Mulling Over Investment Options

After not investing any new capital in May for a variety of reasons, I’ve now built up a decent little stash of cash ready to be deployed into quality dividend growth stocks that will provide me with a reliable source of passive income going forward.

So what to buy? Looking over my watch list, I struggled to come up with any ideas for a while. Seems like the majority of them are overvalued. Can we please just have a market correction already? 😉

But I figured I’d find some candidates eventually and after going through my list again and looking at other blogs and investing sites, this is what I came up with.

J. M. Smucker Company (SJM)-This dividend contender with 16 years of dividend growth was founded in 1897 and operates in the consumer staples sector. Although a name like Smucker makes you think of grape jelly, the J.M. Smucker Company’s largest business segment is in the brew at home coffee industry which was bolstered by their acquisition of the Folger’s brand in 2008. Smucker is the market leader in the brew at home coffee industry here in the United States and also holds the number one brand in the $2 billion a year peanut butter industry, Jif. Coffee makes up 48% of sales, which is way ahead of their number two product, peanut butter, at 13%. The company’s namesake fruit spreads only account for 6% of all product sales as of 2013, but are the market leader in that category.

Although not undervalued by any means, I think the stock is trading at fair/possibly slightly overvalued price right now with a current P/E of 19.5 and a forward P/E of 16.8. Looking back over the last ten years, SJM has traded between a P/E of 11.45 and 23.95.

Dr. Pepper Snapple Group (DPS)Thanks to Brian over at Dividend Mongrel for giving me this idea. DPS is a manufacturer and distributor of non-alcoholic beverages that are sold in the United States, Canada, and Mexico. The company’s brands include its flagship Dr. Pepper and Snapple drinks, Sunkist soda, 7UP, A&W, Canada Dry, Crush soda, Hawiian Punch, Mott’s, Schweppes, and my personal favorite as a kid, Yoohoo. Unlike its main competitors, Coca-Cola and Pepsi, both of which are trading at P/E’s of 19+, Dr. Pepper’s P/E comes in at 17.5 with a forward P/E of 15.2, both of which are less than the S&P 500’s current and forward P/E ratios of 18.3 and 17 respectively. Although they have only been growing their dividend for 5 years, the stock does sport dividend growth rates of 10.4% for the past year, and 22.8% average for the last three years while still keeping the payout ratio at 47%. While their current P/E of 17.5 is above their 5 year average of 14.9 since being spun off from Cadbury in 2008, I think we have to take in to account that the P/E stood at a low of 13.01 at year end 2009 due to the recession and bear market which skews the average.

Exxon Mobil (XOM)-I remember reading on The Conservative Income Investor a while back something to the effect of, when in doubt buy Exxon stock. 😉 In all seriousness though, the global oil giant and dividend champion is currently trading at a P/E of 13.9 with a forward P/E of 13.2. What most attracts me to a potential buy of Exxon right now though is the PEG ratio is currently at .9. The PEG, which was popularized by Peter Lynch compares the P/E ratio of a company to its growth rate. A PEG of 1 which is considered fair value by most investors indicates a stock is selling at a P/E equal to its growth rate. Exxon appears slightly undervalued here going by that metric. While not the flashiest of stock picks, Exxon has been and should continue to make for a great long-term dividend growth investment.

Deere & Company (DE)-Another stock that looks undervalued based on the PEG ratio. Although earnings are expected to decrease in the coming few years, I like the long-term growth story of this company which is summed up nicely at their investor page. After keeping their dividend static for five quarters, Deere recently announced a 17.6% increase, bringing the quarterly payout up to $0.60 from $0.51. Sweet. 🙂 Even after the recent run-up in price the stock continues to trade at an attractive valuation with a P/E of just 9.9.

And for some stocks I already own that I would consider adding to at current levels.

Target (TGT)-The dividend champion with 47 years of dividend growth continues to trade at a depressed share price due to the fallout from their data breach and difficult roll-out in Canada. After a very impressive 20.9% increase to their dividend announced last week, shares now trade at with a froward yield of 3.66%.

Visa (V)-Even though shares have run up a bit since my first purchase in April, the company is still trading at an attractive valuation, in my opinion, for those seeking to open a long-term position.

Disclosure: I am long TGT, V, and may initiate a long position in SJM, DPS, XOM, and DE in the coming weeks. Please my portfolio page for a full list of my holdings.

