Friday, November 28, 2014

I Don't Like Smoking but I Like Money


I grew up in a family were both parents smoked.  My grandparents smoked and so did my aunts and uncles.  I remember at holiday gatherings the smoke being so thick you could not see from one end of the living room to the other.  Slight exaggeration but it was pretty foggy.  I did not enjoy any part of it and have never tried a cigarette in my life.  It is very addictive though so I don't see tobacco products going away any time soon.  It is a personal preference and I am fine with that so long as it doesn't affect my family. 

There is money in tobacco though so I thought I would take a look in my rankings to see if any stood out.  There is only one that made the top 100, Universal Corp.  The others all have high yields but looking at their other numbers who knows if they can pay that yield long term.   Of the six we are looking at today only UVV and MO are dividend champions.  That is a good indicator that dividend will continue to increase over the next few decades but that doesn't tell the whole story.  Let's take a look and see how they stack up against each other using the DFG ranking system.

The numbers are from the October edition of the U.S Dividend Champions spreadsheet.  If I were to look at purchases any of these companies I would reevaluate based on more current numbers.

Value
Several of the companies do offer some value at this time (under 20 PE).  What gives UVV the edge is the low price-to-sales ratio.  Companies with a ratio of less than one are generating more in sales than what the stock is costing me.  If kept up long term and managed properly that will create lots of cash that could be returned via dividends.  If that were the only metric I looked at I would buy them right away.  However we have to look at some other metrics to determine if this value will provide us with long term income.

Company Name
Symbol
Industry
P/E
P/S
Universal Corp.
UVV
Tobacco
14.46
0.43
Philip Morris International
PM
Tobacco
16.58
4.28
Lorillard Inc.
LO
Tobacco
19.71
3.10
Reynolds American Inc.
RAI
Tobacco
20.27
3.79
Altria Group Inc.
MO
Tobacco
21.17
3.73
Vector Group Ltd.
VGR
Tobacco
61.61
1.77

Growth
Only Lorillard stands out with double digit growth over the past five years.  PM still takes the top spot here with close to double digit growth but a higher earnings per share over the past twelve months than LO.

Company Name
Symbol
Industry
Past 5yr Growth
TTM EPS
Philip Morris International
PM
Tobacco
9.7
5.03
Lorillard Inc.
LO
Tobacco
12.9
3.04
Reynolds American Inc.
RAI
Tobacco
6.6
2.91
Universal Corp.
UVV
Tobacco
4.0
3.07
Altria Group Inc.
MO
Tobacco
8.8
2.17
Vector Group Ltd.
VGR
Tobacco
(8.3)
0.36

The picture below is a little more interesting when you look at the stability of the EPS over time.  Normally you want to see it grow steadily over time.  Upon closer inspection of the mess of lines below you can see that LO and PM are not as jagged as the others and have grown over the past ten years. Even between the 2, PM had some early dips 10 years ago while LO is slow and steady.  Earnings may not be as high but the trend is the best. UVV had a dip in 2011 and the TTM show another dip as well.  This instability has probably led to some of the value we saw earlier.  If management can stabilize things than the value presents an opportunity for us.  RAI also had some moderate growth with a few minor dips.



Quality
UVV is 2 for 3 at this point.  Wow look at how well they are managing debt.  Way under the 1 mark for quality debt management.  Also the price-to-book value is under 1 telling us Universal Corp. has plenty on the books to justify the price this past quarter.  The last 3 were n/a in the spreadsheet.  Usually I don't consider companies that don't have metrics available.  Looking on Morningstar LO had a book value per share  TTM of -5.99.   PM had -6.51 and VGR had a book value per share of -0.82.

The definition of book value per share from www.investopedia.com is this:
In simple terms it would be the amount of money that a holder of a common share would get if a company were to liquidate.
That puts things in perspective.  Who would want to hold a company that much in the red?

