A new article of mine has been published on the investing website Seeking Alpha. The article is entitled A Real Dividend Growth Machine: 2012 Review and it provides a review of my dividend growth investing progress last year.
Going forward, I plan to continue writing monthly reviews on my blog, but I will publish quarterly and annual reviews on Seeking Alpha.
Tuesday, January 15, 2013
Friday, January 11, 2013
Personal News
I rarely discuss my personal life on this blog, mainly because I want to keep it focused on investing, but I have some relevant personal news that I would like to share with you.
For the past few years I have been working as a postdoctoral research fellow at a well-known university, with the ultimate career goal of becoming a professor. Despite being successful in my work, I have struggled to obtain a tenure-track faculty position, especially after the academic job market tanked in 2008-09. The job market has gradually improved over time, but there is an overabundance of highly qualified candidates for a small number of positions, resulting in fierce competition.
To give you some context, I applied to about 20 positions at various universities around the country in my current search, and each position received anywhere from 150 to 200+ applications (with only 3-6 people typically being invited for interviews). This put my base-level probability of getting a job at less than 1%, which was rather discouraging. Moreover, this is the final year I can remain in my current position (due to funding and other constraints), so the pressure was higher than ever.
In my previous two searches, I had zero interviews out of a combined total of 45 applications -- how's that for disappointing? Fortunately, this time around I was invited for five interviews. I did some of the interviews back in November and December; they were the important "work-related trips" I mentioned in previous posts. I thought I did fairly well at all the interviews, but I had to wait until other candidates were interviewed before I would find out the decisions of the search committees.
A few days before Christmas I received a very special gift by e-mail: A job offer! And it was from my favorite of all the places where I interviewed! Over the next two weeks I engaged in negotiations regarding the offer, which wrapped up last week. I received the formal offer in the mail this week, which I promptly signed and returned, so it is now a done deal! Starting this upcoming summer, I will be a professor at a good university, working in a department that is a great fit for my research program.
What is the relevance of all this to my investing? It has to do with saving new capital for investment. The salary at my new job will be 62% higher than what I am getting at my current job. While I anticipate some moving expenses (my new job is in a different state) and a moderate increase in my cost of living, they will be more than offset by my higher salary. Thus, starting in the second half of 2013, I expect to save much more new capital for investment than before. I will not know just how much until I get settled, but I am definitely looking forward to increased savings.
Given the difficulty in estimating how much I will be saving later this year, and how much those invested savings might reap in dividends, I have decided not to set specific saving and dividend goals for 2013. However, I will still keep track of my savings and dividends on a monthly basis, monitoring my progress throughout the year.
The main implication of having more new capital for investment is that I will be able to accelerate the growth of my dividend income stream. Earlier this week I posted a dividend income projection that involved a savings assumption based on what I achieved in 2012. I anticipate that I will be able to revise that assumption upward in the future.
What a great way to start off the new year!
For the past few years I have been working as a postdoctoral research fellow at a well-known university, with the ultimate career goal of becoming a professor. Despite being successful in my work, I have struggled to obtain a tenure-track faculty position, especially after the academic job market tanked in 2008-09. The job market has gradually improved over time, but there is an overabundance of highly qualified candidates for a small number of positions, resulting in fierce competition.
To give you some context, I applied to about 20 positions at various universities around the country in my current search, and each position received anywhere from 150 to 200+ applications (with only 3-6 people typically being invited for interviews). This put my base-level probability of getting a job at less than 1%, which was rather discouraging. Moreover, this is the final year I can remain in my current position (due to funding and other constraints), so the pressure was higher than ever.
In my previous two searches, I had zero interviews out of a combined total of 45 applications -- how's that for disappointing? Fortunately, this time around I was invited for five interviews. I did some of the interviews back in November and December; they were the important "work-related trips" I mentioned in previous posts. I thought I did fairly well at all the interviews, but I had to wait until other candidates were interviewed before I would find out the decisions of the search committees.
A few days before Christmas I received a very special gift by e-mail: A job offer! And it was from my favorite of all the places where I interviewed! Over the next two weeks I engaged in negotiations regarding the offer, which wrapped up last week. I received the formal offer in the mail this week, which I promptly signed and returned, so it is now a done deal! Starting this upcoming summer, I will be a professor at a good university, working in a department that is a great fit for my research program.