What do you think of these stocks? Are there any others you are looking to buy right now?

25 comments

  1. Thanks for the ideas, I’ll be eager to see which you choose. V looks amazing with such a low payout ratio and high growth potential. I’m also looking at possibly joining you in IBM as I have zero tech plays. Any thoughts on WMT if it continues to slide? I might pick that or ROST to balance my TGT position.

    1. Hey Ryan, thanks for commenting man. IBM is another good buy at current levels. If I didn’t already own it and Apple in the tech sector, I’d be adding here.

      I like Wal-Mart as a long term investment, just kind of disappointed with that last dividend increase. However they do have a lot of positives such as their e-commerce business and share buyback program. If it wasn’t for Target’s large dividend increase and continued decreased share price I’d probably start adding some shares at current levels. Maybe next month.

  2. Hey SFZ,
    Thanks for the mention in the article. It`s great to have the support from other bloggers. I really like the points you have made here for each company. This is a very tough list to pick from. I look forward to seeing what you add to your portfolio in the upcoming weeks. I also plan on adding a postion or two in ths upcoming weeks. I would really like to add ATT (T) to my portfolio but I am still undecided. Keep up the great work and best of luck to you!

    1. Your welcome Brian! I enjoyed the post. It is kind of a tough list to pick from, I’m leaning towards Deere right now for my last Roth IRA buy of the year, and will look to pick up one of the others next month as long as the valuations still make sense. Just put in an order for more TGT and some DPS last night through Loyal3.

      Best wishes,
      SFZ

  3. Lots of great companies here although like a lot of the investment opportunities the value isn’t really there at current levels. V is getting closer as it dips back closer to $200 so I might be adding some more there. Really love the business model. High margins and essentially no capex and a management that wants to return cash to shareholders is a great combination. I’m hoping to add to TGT, DE and WMT and might throw some more in on XOM. Like CII said there’s never a bad time to invest in XOM.

    1. JC,
      I agree with you there not being a whole lot of value out there right now. I’ve been sitting on cash since April so I’m ready to start putting my money to work for me again instead of it just sitting in a savings account. Visa does have a terrific business model, should be a great investment going forward. I bought my first shares just below 200 so I’d like it to pullback near there before I make another buy. I think I’m leaning toward DE or XOM right now.

      Thanks for stopping by and commenting,
      SFZ

  4. Thanks for the list SFZ! They are all great companies, but Exxon Mobil and Deere & Company seem most attractive to me. Only problem is their rather small initial yield. I would like to get an initial yield of >3%. It really seems very difficult to find any attractive companies at the moment.

    Regards,
    TDW

    1. You’re welcome TDW! Hope things are going well for you man. Seems like we think alike. After going through the stocks I listed I ended up picking between Exxon and Deere for my final Roth IRA purchase of the year. Since I already have so much oil/energy exposure I went with Deere. I hear you on the low yield, but I think the higher dividend growth rate will help make up for that over the long-term.

      Thanks for reading and commenting.
      Best wishes,
      SFZ

    1. Thanks for the comment Living At Home! Glad to be a fellow shareholder. I really like Visa as a long-term dividend growth investment and will probably be adding more to my position here soon.

      Regards,
      SFZ

  5. DE, XOM and V are my picks from your choices. Want to invest in just one company go with high dividend growth V. It seems from the comments a lot of people like DE and XOM too. Thanks for sharing your shopping list.

    1. Thanks for the input Keith. I ended up buying DE Friday afternoon for my last Roth purchase of the year plus put in some small orders through Loyal3 for TGT and DPS. As long as V stays around $200 or so, I’ll probably look at that again next month.

      Best wishes,
      SFZ

  6. K and KRFT look like they might be good buys still. I just did a write up on K over on my blog. I recently added some K to my portfolio and KRFT might be next.

    1. Thanks for the ideas DD. I haven’t researched either of those two that much. Took a brief look at K recently and decided against it for some reason, can’t remember exactly why. I’ll have to take another look at it, especially considering it can be bought commission free over at Loyal3.

      Best wishes,
      SFZ

  7. Thanks for sharing these ideas, SFZ. It’s definitely frustrating to see everything valued so high when you’ve got cash ready to make a purchase. I’ll keep an eye on these and I will look forward to reading about what you choose.

    1. Not a problem Addison. I like sharing these watchlist updates every once in a while since it often makes me look deeper into a company before I’m ready to write and eventually invest in it plus I get to hear other’s opinions.

