Today I bought shares of Hormel Foods (HRL), a well-known manufacturer of food and meat products. I wrote about several appealing features of the company in the post for my initial purchase back in April.
I was motivated to add to my position in HRL because the stock's price has dropped recently, falling 9% in less than one month. The stock is now trading at its lowest point since early October 2011. I consider HRL to be fairly valued with a P/E of 16.0 (its historic P/E is around 16.8), PEG of 1.7, and P/S of 0.9. Even though I generally aim to buy undervalued stocks, I will also buy fairly valued stocks of high-quality companies, of which HRL is a prime example.
Additional motivations for this purchase were related to the ongoing problems in Europe, the drought in the U.S., and slow economic growth in the U.S. I watched a recent interview in which Jeffrey Ettinger, the CEO of Hormel Foods, was asked how Europe would affect the company's business. He remarked that it would have very little impact because the company has a minimal presence in Europe; the vast majority of its business is conducted in North America. In another interview, he was asked how the U.S. drought would affect the company's margins because feed prices are increasing. He indicated that the company was doing okay for the time being because of its hedging practices. Finally, regarding the U.S. economy, I think the company would continue to fare well in a recessionary environment because consumers may be more likely to eat at home than go out. Moreover, the company has very little debt, so it is in good financial shape for weathering any downturn. For all these reasons, I like Hormel Foods as a long-term investment, especially in light of current domestic and global conditions.
I bought 50 shares of HRL at the price of $27.84 per share, giving me a total of 100 shares at an average price of exactly $28.00 per share and a 2.13% yield on cost. As I mentioned before, the yield is lower than I prefer, but it is the only negative aspect of the stock and outweighed by its many positive aspects. At the current dividend rate, I can expect to receive quarterly dividends from HRL of $15.00, which is double the $7.50 I was getting before this purchase. The stock went ex-dividend last week, so the higher dividend will not take effect until the fall, but my lower cost basis more than makes up for the single-quarter dividend difference. HRL will now contribute a total of $60.00 to my annual dividend income, which is $30.00 more than before. Even though I now have a decent-sized position in HRL, I would consider making an additional purchase if the stock's price were to fall further in the coming months.
Tuesday, July 24, 2012
Saturday, July 21, 2012
Book Review: The Big Short
The Big Short (2010) by Michael Lewis
This book addresses the 2008 financial crisis by discussing how a few relatively unknown hedge fund managers recognized the impending crisis and profited from it by shorting mortgage-backed securities and the stocks of the financial institutions that owned them. It was interesting to read about how these managers saw the warning signs surrounding the subprime mortgage industry that others (government regulators, rating agencies, major banks, etc.) either failed to see or chose to ignore. There were also some details regarding how the managers went about profiting from the greedy and irresponsible actions of major banks. The book's focus on the personalities and individual decisions of the managers made for an interesting and provocative read. However, if I were to offer one criticism of the book, it would be that it covers the financial crisis from a single perspective (albeit a unique one), providing limited insight into what the people responsible for the crisis were thinking and doing at the time.
Note: I read this book in July 2012.
This book addresses the 2008 financial crisis by discussing how a few relatively unknown hedge fund managers recognized the impending crisis and profited from it by shorting mortgage-backed securities and the stocks of the financial institutions that owned them. It was interesting to read about how these managers saw the warning signs surrounding the subprime mortgage industry that others (government regulators, rating agencies, major banks, etc.) either failed to see or chose to ignore. There were also some details regarding how the managers went about profiting from the greedy and irresponsible actions of major banks. The book's focus on the personalities and individual decisions of the managers made for an interesting and provocative read. However, if I were to offer one criticism of the book, it would be that it covers the financial crisis from a single perspective (albeit a unique one), providing limited insight into what the people responsible for the crisis were thinking and doing at the time.
Note: I read this book in July 2012.
Monday, July 16, 2012
Book Review: When Genius Failed
When Genius Failed: The Rise and Fall of Long-Term Capital Management (2000) by Roger Lowenstein
This book provides a compelling account of the people and events surrounding the dramatic rise and epic fall of Long-Term Capital Management (LTCM), a hedge fund that existed for a short period in the 1990s.