What is the relevance of all this to my investing? It has to do with saving new capital for investment. The salary at my new job will be 62% higher than what I am getting at my current job. While I anticipate some moving expenses (my new job is in a different state) and a moderate increase in my cost of living, they will be more than offset by my higher salary. Thus, starting in the second half of 2013, I expect to save much more new capital for investment than before. I will not know just how much until I get settled, but I am definitely looking forward to increased savings.
Given the difficulty in estimating how much I will be saving later this year, and how much those invested savings might reap in dividends, I have decided not to set specific saving and dividend goals for 2013. However, I will still keep track of my savings and dividends on a monthly basis, monitoring my progress throughout the year.
The main implication of having more new capital for investment is that I will be able to accelerate the growth of my dividend income stream. Earlier this week I posted a dividend income projection that involved a savings assumption based on what I achieved in 2012. I anticipate that I will be able to revise that assumption upward in the future.
What a great way to start off the new year!
Thursday, January 10, 2013
Stock Bought: MSFT
Today I bought shares of Microsoft (MSFT),
the world's largest software maker. The company dominates the market for desktop operating systems (more than 90% of PCs still run Windows) and makes the popular Office productivity applications. Additional business components include server software, online advertising tools, and the Xbox video game system.
Microsoft is often derided as "dead money" because its stock price return for the past several years has been negligible. However, this ignores three important points. First, MSFT was overvalued at the turn of the century (P/E > 30), so the poor return mainly reflects the stock coming down to a more realistic valuation. Second, the focus on stock price return ignores the return from dividends that MSFT has been paying since 2003. Third, despite the lackluster stock price movement, the company's operating results have been quite good.
To elaborate on the last point (see also this article by Chuck Carnevale), Microsoft has had fairly steady revenue and earnings growth, with 10-year growth rates of 10% for revenue and 11% for earnings. The company has maintained high margins, strong operating and free cash flows, and returns on equity above 20%. Its financial position is excellent, with $66B in cash, $12B in debt, debt/capitalization of 14%, debt/equity of 18%, 59x interest coverage, and a current ratio of 2.7. Value Line gives it a safety rating of 1 and a financial strength rating of A++. It is one of just a few companies with an AAA credit rating from S&P.
For a tech company, Microsoft's recent dividend history is pretty good. The company has increased its dividend for 10 consecutive years and has a 5-year dividend growth rate of 15%, which also happens to be the size of the most recent increase, announced in September 2012. The EPS payout ratio is 50% (which is a bit misleading; see below) and the FCF payout ratio is 35%. The company also has a strong history of share buybacks, reducing the number of outstanding shares by more than 20% over the past 10 years.
I consider Microsoft to be undervalued at the current price. It appears to have a P/E of 14.2, but that reflects a large, one-time charge they took against earnings last year. Adjusting for that, Value Line reports EPS of $2.72 for 2012, which gives a P/E of 9.7. Other metrics include P/S of 3.1, P/B of 3.2, and PEG of 1.0. Using a Dividend Discount Model with a below-average dividend growth rate of 9% and an aggressive discount rate of 12%, I calculate a fair value of $33.43. Morningstar gives a fair value of $35.00 and a 4-star rating, whereas S&P gives a fair value of $36.90 and a 5-star rating. The average of those three estimates is a fair value of $35.11, which implies a 25% margin of safety at the current price. MSFT is flirting with its 52-week low and is 20% off its 52-week high. (For another informative look at its valuation, albeit from early 2012, see this article by Dividend Monk.)
I bought 55 shares of MSFT at the price of $26.30 per share, giving me a 3.48% yield on cost. At the current dividend rate, I can expect to receive quarterly dividends of $12.65, which will add a total of $50.60 to my annual dividend income. Microsoft is now the 26th stock in my portfolio and my second tech stock (the other being INTC). I continue to be wary of tech stocks in general, but I feel comfortable having MSFT in my portfolio, especially given the extent of its undervaluation and its continued innovation efforts (see this article by Catalyst Investments). However, I will likely keep the overall allocation of my portfolio to tech stocks below 10% (it is currently 8%).
It is a bit difficult to find undervalued stocks at the moment, so even though I have sufficient cash on hand to make another purchase this month, I may just sit back and watch what happens as quarterly earnings are reported. If there is a significant dip that catches my eye, then I might take advantage of it.
Microsoft is often derided as "dead money" because its stock price return for the past several years has been negligible. However, this ignores three important points. First, MSFT was overvalued at the turn of the century (P/E > 30), so the poor return mainly reflects the stock coming down to a more realistic valuation. Second, the focus on stock price return ignores the return from dividends that MSFT has been paying since 2003. Third, despite the lackluster stock price movement, the company's operating results have been quite good.