Company Name
Symbol
Industry
MRQ P/Book
Debt/Equity
Universal Corp.
UVV
Tobacco
0.90
0.49
Reynolds American Inc.
RAI
Tobacco
6.43
1.20
Altria Group Inc.
MO
Tobacco
20.69
3.18
Lorillard Inc.
LO
Tobacco
-
-
Philip Morris International
PM
Tobacco
-
-
Vector Group Ltd.
VGR
Tobacco
-
-

Yield
PM takes the lead on yield.  With the second highest yield and a mega dividend growth rate I can see why it may be appealing to some investors.

Company Name
Symbol
Industry
Dividend Yield
DGR 5 Year
Philip Morris International
PM
Tobacco
4.80
28.4
Lorillard Inc.
LO
Tobacco
4.11
29.1
Altria Group Inc.
MO
Tobacco
4.53
9.2
Reynolds American Inc.
RAI
Tobacco
4.54
7.5
Vector Group Ltd.
VGR
Tobacco
6.87
5.0
Universal Corp.
UVV
Tobacco
4.60
2.1

However looking at free cash flow and the payout ratio gives a better picture of the sustainability of these yields and the ability for the dividend growth rate to continue.  None of the metrics over the past twelve months paint a pretty picture for the dividend investor.  Sure the top 3 have plenty of cash to burn but for how long?  That surely isn't sustainable over decades that a dividend investor looks at.  Would they be worth buying now to collect the dividends until they are cut?  Tough call and would depend on the entry price and the potential capital loss when you sell them.

Metric/Company
PM
LO
MO
RAI
VGR
UVV
Free Cash Flow TTM (Mil)
7,522
1,119
4,419
1,528
71
-107
Payout Ratio %
76.6
76
89.9
89.2
173.70
79.60

News
It is black Friday and there are deals to be had in the energy sector (again).  The news for tobacco shows cigarette volume down for PM and LO loses a lawsuit over the summer worth 23.6 BILLION dollars.  E-cigarettes are on the rise for high school students and over the past ten years cigarette consumption has risen 13%.  The rise is mostly in other counties and not the U.S.A.  This is a lot of mixed news and hard to interpret where the industry will be in 10-20 years.  Back in July Reynolds American had announced plans to buyout Lorillard for 27.4 billion dollars.  This may be to your advantage if you can obtain LO at a deep discount.  To close to 20 PE for me to be interested in it.  After that merger is complete RAI will control 42% of the U.S cigarette market but Altria will retain the top position with 51%.

Conclusion
Overall UVV comes out on top with quality and value that stands out in this industry.  The yield is not too shabby either but it compares to the dismal growth rate of utility companies that have been paying a dividend for a long time.  On the flip side they have been paying an increasing dividend for a long time.  So for current income this would be a good company to own.  I am not sure what to do about the merger.  LO has a lot of debt but the combined companies will dominate the market.  Tough call so I will keep an eye on it for now.  Happy Thanksgiving!
 
Company Name
Symbol
Industry
Dividend Yield
Universal Corp.
UVV
Tobacco
4.60
Philip Morris International
PM
Tobacco
4.80
Lorillard Inc.
LO
Tobacco
4.11
Reynolds American Inc.
RAI
Tobacco
4.54
Altria Group Inc.
MO
Tobacco
4.53
Vector Group Ltd.
VGR
Tobacco
6.87

Thursday, November 13, 2014

Battlefield Oil


Gas was $2.80 for me this weekend.  That was with my gas card's 3 cents/gallon discount.  Going through my ranking system for the month 3 big oil companies were in the top 100 list.  High yields?  Good value?  Let's take a look at how the 3 end up in a battle against each other using the DFG ranking system.  I do need to work some more on that page once I have some more time.

The companies I will be looking at are all well-known companies.  ConocoPhillips (COP), Chevron Corp. (CVX) and of course ExxonMobil Corp. (XOM).  All of them are energy companies that have businesses that deal with exploration of oils and gasses, production, refinement, etc. though out the world.  XOM and CVX are both dividend champions (25+ straight years of higher dividends) while COP is an up and coming contender (10-24 straight years of higher dividends.)  

