Hello Everyone ! Welcome 2018 !!!
Hope we all have a great investing year in 2018 and beyond.
Hope everyone had wonderful Bull run for 2017 and ready for what wall street has stored for us this year. I am pretty excited for the year 2018, regardless the greatest bull run ends or not or market correction comes this year or not. I wish everyone to have great investing year ahead and trust that the dividend income keeps stepping up for all of us to get a step closer to financial freedom.
My Target is to increase TDK’s forward dividend income to $6,000 before the year ends.
As a value investor, its extremely important not to overpay for even a quality companies while hunting for continued sustainable dividend income. For example, Boeing, Johnson & Johnson, McDonald’s, MMM, Lockheed Martin Corp, Procter & Gamble, Colgate-Palmolive etc. are all great dividend companies to buy and hold forever. However, I wouldn’t want to buy any of these great names at their current valuations. While traditionally dividends within these great blue chip companies have increased generally at a faster pace than inflation over time, I still believe overpaying for a blue chip is not the greatest idea after all. I also understand that it depends on one’s perception and the way they calculate the intrinsic value on whether one finds a company being overvalued or undervalued or somewhere in between and that creates this market so much interesting. Moreover, I also think timing the market is not cup of my tea and traditionally I have not succeeded either to try and time the market. Despite all these, I am still a strong believer of not overpaying for a great quality dividend paying company either. I am sure that during this process, I will be wrong at times and will miss greatest opportunities but I am personally OK with missing big opportunities than to buy knowing that the price I am paying is way too high than the value of the company.
I also would like to add, while searching for a value stock, one must not get carried away just by one or two ratios either. For example, if PEG ratio is given too much of importance while making investing decision, it can mislead the overall decision. Like PE ratio, PEG ratio is also considered, smaller the better. Companies trading below PEG ratio of 1.0 is generally considered in value zone. (My person limit for PEG is actually 2.5 coupled with several other parameter limits). However, for Caterpillar and Deere & Company, PEG ratios are at 0.55 and 0.94, respectively, makes it look like a value stock, even after having a huge run of about 55% and 47% in past year, respectively. If one pays too much attention to PEG ratios, then CAT seems very lucrative at these prices than what it looked like a year ago based on its last year’s trading PEG ratio. Also, total Debt for CAT and DE stands at about $25B and $24B, respectively. While I believe these debts are still within manageable levels but in increasing interest rate market, interest payments will also expand which can negatively affect company’s free cash flow. Hence, I wouldn’t be buyer of these great blue chip companies at these prices.
Below is my list, not in any particular order, for any investor to consider for 2018:
CVS Health Corp (CVS)
CVS has been down for year 2017. However, with current Tax reform will positively affect CVS. Company has recently announced that tax advantage will increase companies cash flow by about 1.2B per year due to tax reform. AET buyout can also happen in later half of 2018, assuming it’s approved. If it doesn’t get thru, CVS will still be in a great shape and if it gets thru, then there will be good amount positive cash flow coming in from AET’s continuing operations. Like CVS, AET is also among high TAX paying companies which will be benefited from tax reform. Please see TDK’s recent buy posts (here and here) about CVS for more detailed analysis. CVS will not increase dividend until the debt levels will come down to companies targeted debt levels relative to EBITDA. With tax reform, I believe that level will come within a year or two at most.
Exxon Mobile (XOM)
Exxon Mobile is another good name that I believe will do good for 2018 and beyond. More details about XOM and my thoughts about this company can be found here. Increase in oil prices in recent months is very positive sign for this cyclical oil giant company. I believe XOM is attractively priced with 3.55% current dividend yield. XOM has not been paying very high taxes in domestic taxes, however, XOM has paid very high taxes in past specially close to top of the cycle. That means, in future when XOM will make more profits from its operations in higher oil price environment, that is when it will see the most advantage on the taxes.
Target Corp (TGT)
Target is definitely the name on the my list for 2018 and beyond. More details about Target can be found here , in TDK’s post about a month ago for purchase of TGT shares While target has gone up by about 14% in one month since TDK’s purchase, I still believe target is nicely priced with 3.77% current dividend yield. Target has been paying about 33% in domestic taxes, which is another reason why target will be positively impacted by reduction in corporate taxes.
Kinder Morgan (KMI)
Kinder Morgan has had rough past year and half after the debt levels were considered too high for allowing to borrow more money there by issuing more share in open market to fund for dividend payments and/or CapEx. Company decided to cut down their dividend and ever since it is taking right steps to move forward with positive results. Company’s debt levels are reduced from 42B in 2015 down to 35B as of Q3 17. Net operating cah flow is about 5B, that can well cover company’s projected 60% dividend increase for year 2018 with continuing CapEx without needing additional funding. Company has paid about 30% in taxes (KMI has paid 3.01B in Taxes from 10.3B of pretax income) over past 5 years that means lower taxes from tax reform will positively impact KMI’s future net income and cash flow from operations. You can find recent post where I initiated a long position within the company here.
Some of these companies have already gone up in prices since last I purchase, however I still think there is more room for growth both in terms of earnings and share prices.
I am long JNJ, CVS, KMI, XOM & TGT. You can find TDK’s full portfolio here.