessions due to the debt ceiling soap opera. The cheaper stocks get, the happier I am, because cheap stocks mean great future returns.
Today's buy:
35 shares of Dr Pepper Snapple Group Inc. (DPS) @ $43.70
This purchase will add $53.20 to my annual dividend income.
I already had a position in DPS, and decided to average down. The stock seems fairly valued. Management is expecting 2013 EPS to hit the $3.04 - $3.12 range. That means a forward PE between 14 and 14.4 which seems fair for this company. DPS is one a the few consumer staples that doesn't seem fully valued at the moment. The whole sector has been quite expensive the last few months.
On a different note, Coca-Cola's stock also pulled back. Buying now gives me an 3% entry yield which is something you don't get to often with Coke shares. I might pick up some shares of this great company in the near future. I'd love to have a position in Coca-Cola!
Nice month for the portfolio regarding dividends. September treated me with four dividend increases, I decided to sell Intel, and today PSX announced a stunning 25% dividend increase! I love the growing stream of passive income my portfolio is generating. The amount of dividends my portfolio generated this month is a record!
I'm 100% sure I will meet this goal and already thinking about setting a goal for 2014. I'm thinking about $1500 in dividends for 2014 would be a nice challenge.
So, after Intel announced the same dividend for the 6th time in a row I decided to sell my shares. I discussed Intel in this post.
For me, the future is too blurry for Intel. They've missed the Phone market. PC sales are contracting. Future cash flows are hard to predict for me, therefore it is hard to know if the stock is cheap, expensive or fairly valued. I decided to sell and find a better use with the capital.
I sold my 50 Shares for $23.00. I originally purchased them on May 22, 2012 for $26.10. I got $1.125 of dividends in those 16 months. A loss of $1.975 per share or about 7.6%.
This sale reduces my annual dividend with $45.00
I haven't decided what I'm gonna buy yet, XOM, CVX, WMT, Nestle, DPS all seem reasonable at the moment.
The main focus of my portfolio is to purchase stocks that raise their dividends in the future. The stream of dividend will grow over time due to reinvested dividends, investing fresh capital and companyie raising their dividend. In the few weeks four of my companies raised their distributions to their loyal shareholders.
Altria Group (MO) - Announced that its board of Directors voted to increase Altria's regular quarterly dividend by 9.1% to $0.48 per common share versus the previous rate of $0.44 per common share.
Philip Morris (PM) - Announced a 10.6% dividend hike. The Board of Directors agreed to raise the company's quarterly dividend to $0.94 per common share up from $0.85 a share.
Microsoft (MSFT) - Announced on Tuesday that its Board of Directors declared a quarterly dividend of $0.28 per share, reflecting a $0.05 or whopping 21.7% raise over the previous quarter. On top of that, the Board of Directors also approved a new share repurchase program up to $40 billion in share repurchases.
McDonald's (MCD) - McDonald's Board of Directors declared a quarterly dividend of $0.81 per share. This represents a 5.2% increase over the company's previous quarterly dividend.
The big surprise was Microsoft. I expected a 2-3 cent, or 9-13% raise, I'm got a 22% raise! Great. This is what it's all about. Seeing my dividends get raised. It makes my day when I read I'm getting a pay raise, especially when it's way more than I expected!
Another month over, another month of dividends hitting my account. The taper-talk is getting a bit old. Interesting to see what happens to the market when the FED reduces stimulus. I have been building op some capital in the last few months, even tough I'm long stocks, I root for a pullback in the markets, I have some dry powder I'd like to use!
Looking forward, next month will be a big month for me, more than half of my positions will be paying out. I'm also expecting dividend increases from MCD, MSFT and PM. I can't wait!
I know there are a lot of stock analysis out there in the blogosphere. All the big dividend growth stocks like JNJ, KO, PG, XOM and MCD are well covered. I decided to analyze a stock that isn't been looked at as much. Recently I was looking at Brown-Forman. All data in this analysis is found in the 2013 Annual Report, found here: Investor relations Brown-Forman
Overview
Brown-Forman manufactures, bottles, imports, exports and markets a range of alcoholic beverage brands. A large chunk of its revenue comes from the Jack Daniel's line. The company produces recognizable brands for which consumers are willing to pay a premium in order to enjoy them.