Value
ExxonMobil has the best value when I put the ranking together.  The price to earnings and sales both out did COP and CVX.  The company continues to make a ton of money.  We will see if that continues the rest of the year if prices remain low throughout the holidays.

Company
P/E
P/S
XOM
11.98
0.95
CVX
11.39
1.04
COP
11.79
1.65

Growth
There are some benefits to being smaller.  This has allowed COP to grow fast and over the last 5 years they have seen 21.1% growth.  CVX takes second with a dismal negative 1%.  XOM has had negative 3.2% over the same time and takes last place.

I am still working on learning trend lines in Excel.  2011-2012 were the tops with earnings in 2013 and the past twelve months staying steady.  The only bad year was 2008, the Great Recession, and only for COP.  The other 2 behemoths were able to weather the storm.


Quality
Again CVX shines on this as it ranked 39 companies ahead of XOM and 43 ahead of COP.  I would have expected COP to be last because of its size and cash flow.  XOM on the other had has tons of free cash but ranks very close to COP regarding quality.   XOM's high P/B is the primary driver behind the ranking.  From this perspective you would prefer CVX on dips and get more bang for your buck as the 2 have very close Debt-to-Equity ratios.

Company
MRQ Price/Book
Debt/Equity
CVX
1.47
0.15
XOM
2.23
0.12
COP
1.71
0.38

Yield
One of the more important factors for dividend investors.  This has been fluctuating quite a bit lately for oil companies.  If you were lucky you bought in the October dips and are starting off with a nice entry yield.  I look at the 5 year growth rate mainly because I look at all Champions, Contenders and Challengers.  I would prefer 10 year metric but that would weed out some good potential growth companies.

COP has been affected more by the recent swings.  I get alerts on dip sent to my phone and the texts pile up on it more than the other 2.  It's high yield and double digit growth rate over the past 5 years puts it at the top.  We will see if COP can continue the growth over the long haul.  CVX and XOM are very respectable as well.  I plan on holding all three companies eventually.

Company
Dividend Yield
5 Year Dividend Growth Rate
COP
3.82%
13.3%
CVX
3.59%
9.0%
XOM
2.93%
9.7

All the payout ratios are well below the 75% guideline pretty much every dividend investor uses.  The guideline helps us to determine if there is enough cash to cover the dividend and how likely it is to be cut (no cash).  Morningstar where I get allot of good information didn't have a payout ratio for COP for 2008 thus the dip down to 0 that year.  Being a smaller company it is still investing heavily and hasn't built up the cash reserves that the other two have.

Had problems with this chart on Excel Online so it is just an image.


News
I did a quick scan in my ShareBuilder account to check the news on all three companies.  All the news was centered around the cost of oil per barrel.  At this time I am not worried about the price.  Oil and gas are not a renewable resources so companies in this area will remain profitable until an alternate energy source overtakes them.  That might not be for decades so for now I am okay with the news.

The Winner
The final votes are in and the winner is COP.  Yes that was surprising to me as well.  I do not put a weight on yield but I think it played an important part in the overall score.  Since I already own COP I may look at the other two on dips as they are all good companies to own.  

Any of these on your radar this month?

Company
Overall Rank
COP
11
CVX
26
XOM
50

Full Disclosure: Long on COP

On a side note I have started using royalty free clip-art.


Thursday, November 6, 2014

October 2014 Budget



I always look forward to this bi-annual event of 3 paychecks in one month.  My last one was in May.  Overall it wasn't a bad month.  I did come in a little over budget (about $608.95 to be exact).  There was one of those unexpected expenses that come out of nowhere.  My wife's 2006 minivan wouldn't accelerate.  Allot of things with houses and cars seem to break in the fall with the first cold spell.  This car repair was costly.  What am I talking about all car repairs these days are costly.  If it didn't happen I would have stayed within my budget.  Oh well.  I save for car expenses so when these things happen I do not go further into debt.