      I hear you on the market values, it seems like it’s getting harder each month trying to find good deals in the market.

      Hope things are going well with your dividend investing.
      Best wishes,
      SFZ

  8. Very strong watch list. There are some very solid companies on your list. I have always had Smuckers on my watch list (I have a soft spot for the stock). Their product portfolio dominates in food categories that are found in every home. The dividend increases have been >10% over the last five years and the current Payout ratio of 40%, which leaves room to grow the dividend going forward. The only thing that is holding me back at the moment is the current PE Ratio, which is a little high for my liking. I am monitoring it closely for a slight pullback. Maybe then I can finally move the stock from my watch list to my portfolio!

    Keep up the great work. You can’t go wrong with any of the purchases. The most important thing is that you are investing your cash into solid income producing investments. Keep us updated with your final decision.

    ~Bert, one of the Dividend Diplomats

    1. Hey Bert, thanks for commenting. Yeah Smucker’s P/E ended up being a little high for me so I choose Deere for the last Roth IRA purchase of the year plus bought a couple small positions in both Target and Dr. Pepper through Loyal3.

      For all the reasons you mentioned,Smucker’s is a stock I’d like to own at some point once it pulls back a bit. Do you have a certain P/E or price range you’re targeting?

      Best wishes,
      SFZ

  9. Great purchases, congrats on adding to your position. The other Diplomat, Lanny, recently purchased TGT and loves the stock at its current value. So great pickup. Great growth and dividend growth potential.

    What’s tough for me with SJM is that they don’t have a direct competitor that I can perform an apples to apples P/E comaprison. They compete with some brands of Kraft, some brands of Nestle, some brands with Conagra, and so on. In terms of PE, they are in the middle of the pack for the group. When in doubt, I use a target PE of 15 to provide a nice discount from the current market levels. So since I can’t get a good industry comparison, I am sitting at a PE of around 15, which is much lower than its current price. I would settle for somewhere close to that level, but I feel as if I can find a company like TGT that carries a strong brand and may be trading a a current discount. What about you? Do you have a buy in range?

    Bert

    1. Getting the stock at a P/E of 15 would be nice, I just don’t think we’ll see that level unless we have a significant market pullback.

      When I first started buying stocks I was really focused on getting a margin of safety in the stock price, aiming for only buying those with P/E’s close to 15 and with PEG’s under 1.5. However the more I’ve learned about investing I’ve learned that even when you slightly overpay for these dividend growth stocks you still get a good return over the long-term. I know Tim over at The Conservative Income Investor has blogged about this before. With an investing horizon of 20 years I’m willing to slightly overpay for a quality stock knowing it will be a long-term investment for me. For SJM I’d prefer it to pullback some more, maybe to a P/E of ~17 before I pull the trigger. However if there’s no other attractive options next month if say TGT and the rest of my watchlist goes up a lot, than maybe I’ll buy a little SJM. Overall for my portfolio I prefer not to pay anymore than 20x earnings except for high growth investments like Visa.

    1. Thanks for the comment PIM. Yeah I’ve been following DE for a while now as well. Kind of wish I had pulled the trigger on DE last year when it was trading near 52 week lows but I still think I got good value for a long term investment at today’s prices. Agree with you on XOM and CVX, I’m a huge fan of the major oil companies. I’ll probably take a look at XOM for a purchase next month.

      Regards,
      SFZ

  10. Even with large energy exposure, further diversification into the energy market may be prudent right now. The energy sector has very low P/E ratios right now. Somewhere in the range of 7-13 depending on if you’re looking at refiners like BP, COP, CVX, XOM, RDS.B, etc. or if you’re looking at more upstream like OXY, EOG, CHK (Chesapeake). … or if you’re looking at drilling like ESV and HP.

    I happen to be long BP, CVX, XOM, RDS.B, ESV and KMI(not mentioned above).

    Thanks,
    Wallet Engineer #1

    1. Wallet Engineer #1,

      Even though I know it makes sense to stay diversified by sector, I completely agree and think right now is a great time to load up on energy stocks. I’m comfortable not being properly diversified right now being in the early stages of building a portfolio.

      I haven’t looked too closely at the upstream or drilling companies, tend to play it fairly conservative and stick with the large oil majors at least for now plus KMI. Still learning about the other companies. I’m thinking of investing in Exxon next.

      Regards,
      SFZ

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