Monday, March 2, 2015

All Investing Involves Risk

If your goal is to accumulate wealth for a comfortable retirement, then there is no risk-free path. Throughout time every angle has been tried and failed. However, some approaches carry less risk than others. Let's consider some of the popular paths.


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Sunday, March 1, 2015

Weekend Reading Links - March 1, 2015

For your weekend reading pleasure, the articles listed below contain some of the best dividend and value investing insights found on the web. They were written by various members of the Dividend Investing and Value Network over the past week:


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Saturday, February 28, 2015

Freedom From Gives You Freedom To

I’ve been writing a lot about freedom lately. Probably because I’m more free than I’ve ever been before and perhaps as close to financial independence as one can possibly get without the prerequisite passive income. So you could say it’s been on my mind. As such, I’ve been incredibly interested in sharing the benefits that my freer lifestyle has brought me so as to potentially inspire you to reach for your own goals, dreams, and aspirations.
While there are benefits and drawbacks to everything – I hope to write about the drawbacks of this lifestyle at some point – I can only say that living life largely on my own terms is everything I thought it’d be.
And what I’ve really found throughout the process is that freedom from has allowed me freedom to. That’s true not only in 2010 as a young, hungry Jason eager to dig his way out of debt, but also true – perhaps even more so – of the Jason today.


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Friday, February 27, 2015

Should I invest in Exxon Mobil at Current Prices?

The other day, I posted an article which discussed a few investments I have recently made. I had previously bought some ConocoPhillips in early 2015, at which point forward earnings expectations hadn’t really gone as low as they are now. In previous research I had mentioned that I was looking to adding more to my positions in Exxon Mobil, ConocoPhillips and potentially even Chevron.

You might be surprised to see that I have not added to any of my energy holdings. The reality is that stock prices have not fallen as much as the price of oil, which reduced future earnings power.

Ticker
Price
Dividend
2015 EPS
Payout
P/E
Analysis
COP
62.98
$       2.92
$       1.59
184%
39.61
CVX
102.53
$       4.28
$       4.73
90%
21.68
XOM
87.42
$       2.76
$       4.29
64%
20.38

Note: Data is as of Friday, Jan 30, 2015

The reduced prices on oil have resulted in lowering of the expected earnings for 2015 for ConocoPhillips (COP), ExxonMobil (XOM) and Chevron (CVX) of and $1.59, $4.29, $4.73. Since prices have fallen much less than earnings, those oil companies are now selling above 20 times expected earnings. In all three, the forward dividend payout ratios are very high.

I am well aware that cyclical companies appear cheapest at the top of the cycle when earnings are highest, and that they appear most expensive at the bottom of the cycle when earnings are lowest. However, I also want to knowingly avoid purchasing companies that cannot support their dividend out of expected earnings.

This essentially rules out further investment in ConocoPhillips for me, and potentially even Chevron which should sell below $95/share to enter value territory. For ExxonMobil, my ideal value price would be below $86/share. Given its low payout ratio, ExxonMobil looks like the ideal candidate to build out an energy position.

It also looks like many participants have not priced in low prices, and are acting as if low prices are a temporary event. In the case the drop is temporary, buying today makes a lot of sense. In case prices stay low for longer than expected however, share prices might reflect that new reality. Most importantly, shares in many companies seem slightly overvalued, despite going down in price. Of course, I am also well aware that I should not blindly look into next years earnings as well. As someone who plans on holding for 20 - 30 years, I expect that oil prices will recover at some point, which would result in higher earnings over time ( especially if production volumes increase). However, I also want to avoid situations where a short-term pain ( 1-2 years) causes a company to cut dividends - this would disqualify it right away for my strategy. As most of you are aware, my goal is to generate a defensible stream of dividend income, which grows above the rate of inflation. I am trying to avoid companies which might be prone to dividend cuts as much as possible.

ExxonMobil is the one oil company, where I want to build out a full position over time. I already own a lot of Chevron, which is one of the reasons why any additions there will be limited. Given the high payout ratio on ConocoPhillips, I might not be able to buy more however. When I am presented with new evidence, I believe that the smart thing to do is change my view and manage risk accordingly.

I did add to my ExxonMobil position early this week. I might take the plunge into more ExxonMobil sometime in March, especially if stock prices go lower from here.

Full Disclosure: Long all companies listed above

Relevant Articles:

Margin of Safety in Dividends
Not all P/E ratios are created equal
Why do I use a P/E below 20 for valuation purposes?
Are Energy Stock Values Today a Once in a Lifetime Opportunity?
Are Energy Investments Today a Once in a Lifetime Opportunity (Part 2)

This article was written by Dividend Growth Investor. If you enjoyed this article, please subscribe to have future articles emailed to you [Email] or follow me on Twitter [Twitter]


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