Expense Breakdown
Overall things are pretty much the same.  You will see the percentage increase a lot for cars (like 11%).  Most other categories were pretty much in line with the previous.  I spent a little more on food.  I made a onetime purchase of about $60 worth of grass fed ground beef.  It was on sale so I stocked up on it and froze it.  I like the taste of it and as a plus less e-coli and no antibiotics in it.




Miscellaneous
Childcare was down from the previous month.  We are still potty training both our youngest.  I expect this to drop significantly once I no longer have to buy diapers/training pants for 2 kids.

Household was up for the month.  Time is valuable and I spend most of my fall days out blowing or raking leaves.  That would take 2-3 hours each time.  My wife and I finally agreed to purchase a backpack blower off of Amazon.  I have been saving my Amazon points for some time now so I was able to reduce the cost by a couple hundred bucks.  Now I am able to do my entire yard in 1 hour.  It is even a little fun.  Oh the large leaf piles I can make for the kids to jump in.

Personal care was double from last month.  It was haircut time for me and the kids.  That trip cost me $42.  I should go back to just shaving my kids heads myself.  Who needs style right?

Clothing.  I bought a few work shirts on TJ Maxx's clearance rack for $12 apiece.  These are normally $50 shirts each.  I can't remember the last time I bought clothing at full price.  That will be it for a while as I don't wear out shirts as fast as pants or shoes.

This month was worth noting healthcare costs (again).  This was all related to a touch up to my Lasik surgery I had done earlier this year.  That surgery is being covered by my HSA but I am paying for the meds out of pocket.  Also I bought a pair of glasses for driving at night/in the rain.  There is glare at night so my doctor gave me a prescription for that.

Expense
Amount
Childcare
$53.78
Household
$337.46
Personal Care
$112.66
Clothing
$41.05
Healthcare
$192.46

Guilt Free Spending Money
I do not have a formal budget item any longer for this but I still track it.  GFSM came in at twice what I spent last month.  Eating out 8 times and my Amazon Prime membership fee where the big ones in this category.  That eating out 8 times wasn't all eating out.  I am now moving my wife's chocolate habit ($70) out of food and into this category.  I don't really consider junk food a need but more of a want.  It keeps her happy and since she has no income I don't mind treating her to it.

Investments
Everything was reinvested automatically except for my dividends from Windstream.  I talk a little about it in my dividend post.

Savings
The money I have left over from my 3rd paycheck I haven't decided what to do with yet.  Since things are tight and I don't expect any extra income for the rest of the year it will probably go into the Christmas fund.  It will be a slimmer year for the kids compared to last but that is not the point of the holidays.  Good lesson for the kids I think.

Savings rate for the Month = 33%!

Not bad for a guy with a wife and 4 kids, house, cars, etc.  Hope you did as well or better!


Image By Mister GC and courtesy of www.FreeDigitalPhotos.net

October 2014 Dividends


Macro of US QuartersOne of those odd months where I had more dividend come in my smaller taxable account vs. my IR. Here is a quick breakdown. The biggest company being Windstream where I have a large percentage of it in my taxable portfolio. I did switch this dividend to not be automatically reinvested. Instead it went to cash and I used it along with my remaining cash to purchase shares of MCD when it had a good dip this month. I haven't written about McDonald's yet but there are plenty of articles already out there on it.

I did not have a goal for total dividends set for this year since this is the first year I am actively investing in a dividend portfolio. Regardless I am doing quite well with $627.62 of income from my taxed account. This is light-year's past my total dividends from last year. The IRA is doing better at $1,168 but if I were to lose my job or retire early that income doesn't do me much good until I can withdrawal it penalty free.

What was your best buy this month on the market dip?

Full Disclosure: Long on MCD