To elaborate on the last point (see also this article by Chuck Carnevale), Microsoft has had fairly steady revenue and earnings growth, with 10-year growth rates of 10% for revenue and 11% for earnings. The company has maintained high margins, strong operating and free cash flows, and returns on equity above 20%. Its financial position is excellent, with $66B in cash, $12B in debt, debt/capitalization of 14%, debt/equity of 18%, 59x interest coverage, and a current ratio of 2.7. Value Line gives it a safety rating of 1 and a financial strength rating of A++. It is one of just a few companies with an AAA credit rating from S&P.
For a tech company, Microsoft's recent dividend history is pretty good. The company has increased its dividend for 10 consecutive years and has a 5-year dividend growth rate of 15%, which also happens to be the size of the most recent increase, announced in September 2012. The EPS payout ratio is 50% (which is a bit misleading; see below) and the FCF payout ratio is 35%. The company also has a strong history of share buybacks, reducing the number of outstanding shares by more than 20% over the past 10 years.
I consider Microsoft to be undervalued at the current price. It appears to have a P/E of 14.2, but that reflects a large, one-time charge they took against earnings last year. Adjusting for that, Value Line reports EPS of $2.72 for 2012, which gives a P/E of 9.7. Other metrics include P/S of 3.1, P/B of 3.2, and PEG of 1.0. Using a Dividend Discount Model with a below-average dividend growth rate of 9% and an aggressive discount rate of 12%, I calculate a fair value of $33.43. Morningstar gives a fair value of $35.00 and a 4-star rating, whereas S&P gives a fair value of $36.90 and a 5-star rating. The average of those three estimates is a fair value of $35.11, which implies a 25% margin of safety at the current price. MSFT is flirting with its 52-week low and is 20% off its 52-week high. (For another informative look at its valuation, albeit from early 2012, see this article by Dividend Monk.)
I bought 55 shares of MSFT at the price of $26.30 per share, giving me a 3.48% yield on cost. At the current dividend rate, I can expect to receive quarterly dividends of $12.65, which will add a total of $50.60 to my annual dividend income. Microsoft is now the 26th stock in my portfolio and my second tech stock (the other being INTC). I continue to be wary of tech stocks in general, but I feel comfortable having MSFT in my portfolio, especially given the extent of its undervaluation and its continued innovation efforts (see this article by Catalyst Investments). However, I will likely keep the overall allocation of my portfolio to tech stocks below 10% (it is currently 8%).
It is a bit difficult to find undervalued stocks at the moment, so even though I have sufficient cash on hand to make another purchase this month, I may just sit back and watch what happens as quarterly earnings are reported. If there is a significant dip that catches my eye, then I might take advantage of it.
Sunday, January 6, 2013
Dividend Income Projection
My primary goal as a dividend growth investor is to build a sustainable and rising stream of dividend income over time. I plan to reach this goal by taking advantage of the power of long-term compounding, driven by a combination of dividend growth, dividend reinvestment, and regular investment of new capital. In some of my Seeking Alpha articles I have investigated how various factors affect the long-term compounding of dividend income. In this post I will report an updated projection of my dividend income based on the 2012 year-end status of my portfolio.
Here is some relevant information from 2012, which was my first full year of dividend growth investing:
According to the projection, it is possible for me to reach over $10,000 in annual dividend income after 10 years of dividend growth investing. (If I maintain my current savings rate, I can reach $10,000 in Year 9.) By measuring my actual dividend income against the projection, I will have a way of tracking my long-term progress. For example, to be on track with the projection I will need to receive $2,275 in dividends in 2013. In case you are wondering about later years, projected dividend income reaches $20,000 in Year 15, $50,000 in Year 23, and $100,000 in Year 30.
Of course, long-term projections are rife with uncertainty and a lot can change over the years. However, it is fun to crunch the numbers and see what can potentially be achieved through dividend growth investing.