The first half of the book covers the rise of LTCM, explaining how top bond traders and esteemed academics came together and started the fund, using their combined knowledge and skills to engage in trading strategies involving bond, stock, and merger arbitrage. During the fund's first four years, from May 1994 to April 1998, it produced impressive double-digit returns with very low volatility, leading to an influx of new capital and great acclaim for the fund's principals.
The second half of the book covers the fall of LTCM, explaining how a combination of excessive leverage and overconfidence in precise mathematical models based on historic norms resulted in an accelerating downward spiral when the activity in various global markets failed to conform to model predictions. In a span of less than five months, from May 1998 to September 1998, the fund suffered catastrophic losses (billions of dollars) that threatened to disrupt the global financial system because of the fund's massive size and exposure. The situation was contained when the Federal Reserve helped coordinate a hasty bailout by several major financial institutions. After making up some of its losses, the fund was shut down in 2000.
I enjoyed reading this book, which could be considered a real-life financial thriller story. It was interesting to find out some of the things that went on behind the scenes and how such a massive failure could happen. From a practical standpoint, the book highlighted the dangers of using leverage and being overconfident in one's decisions.
Note: I read this book in July 2012.
This book provides a compelling account of the people and events surrounding the dramatic rise and epic fall of Long-Term Capital Management (LTCM), a hedge fund that existed for a short period in the 1990s.
The first half of the book covers the rise of LTCM, explaining how top bond traders and esteemed academics came together and started the fund, using their combined knowledge and skills to engage in trading strategies involving bond, stock, and merger arbitrage. During the fund's first four years, from May 1994 to April 1998, it produced impressive double-digit returns with very low volatility, leading to an influx of new capital and great acclaim for the fund's principals.
The second half of the book covers the fall of LTCM, explaining how a combination of excessive leverage and overconfidence in precise mathematical models based on historic norms resulted in an accelerating downward spiral when the activity in various global markets failed to conform to model predictions. In a span of less than five months, from May 1998 to September 1998, the fund suffered catastrophic losses (billions of dollars) that threatened to disrupt the global financial system because of the fund's massive size and exposure. The situation was contained when the Federal Reserve helped coordinate a hasty bailout by several major financial institutions. After making up some of its losses, the fund was shut down in 2000.
I enjoyed reading this book, which could be considered a real-life financial thriller story. It was interesting to find out some of the things that went on behind the scenes and how such a massive failure could happen. From a practical standpoint, the book highlighted the dangers of using leverage and being overconfident in one's decisions.
Note: I read this book in July 2012.
Friday, July 13, 2012
Book Review: The Essential Buffett
The Essential Buffett (2001) by Robert G. Hagstrom
The author discusses an approach called "focus investing" that draws on the thinking and investing style of well-known investor Warren Buffett. He starts the book with three lessons about investing in Chapter 1, which are: (1) analyze stocks as businesses; (2) manage a focused, low-turnover portfolio; and (3) differentiate between investment and speculation. He goes on to give some background on Buffett and the history of Berkshire Hathaway in Chapter 2, followed by a discussion in Chapter 3 of how Buffett was influenced by Benjamin Graham, Philip Fisher, and Charlie Munger.
The middle chapters in the book deal with focus investing. Chapter 4 presents 12 "Tenets of the Warren Buffett Way" that address business, management, financial, and market aspects of investing. Chapter 5 provides some "golden rules" for focus investing, such as having a concentrated portfolio with only the very best companies that you intend to hold for the long term amid market volatility. (The preceding sentence covers all the golden rules.) Chapter 6 reviews the records of some well-known focus investors and Chapter 7 has a brief discussion of the emotional side of investing. The book concludes with speculation in Chapter 8 about how focus investing can be applied to tech, small-cap, and international stocks. Unfortunately, the arguments are not compelling and the examples fall flat (e.g., America Online is touted as a strong company consistent with the Buffett tenets).