The company has been paying dividends since 1949 and raising it for 29 years, making it a Dividend Aristocrat.
The Numbers
An overview of the last 10 years:
For convenience, I put the most important numbers in charts:
Net sales have grown from 1,992 million to 3,784 million. An average growth rate of 7.4% during those years.
Diluted EPS has grown from $1.06 to $2.75. An average growth rate of 11.2%.
Dividends (excluded special dividends) have grown from $0.43 to $0.98 per share. An average growth rate of 8%.
Some notes:
Outstanding shares have been steadily decreasing from 228.7 million to 215 million. This means management is returning cash to share holders through buybacks.
As we can see, Long term debt suddenly rose from $503 million to $997 million 2012 vs 2013. This might be a red flag and something to look further into. Although, the debt to capital ratio is at 35% which isn't exceptionally high if we look at the historical debt to capital ratio.
We can see very high profit margins, hovering in the low 20% for the last decade. Return on equity between 20% and 30% even through the Great Recession. Overall, the numbers seem pretty damn solid.
Behind the Numbers
Of course, a company is not just numbers on a piece of paper. It's a real entity, providing high quality alcoholic beverages for the consumer to enjoy. The business provides jobs to 4,000 people. It rewards its shareholders. It creates economic activity which benefits society by generating taxable income, which supports our schools, military and social programs.
Here's an overview of some of the brands Brown-Forman produces:
A look inside a Brown-Forman Cooperage company. It shows men working and making the barrels in which the Bourbons and Whisky's get distilled.
Expected Returns
Today the stock trades at around 25 times earnings. This is not sustainable in my view for the long run. Let's say that in 2023 the stock will trade at 20x earnings. Now, I have to project EPS and dividend to be able to calculate total returns. Let's look at three possible outcomes. A "normal", an optimistic and a pessimistic scenario.
Normal scenario
The normal scenario: The next ten years Brown-Forman is able to perform in the same way it has for the last decade: Growing EPS at 11.2% and dividends at 8%. In 2023 the EPS would be $7.95 and along the way you would have gotten around $17.62 in dividends. Assuming you don't reinvest dividends, your total return would be 20x$7.95 + $17,62 = $176.62. Bought at today's price ($68.59) that would mean a compounded annual return of 9.9%
Optimistic scenario
The optimistic scenario:The next ten years Brown-Forman is able to perform 25% better than it has for the last decade: Growing EPS at 14% and dividends at 10%. In 2023 the EPS would be $10.19 and along the way you would have gotten around $19.98 in dividends. Assuming you don't reinvest dividends, your total return would be 20x$10.19 + $19.98 = $223.78. Bought at today's price ($68.59) that would mean a compounded annual return of 12.6%
Pessimistic scenario
The pessimistic scenario: The next ten years Brown-Forman is able to perform 25% worse than it has for the last decade: Growing EPS at 8.4% and dividends at 6%. In 2023 the EPS would be $6.16 and along the way you would have gotten around $15.55 in dividends. Assuming you don't reinvest dividends, your total return would be 20x$6.16 + $15.55 = $138.75. Bought at today's price ($68.59) that would mean a compounded annual return of 7.3%
Based on these assumptions Brown-Forman will generate between 7.3% and 12.6% shareholder returns through 2023, this is assuming you would not have reinvested dividends, if you do this, the calculated returns would be higher obviously.
Conclusion
Overall the company looks great. It holds a portfolio of great brands, it enjoys customer loyalty, high profit margins, solid growth numbers, possibility's to expand in emerging markets and international developed country's. This is a company I like to have a big stake in. To me, this company sort of resembles Coca-Cola, only with alcoholic beverages.
The company seems to be doing a good job consistently growing revenue, EPS and dividends. The company isn't very sensitive to recessions.
With quality comes a price. The stock isn't cheap right now, it trades at 25 times earnings. Based on today's fundamentals and future projections, I would pick up shares when we see it trading at $63.
Either fundamentals per share have to improve, or the market price would have to come down. I stay on the sidelines for now.
My investing strategy entails purchasing high quality dividend growth stocks. The goal of my investing portfolio is to purchase stocks that will raise dividends in the future. The stream of dividend income will be used to fund my early retirement, making be completely financial independent. The dividend growth will protect my income stream against inflation.
But what exactly am I looking for in stocks. These are a few specific characteristics I'm looking for when researching stocks.