Here is some relevant information from 2012, which was my first full year of dividend growth investing:
- Dividends received: $1,649.63
- Final portfolio value (including cash): $65,137.07
- Portfolio yield on cost: 3.5% (unweighted mean across all stocks)
- Dividend increases: mean of 10.4%, median of 8.5%
- Savings: mean of $1,427 per month
- Portfolio value at start of Year 2: $65,000
- Dividend yield of portfolio and subsequent purchases: 3.5%
- Capital appreciation rate: 7.2% (stocks double in value every 10 years)
- Dividend growth rate: 7.2% (dividends double every 10 years)
- Dividend tax rate: 15% (after-tax dividends are reinvested)
- New capital invested: $1,200 per month
Of course, long-term projections are rife with uncertainty and a lot can change over the years. However, it is fun to crunch the numbers and see what can potentially be achieved through dividend growth investing.
Friday, January 4, 2013
Stock Sold: ADM
Today I sold all my shares of Archer Daniels Midland (ADM). In a previous post I discussed my conditions for selling a stock and back in November I expressed some concerns about ADM. Here are the reasons why I sold:
- No dividend increase announced in 2012: Even though ADM can maintain its long dividend growth streak by announcing an increase during 2013, I was disappointed by this (lack of) news. Every other company in my portfolio increased its dividend in 2012.
- Earnings volatility: It was not until last year's drought that I recognized just how volatile the company's earnings could be and how susceptible they were to external factors. I want the companies in my portfolio to have better earnings stability.
- Occasional negative free cash flows: I did not notice until after I bought ADM that its free cash flow is also volatile, being negative in four of the last ten years. I want my companies to have consistently positive free cash flows. It was a failure of due diligence that I did not examine this point prior to my investment in ADM.
- Questionable acquisition attempt: Despite the recent weakness in its financial position, ADM is attempting to acquire Australian-based GrainCorp for nearly $3 billion. Even though such an acquisition might ultimately benefit ADM, I question whether it is a prudent action at this time.
- Better investment opportunities: I think I can put the capital I had invested in ADM toward a better opportunity, perhaps one with a higher dividend yield than the 2.4% I was getting from ADM.
Company News: HRL
Hormel Foods (HRL) announced on Thursday that it will be acquiring the Skippy peanut butter business from Unilever (UL) for about $700 million (here is the press release).
I think this is a good acquisition by Hormel. It helps the company diversify its offerings in the packaged/processed food space with a non-meat protein product. Skippy is a well-known brand that holds the No. 2 share of the peanut butter market in the U.S. and it is the leading brand in China; this latter point may help Hormel expand its other products in the region. Hormel is in a good position to make an acquisition of this size (the company has $760 million in cash on its balance sheet) and they expect the deal to be modestly accretive to earnings in fiscal 2013 and fully accretive in fiscal 2014.
The market evidently liked the deal, moving HRL up 3.7% to a new 52-week high. (January 4 update: The stock moved up another 3.3% today.) The stock is currently the 6th largest position in my portfolio.
I think this is a good acquisition by Hormel. It helps the company diversify its offerings in the packaged/processed food space with a non-meat protein product. Skippy is a well-known brand that holds the No. 2 share of the peanut butter market in the U.S. and it is the leading brand in China; this latter point may help Hormel expand its other products in the region. Hormel is in a good position to make an acquisition of this size (the company has $760 million in cash on its balance sheet) and they expect the deal to be modestly accretive to earnings in fiscal 2013 and fully accretive in fiscal 2014.
The market evidently liked the deal, moving HRL up 3.7% to a new 52-week high. (January 4 update: The stock moved up another 3.3% today.) The stock is currently the 6th largest position in my portfolio.
Monthly Review: December 2012
Happy new year! Here is a review of what happened in December:
Dividends: I received a total of $237.49 in dividends from the following stocks:
Dividend Increases: After a nice string of dividend increases in November, there were none in December. Dividend increases occurred for 24 of the 25 stocks in my portfolio in 2012, with the lone holdout being ADM.
Savings: This month I saved an estimated $1,174 (39.5%) of my net income, which was lower than in previous months due to a large (but expected) annual expense. Similar to November, the savings are estimated because of the difficulties in accounting for travel expenses associated with my recent work-related trips. I hope to receive all my reimbursements by the end of January. My final savings total for 2012 is $17,124 (48.4%) of my net income, which blows away the goal of $12,000 that I set at the beginning of the year.
Transactions: I bought one stock in December (click on the transaction to see my post about it): This purchase allowed me to average down on my INTC position and it increases my annual dividend income by $67.48. INTC is now one of the largest positions in my portfolio and I am comfortable with its size, so I do not plan to buy more shares anytime soon. I did not sell any stocks for the 12th consecutive month, which means I had zero portfolio turnover in 2012.
