Monday, March 17, 2014

Stock picks for April

As April approaches, I find myself on the prowl for candidates to be acquired and added to my portfolio. My first criteria of search is valuation, there's no point in me analyzing a company in depth if their valuation won't make them an attractive buy no matter what.

My procedure is simple, as the month comes to and end, I scout for stocks which are potentially trading at a good valuation, I select the ones which satisfy my criteria of: dividend yield, growth and track record of dividend payments. Then, I choose a set of at most 5 companies which look the most promising and only then I dive into their annual reports and long-term potential to decide my buy of the month. 

This is somewhat a torturous exercise, as many times, all of them present good opportunities and I would like to acquire them all, sadly my capital deployment only allows me to purchase one at a time, so I will have to stick with that for now.

My contenders for this month are the ones in the title, by no particular order of preference: General Mills (GIS), Philip Morris (PM), AT&T (T), Bank of Nova Scotia (BNS). While I am still in the process of selecting one of them for April, they all seem to present good value opportunities.

General Mills has an incredible dividend track record, in the sense that they NEVER reduced the dividend in more than the 100 years in which the company has existed. Additionally, while they are not a dividend aristocrat they have grown their dividend every year for the latest 10 years. None of their competitors have such a good track record, comparable valuation and level of debt. On top of that, their presence in emerging markets is not that strong, meaning there is space for growth.

Philip Morris International is a spin-off from Altria (MO). Due to that their dividend track record only starts in 2008. But don't let that fool you, they still work closely with Altria and are a century-old company. They have a low valuation, impressive recent growth in earnings and dividends and a high yield. Their main financial downside is their very high level of debt, which they proposedly acquired in order to perform massive share buybacks. This is actually a good move, as they will probably achieve higher return on their shares than the interest they pay for their loans. Otherwise, it depends on how bullish you are on the future of tobacco, as always there is a strong war on the tobacco industry, and sometimes, regulations are unpredictable.

AT&T is the giant of the telecommunications sector. There is some uncertainty in this sector as technologies and trends are moving fast, maybe too fast for the bigger companies. But so far, even though their performance has been lagging in the latest years, they have managed to slowly grow their earnings. The company is a dividend aristocrat having increased their dividend consecutively for 25 years, admittedly only 1 penny a year, but still it shows commitment to at least maintain the dividend. Also note, that it amounts to 2.2% annual increase which almost keeps up with inflation. I am also hopeful that with Verizon's big debt after the acquisition, AT&T might gain some market share. Considering the yield, you can even look at AT&T as a utility company with less debt and more cash. 

Bank of Nova Scotia Canadian banks are a stalwart of stability, of course facing the typical bank lawsuits, but they barely felt 2008 due to the way that the Canadian banking system works and is supported by the government. Because everyone wants a piece of these banks, they are usually expensive. However, lately, there have been fears of housing market crisis in Canada, and because most of the revenue for Canadian banks comes from mortgages, they are all trading at lower valuations than usual. This is where BNS Shines, they have a well diversified source of revenue and they are the Canadian bank with the most international presence. They are particularly beat up because of the emerging market slow down. Their dividend has been growing for 16 years and has more than 100 years history.

I am still evaluating which company I will be buying for April, but I will definitely keep an eye on all these companies and respective prices for the near future. 

In your case, What companies are in your shortlist as good opportunities?


  1. I'm looking at KMI and ESV as my next buys at their current share prices. Chevron is pretty good too, but I bought some the 2 months ago. I like PM the best of the ones you mentioned.

    1. They both have quote high yields, great stuff! I still find KMI a bit overpriced for my taste, would be interested if it dropped a bit more.

      I agree with you on PM, in my opinion, at the moment, looking exclusively at performance, price, yield and growth, PM is probably the best dividend stock on the market. How interesting it is depends on how comfortable you are with the tobacco industry and the regulations it faces.

      Great to hear from you,

      Best Wishes!

  2. DV, it is interesting that you find KMI overpriced at this point. Would you care to elaborate some of your thoughts behind their current value and future prospects? I'd love to hear them!

    1. Hey writing2reality,

      I haven't researched the company in depth so I don't feel fully qualified to elaborate so much. It operates in a sector where it is a great place to be at this time and in the near-future. I have no doubts they will deliver great performance.

      The reason why I consider them overpriced is their P/E of 27. I tend to look for companies trading under a P/E of 20 no matter what sector they operate in. I understand that their expected growth is high and I would expect it as well, but I don't like to invest in stocks where the price reflects future growth so much. One stock that I like a lot but don't buy for the same reason is Colgate-Palmolive.

      That is not to say that it might not be a bargain, but I'm probably too defensive to for these kind of opportunities.

      Hope I answered your question,

      Best Wishes!

  3. DV,

    Nice picks here! They all remain high on my list as well. I kept going back and forth on T lately, and it popped quite a bit. Didn't see that coming.

    As far as KMI goes, be careful with the P/E ratio. Like REITs, MLPs have a lot of depreciation. Like you would use FFO for a REIT, many use DCF (Distributable Cash Flow) for MLPs.

    I value them using a DDM since any income-producing investment is only worth] the amount of income it can produce from now to eternity, discounted back to today.

    Best wishes!

    1. Hi DM,

      Yes, I was back and forth between BNS and T, but it did go up a lot. It still looks decently valued for me, but I never like to buy after big price increases and the stock might climb back down quite fast and it might eat into my margin of safety.

      Thanks for the advice! I admit I'm clueless regarding MLPs, but Kinder Morgan looks like a particularly confusing case. KMI look like shares of a normal company while KMP looks like an MLP, so I have been treating KMI as a normal company.

      Since I have been finding quality companies with simpler business models that I understand, I've been avoiding MLPs, I also want to get some REITs. But I definitely intend to get up to speed with how MLPs work.