Overall, I thought the book was interesting and the focus investing approach seems reasonable for the most part. However, I would argue that focus investing is more closely related to the approach of Philip Fisher than that of Buffett.
Note: I read this book in June 2012.
The author discusses an approach called "focus investing" that draws on the thinking and investing style of well-known investor Warren Buffett. He starts the book with three lessons about investing in Chapter 1, which are: (1) analyze stocks as businesses; (2) manage a focused, low-turnover portfolio; and (3) differentiate between investment and speculation. He goes on to give some background on Buffett and the history of Berkshire Hathaway in Chapter 2, followed by a discussion in Chapter 3 of how Buffett was influenced by Benjamin Graham, Philip Fisher, and Charlie Munger.
The middle chapters in the book deal with focus investing. Chapter 4 presents 12 "Tenets of the Warren Buffett Way" that address business, management, financial, and market aspects of investing. Chapter 5 provides some "golden rules" for focus investing, such as having a concentrated portfolio with only the very best companies that you intend to hold for the long term amid market volatility. (The preceding sentence covers all the golden rules.) Chapter 6 reviews the records of some well-known focus investors and Chapter 7 has a brief discussion of the emotional side of investing. The book concludes with speculation in Chapter 8 about how focus investing can be applied to tech, small-cap, and international stocks. Unfortunately, the arguments are not compelling and the examples fall flat (e.g., America Online is touted as a strong company consistent with the Buffett tenets).
Overall, I thought the book was interesting and the focus investing approach seems reasonable for the most part. However, I would argue that focus investing is more closely related to the approach of Philip Fisher than that of Buffett.
Note: I read this book in June 2012.
Wednesday, July 11, 2012
Investigating How Stock Price Variability Can Benefit Dividend Growth Investors
A new article of mine has been published on the investing website Seeking Alpha. The article is entitled Investigating How Stock Price Variability Can Benefit Dividend Growth Investors and it presents the results of random walk simulations of stock price changes over time and their implications for the long-term compounding of a dividend income stream.
Note that my articles appear under the username "Dividend Growth Machine."
Note that my articles appear under the username "Dividend Growth Machine."
Thursday, July 5, 2012
Illustrating The Factors That Affect Dividend Growth Investing
A new article of mine has been published on the investing website Seeking Alpha. The article is entitled Illustrating The Factors That Affect Dividend Growth Investing and it shows in graphical form how the long-term compounding of the dividend income stream is affected by six factors: dividend reinvestment, dividend growth, capital appreciation, new capital investment, taxes, and time.
Note that my articles appear under the username "Dividend Growth Machine."
Note that my articles appear under the username "Dividend Growth Machine."
Tuesday, July 3, 2012
Monthly Review: June 2012
Here is a review of what happened in June:
Dividends: I received a total of $131.60 in dividends from the following stocks:
Dividend Increases: I was pleased to see dividend increases announced for three of my stocks (click on each stock to see my post about the increase): These are all good-sized increases, so I am quite pleased. Thus far this year, there have been dividend increases for 16 of the 22 dividend growth stocks in my portfolio.
Savings: This month I saved $916 (31.4%) of my net income, which is my lowest monthly total thus far this year. I mentioned in previous posts that I anticipated my savings rate would take a hit in June due to some large annual expenses and travel costs (I went on a road trip to visit some friends at the start of the month). This results in year-to-date savings of $8,306, which puts me 69.2% of the way toward my goal of $12,000 in savings for 2012. Thus, in spite of lower savings in May and June, I remain on track to meet my goal.
Transactions: This was the first month of 2012 in which I did not buy any stocks. (I did not sell any stocks for the sixth consecutive month.) There are two main reasons why I stayed on the sidelines. First, I anticipated my low savings for June, so I wanted to conserve my limited cash. Second, even though I did have sufficient cash on hand to make one purchase, I could not make up my mind as to what to buy. I decided it might be best to exercise some patience and wait until I had a stronger sense of what I wanted.