Portfolio: My portfolio currently consists of 25 stocks and has a market value of $65,137.07 (including cash), which is a 2.6% increase over last month's value. The increase primarily reflects new capital, with the remainder split about evenly between dividends and capital gains. My portfolio value at the start of the year was $42,830.02, which means it increased by $22,307.05 (52.1%) during 2012. Of course, most of that increase (82.0%) is attributable to new capital, but there were also good-sized contributions from capital gains and dividends.
Seeking Alpha: Due to travel and being generally busier than usual, I did not publish any new articles on the investing website Seeking Alpha. However, in December I earned $7.14 from page views of my previous articles, increasing my Q4 total (to be paid in January) to $107.21 and my total for 2012 (note that I started writing in April) to $686.81. That is a pretty nice total for occasional investment writing!
Looking Ahead: January will be a below-average month for dividends, partly due to the accelerated dividends noted above. I am expecting at least one dividend increase to be announced in January. My savings rate will likely rebound a bit, although it will not be back to normal until February. As in the past two months, I will have sufficient cash to make just one purchase. The recent market uptick due to a fiscal cliff deal has taken away some buying opportunities that interested me, but I plan to overhaul my watch list this month and see whether something new comes on my radar.
Thankfully, after a tiresome travel schedule to close out 2012, I am essentially done traveling for a while. (Another work-related trip is possible in January, but that is still to be determined.) This means I will have more time for investing-related activities such as research, reading, and writing. I hope that 2012 finished on a positive note for everyone and I wish us all the best with our investing in 2013.
Dividends: I received a total of $237.49 in dividends from the following stocks:
- ADM: $10.50
- BDX: $12.38
- CMI: $7.50
- CVX: $18.00
- GD: $10.20
- INTC: $25.88
- ITW: $15.20
- JNJ: $21.35
- KO: $15.30
- MCD: $38.50
- MDT: $14.30
- NSC: $35.00
- UTX: $13.38
Dividend Increases: After a nice string of dividend increases in November, there were none in December. Dividend increases occurred for 24 of the 25 stocks in my portfolio in 2012, with the lone holdout being ADM.
Savings: This month I saved an estimated $1,174 (39.5%) of my net income, which was lower than in previous months due to a large (but expected) annual expense. Similar to November, the savings are estimated because of the difficulties in accounting for travel expenses associated with my recent work-related trips. I hope to receive all my reimbursements by the end of January. My final savings total for 2012 is $17,124 (48.4%) of my net income, which blows away the goal of $12,000 that I set at the beginning of the year.
Transactions: I bought one stock in December (click on the transaction to see my post about it): This purchase allowed me to average down on my INTC position and it increases my annual dividend income by $67.48. INTC is now one of the largest positions in my portfolio and I am comfortable with its size, so I do not plan to buy more shares anytime soon. I did not sell any stocks for the 12th consecutive month, which means I had zero portfolio turnover in 2012.
Portfolio: My portfolio currently consists of 25 stocks and has a market value of $65,137.07 (including cash), which is a 2.6% increase over last month's value. The increase primarily reflects new capital, with the remainder split about evenly between dividends and capital gains. My portfolio value at the start of the year was $42,830.02, which means it increased by $22,307.05 (52.1%) during 2012. Of course, most of that increase (82.0%) is attributable to new capital, but there were also good-sized contributions from capital gains and dividends.
Seeking Alpha: Due to travel and being generally busier than usual, I did not publish any new articles on the investing website Seeking Alpha. However, in December I earned $7.14 from page views of my previous articles, increasing my Q4 total (to be paid in January) to $107.21 and my total for 2012 (note that I started writing in April) to $686.81. That is a pretty nice total for occasional investment writing!
Looking Ahead: January will be a below-average month for dividends, partly due to the accelerated dividends noted above. I am expecting at least one dividend increase to be announced in January. My savings rate will likely rebound a bit, although it will not be back to normal until February. As in the past two months, I will have sufficient cash to make just one purchase. The recent market uptick due to a fiscal cliff deal has taken away some buying opportunities that interested me, but I plan to overhaul my watch list this month and see whether something new comes on my radar.
Thankfully, after a tiresome travel schedule to close out 2012, I am essentially done traveling for a while. (Another work-related trip is possible in January, but that is still to be determined.) This means I will have more time for investing-related activities such as research, reading, and writing. I hope that 2012 finished on a positive note for everyone and I wish us all the best with our investing in 2013.
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