Strong competitive advantage
The first thing I'm looking for are strong competitive advantages. This is what Warren Buffett calls "wide moat businesses". It is very difficult to take away market share from such businesses due to their customer loyalty.
These features protect the companies from competitors and help them generate higher return on equity and charge higher prices to customers.
Wal-Mart, a very successful retailer, has marketed itself as the lowest price retailer for almost everything consumers spend their money on. Due to the size of Wal-Mart it is enable to to squeeze lower prices from it suppliers, they pass these low prices on to the customer. The low prices are Wal-Mart's competitive advantage.
The Coca-Cola Company, worlds biggest soft drink producers, is best known for its most prominent drink, Coke. It's a strong global brand, consumers a willing to pay a premium for the product. There are alternatives to Coke, like Pepsi, but any Coke drinker can taste the difference between a Coke and a Pepsi. The quality of Coca-Cola is the reason why multiple generations keep drinking the sugar flavored drink. This strong band name is a competitive advantage The Coca-Cola Company has. Another company with a portfolio of strong brand names is Philip Morris Co. It sells cigarettes outside the united states and owns the strong Marlboro brand.
A steady business model
A steady business model, what does that mean? It means that the business isn't subject to rapid changes. This results in shying away from start-ups and most technology companies. Technology has to be innovative, if it's not, it will lose its competitive advantages. In the tech sector, moats can evaporate quickly, we all remember Eastman Kodak, market leader in camera's in the past, now basically bankrupt. It failed to adept to the a big market changer, the digital camera.
A steady business model like Coke is much more appealing to me. The company has been selling sugar flavored syrup for over 130 years now, this makes the profits very predictable and thus easy to predict future profits and future dividend growth.
Small companies do not have establish their moats yet. Shying away from small companies might result in me missing out on the next Apple. You just have to remember, for every success story like Apple, there are 100 not-so-success stories. I can't pick the next Apple, so I'm not trying to. I stick to steady businesses.
A strong balance sheet
When researching a stock, I always take a look at the balance sheet. I'm looking for a low debt/equity ratio. I want the company to be able to cover its interest payments very generously (interest coverage ratio). I do not like companies with big debt loads, this could bring problems in the future when interest rates rise.
Some companies have huge amounts of cash sitting on the balance sheet. Microsoft for example has more than 70 billion dollars in cash & equivalents the last time I checked. This bale of cash, if used intelligently, can provide great shareholder returns. This money can be used for expansion of the business, acquisitions, share buybacks and dividends. A strong balance sheet is always a plus.
A history of paying and increasing dividends
Being a dividend growth investor, I focus on dividend paying stocks. I want my portfolio to produce a rising stream of income that protects my principal and income from inflation. Companies which have raised their dividend for decades typically are mature and stable businesses, which generate a sufficient amount of cash to expand and share with the shareholders in the form of dividends and share buybacks. When a management has committed itself to raising the dividend year after year, it gets ingrained in the corporate culture.
An attractive valuation
I don't want to pay too much for a business. No matter how wonderful a company is, no business is worth any price. Overpaying for businesses could result in sub par total returns. We saw this during the dot-com boom or irrational exuberance in the late nineties. Household names like Coca-Cola and Wal-Mart were trading for 40 times earnings. The investor who bought stocks at those valuation were experiencing sub par total returns for the last 13 years.
As a rule of thumb, I do not to pay more than 20 times trailing earnings for a stock, unless I feel very confident about the future growth prospect of a business.
Conclusion
I briefly discussed a few characteristics I look for in businesses.Of course there are multiple other factors I take into account. When I think of buying a stock, I don't ask myself the question: "What will go up next week?" I think about the things I discussed above. These are things make a business a good business, in my opinion.
When the business is good, the stock will eventually follow.
A bit of a disappointing month for me. INTC didn't raise the dividend. I decided not to sell yet and make a decision on whether to sell or not in the future. NSC did raise the dividend only 4%. I was really hoping for something a little bit more than that, given their previous raises were substantially higher. I also added some KMI shares to my portfolio.
All that said, dividends just keep rolling in like clockwork.
Looking at the market, there aren't any stocks that stand out as bargains right now to me. Some things look fairly valued. I have some capital ready to allocate into a great business, if the opportunity arises, I'll grab it.
