For my second purchase today I bought shares of General Dynamics (GD), a company that is the fifth largest defense contractor in the world. GD has four main business groups: Aerospace (e.g., Gulfstream business jets), Combat Systems (e.g., Abrams tanks), Marine Systems (e.g., submarines), and Information Systems and Technology (e.g., thermal cameras and satellite components). Although defense stocks in general have been beaten down due to concerns about U.S. government spending cuts, I think GD is sufficiently diversified to cope with some reduced spending.
GD is a good dividend-growth stock. The company has increased its dividend for 20 consecutive years, which I think is the longest streak among companies in the defense industry. The 5-year average annual dividend growth rate is 15.5% and the most recent increase was 11.9% in April 2011. With a payout ratio of only 26% and relatively low debt, the dividend appears to be sustainable even in the event of short-term earnings fluctuations.
In terms of valuation, GD has a P/E (ttm) of 9.73, P/S (ttm) of 0.78, P/B of 1.84, and PEG of 1.24. These numbers suggest that the stock is undervalued, so I decided to start a position.
I bought 20 shares of GD at the price of $69.60 per share, giving me a 2.70% yield on cost. At the current dividend rate, I can expect to receive quarterly dividends of $9.40, which would add a total of $37.60 to my annual dividend income.
To demonstrate the foibles of trying to time the market, I was watching GD back in mid-December when it was trading at around $63. However, instead of buying it at that time, I kept waiting to see whether it would go down more so I could get a better entry price. It did not dawn on me until later that $63 was already a great price and I was being too greedy. Of course, over the next month and a half the price went up to over $72 and I was kicking myself. I am slowly realizing that when a stock I want is trading at a price that I deem to be "good enough" I just need to pull the trigger instead of waiting to see whether it goes down further -- because it might not go down in the near future. Thus, when GD dipped back below $70 today, I decided to buy it. It may go down further -- maybe even to $63 -- and if it does, then I will simply buy more shares and average down. I consider this experience to be another part of the learning process in becoming a better investor.
Great purchase. I also purchased 20 shares of GD late last year. I think GD is one of the strongest plays in the defense industry.
ReplyDeleteI too have learned to get better with accepting a solid market price for a security and adding it to my portfolio. I also like to employ averaging down, especially if it's a precipitous price drop in an equity I particularly like. In the end, I'd like to think that 30 years from now it won't matter if you paid $69 or $65 for GD. It will be worth many times either of those numbers anyway if GD keeps doing its thing. The thing that matters is that you get the dividend growth machine working for you, instead of keeping it "off" until the right price comes...which may never come.
I also missed a couple chances late last year. My big miss was Raytheon, another defense company. I looked at it in the low $40's and waffled back and forth on it and missed completely. I'm not saying I won't ever do that again..but I am learning.
Of course, the monthly averaging strategy that I employ, and it looks like you do too, could be countered by investors like Buffett who hold on to large sums of cash and wait to unload when the market really goes south. I don't have access to huge amounts of capital so I like to purchase the most attractively priced equities on my watch list month in and month out.
Hope that made sense. I wrote that comment kind of quickly.
Best wishes!
Hi DM,
ReplyDeleteYou make a great point -- 30 years from now I will not care about a few dollars difference in initial share price, especially if the company keeps growing and the dividends keep rising. I think that is a key aspect of the psychological side of long-term investing that I am still learning to integrate into my mindset.
I also try to follow a monthly investing approach by deploying capital within a month or two of putting it in my brokerage account. Sure, it would be nice to have a huge stash of cash at the moment when the market experiences a big decline, but market timing is so difficult that I am finding there is not much point in trying to do it. Given that I add new capital on a monthly basis, I think it is best to just make regular investments in whatever stocks have favorable valuations each month.
It is an ongoing learning process, to be sure. But at least we are recognizing and learning from our missed opportunities.
Cheers!