Portfolio: My portfolio currently consists of 22 stocks and has a market value of $54,207.63 (including cash), which is a 4.5% increase compared with last month's value of $51,861.12. About half of the increase came from capital gains and the other half came from dividends and new capital.
Seeking Alpha: I did not publish any new articles on the investing website Seeking Alpha in June. However, I did earn $6.59 from additional page views of my previous articles, raising my Q2 total (to be paid in July) to $343.94.
Looking Ahead: July will be a good month for dividends, although I am not expecting any dividend increases to be announced for my stocks. I anticipate a substantial rebound in my savings rate, which will be nice after two below-average months. Given that I did not buy any stocks in June, I will have enough cash to make two purchases in July. However, I may wait until the second half of the month to see whether any good buying opportunities arise when companies report earnings.
Dividends: I received a total of $131.60 in dividends from the following stocks:
- ADM: $10.50
- BDX: $11.25
- CVX: $18.00
- JNJ: $21.35
- MCD: $35.00
- NSC: $23.50
- UTX: $12.00
Dividend Increases: I was pleased to see dividend increases announced for three of my stocks (click on each stock to see my post about the increase): These are all good-sized increases, so I am quite pleased. Thus far this year, there have been dividend increases for 16 of the 22 dividend growth stocks in my portfolio.
Savings: This month I saved $916 (31.4%) of my net income, which is my lowest monthly total thus far this year. I mentioned in previous posts that I anticipated my savings rate would take a hit in June due to some large annual expenses and travel costs (I went on a road trip to visit some friends at the start of the month). This results in year-to-date savings of $8,306, which puts me 69.2% of the way toward my goal of $12,000 in savings for 2012. Thus, in spite of lower savings in May and June, I remain on track to meet my goal.
Transactions: This was the first month of 2012 in which I did not buy any stocks. (I did not sell any stocks for the sixth consecutive month.) There are two main reasons why I stayed on the sidelines. First, I anticipated my low savings for June, so I wanted to conserve my limited cash. Second, even though I did have sufficient cash on hand to make one purchase, I could not make up my mind as to what to buy. I decided it might be best to exercise some patience and wait until I had a stronger sense of what I wanted.
Portfolio: My portfolio currently consists of 22 stocks and has a market value of $54,207.63 (including cash), which is a 4.5% increase compared with last month's value of $51,861.12. About half of the increase came from capital gains and the other half came from dividends and new capital.
Seeking Alpha: I did not publish any new articles on the investing website Seeking Alpha in June. However, I did earn $6.59 from additional page views of my previous articles, raising my Q2 total (to be paid in July) to $343.94.
Looking Ahead: July will be a good month for dividends, although I am not expecting any dividend increases to be announced for my stocks. I anticipate a substantial rebound in my savings rate, which will be nice after two below-average months. Given that I did not buy any stocks in June, I will have enough cash to make two purchases in July. However, I may wait until the second half of the month to see whether any good buying opportunities arise when companies report earnings.
Sunday, July 1, 2012
150th Anniversary For Union Pacific
One of the companies in my portfolio, Union Pacific (UNP), is celebrating its 150th anniversary today. It was on July 1, 1862, that Abraham Lincoln signed the Pacific Railway Act that established the company and initiated the construction of the first transcontinental railroad.
With all the events and changes that have taken place over the past 150 years, I find it remarkable that Union Pacific not only still exists today, but is a strong enterprise that continues to grow. There are not many companies that have that kind of staying power. It is also worth noting that even though its current dividend growth streak is just 6 years, the company has paid dividends for 112 consecutive years, which is another great feat.
I hope Union Pacific keeps on rolling for another 150 years!
With all the events and changes that have taken place over the past 150 years, I find it remarkable that Union Pacific not only still exists today, but is a strong enterprise that continues to grow. There are not many companies that have that kind of staying power. It is also worth noting that even though its current dividend growth streak is just 6 years, the company has paid dividends for 112 consecutive years, which is another great feat.
I hope Union Pacific keeps on rolling for another 150 years!
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