"Price is what you pay. Value is what you get."
- Quote by Warren Buffett.
Words have never rang truer. Warren Buffett is one of my personal heroes, and I can think of few quotes that more embody his thesis on investing than the one I've included above.
I'm including that quote because it's easy to get caught up in the excitement of the stock market. When stocks are going up seemingly every single month and it appears impossible to pick a bad company, one needs to be even more persistent on focusing on the intrinsic value of the companies that are being investigated for a possible investment of long-term capital. Time heals all wounds, but overpaying even for a very high quality company can lead to sub-par total returns for a long period of time. I believe in paying fair value for a high quality company, but if I can get high quality for a price below fair value I'm a very happy investor.
This being said, I'm going to include a list of three stocks that could allow an investor to buy equity in high quality companies for what I feel are reasonably attractive prices relative to their intrinsic value and the broader market as a whole.
General Electric Company (GE)
GE is the first stock I ever purchased, way back in early 2010. I promptly sold it when I couldn't think of a reason why I bought it in the first place. That sale, and the research I started shortly thereafter, led to the valued oriented dividend growth investing strategy I'm currently using. I'm actually a bit anxious to bring the journey full circle and make an investment in GE the 36th company I own equity in. We'll see what happens. I currently find GE attractively valued here at just under $24 per share. I recently used a Dividend Discount Model to value shares, and using a 7% growth rate and a 10% discount rate I got a Fair Value on shares at $27 per share, which lines up nicely with what Mornigstar currently values the shares at. A current yield of 3.21% is attractive and GE has been aggressively increasing the dividend since they had to cut it back in 2009 during the depths of the Great Recession. GE has raised the dividend five times since the cut and Jeffrey Immelt, the CEO of GE, has publicly stated that shareholder returns, and the growth of the dividend, is a priority. They are reducing the size of GE Capital, the division that led to a lot of their financial problems during the recession due to overexposure of subprime mortgages and a freeze of capital markets, and using dividends (like the recent $6.5 billion dividend to parent GE) from this division to reinvest back into core assets and return value to shareholders. GE is also actively selling off non-core assets, like the recent sale of NBC Universal and its headquarters. The P/E ratio of 16.55 is very moderate and the payout ratio of 53% leaves room for future dividend growth, especially anticipating earnings growth from some of the structural changes and focus on infrastructure moving forward. GE is currently near the top of my watch list.
Exxon Mobil Corporation (XOM)
Not much to say here. Exxon Mobil is the second largest company in the world, often trading places for the #1 spot withApple Inc. (AAPL) depending on the day and their respective stock prices. Exxon has been raising the dividend payout for 31 consecutive years, which is a fantastic feat for a company that operates in such a cyclical industry like energy exploration, production and refinement. The price of XOM shares today at just over $91 per share is pretty close to Fair Value, which I calculate at right about $90 per share. Fact is, XOM is one of the highest quality companies in the entire world and paying fair price for a company of this kind of quality is something I'm generally okay with. The entry yield at2.76% leaves a little to be desired, but this is actually on the high side of its historical yield level. The payout ratio is currently at just over 25%, so obviously there is plenty of room for growth of the dividend. The balance sheet is flawless and XOM has a proven track record of success. The P/E ratio of 9.31 is fair for this company, however I'd be looking to buy shares if they can dip down to the $87-88 level. I'm also interested in some of the other oil supermajors like Chevron Corporation (CVX) and Royal Dutch Shell PLC (RDS.B) at current prices.
General Mills, Inc. (GIS)
General Mills is one of those boring investments that just continues to deliver returns to shareholders. A fantastic company with a superb product lineup. They operate in more than 100 countries and they have more than 100 leading U.S. brands. Brands like Cheerios, Pillsbury, Bisquick, Chex Mix, Wheaties, Trix, Haagen-Dazs, Betty Crocker and Fiber One are just a sample of some of the great brands under the General Mills roof. Shares are currently priced with a P/E ratio of 18 and offer an entry yield of 3.1%. I think GIS is attractively valued here, and one could make an argument that shares are worth up to $53. General Mills has raised the dividend for the last 10 years and has been paying out dividends for an impressive 114 years. The payout ratio stands at 55.8%, which is a tad on the high side but certainly sustainable. I was actually interested in purchasing an equity stake with General Mills at the same time the deal involving the purchase of H.J. Heinz Company (HNZ) by Berkshire Hathaway Inc. (BRK.B) and 3G Capital was announced. GIS was one of many food-related companies that spiked significantly after the deal was announced, and the shares just kind of ran away from me. This is an unfortunate side effect of being a cautious investor like myself. I don't react as fast as the market and prefer to take my time and do the due diligence necessary to really immerse myself into a company. I was looking at the most recent annual report for GIS at the same time shares were skyrocketing. I was hoping for a quick return to planet Earth, but it was not to be. A pullback in GIS shares would have me intensely interested as I love the brand names and rich dividend history this company offers.
Price is what you pay. Value is what you get. I think all three companies I have listed offer a reasonable price-to-value relationship for today's elevated market.
I have enough capital to make one more purchase and I have been intently watching shares in all three of the above companies closely over the last week or so hoping for a good entry point. We'll see what the next couple weeks offer. I've been active already this month, with the purchase of shares in Digital Realty Trust, Inc. (DLR) and the addition of anequity stake in Oneok, Inc. (OKE). For now I'll continue to sit on the sidelines with what little capital I have left and hope for a small correction to offer a small window of an opportunity to a modest value investor like myself.
How about you? Like any of the above three companies?
Full Disclosure: Long CVX, DLR, OKE
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2 days ago
