Thursday, March 14, 2013

Dividend Mantra's Recent Buy

What can I say that hasn't already been said? It's tough to buy stocks right now with the Dow Jones Industrial Average has recently broke all-time highs and it doesn't appear to be slowing down. What's a value focused dividend growth investor to do? I think the answer to this conundrum is to continue to do what you have always done. Stick to your plan. Ignore the noise. Keep your focus on the businesses you're interested in and their operations. That's what I'm doing. I like to focus on businesses and whether or not I want to be a part-owner in those businesses. Are operations doing well? Profits up? Dividends growing at a rapid pace? Are people buying their products or services?

The DJIA could rise or fall 500 points, but that doesn't really affect the day-to-day lives of most everyone and what they're doing or buying. Valuations are paramount, but again I always value individual businesses rather than the market as a whole when making purchasing decisions as I am, after all, buying individual shares in said businesses. I'm not buying the Dow Jones Industrial Average or the S&P 500.

As part of my Recent Buy series, I try to let my readers know of any equities I purchase soon after the transaction is completed. This is just one way I try to document my progress toward early retirement and financial independence.
I purchased 40 shares Lorillard Inc. (LO) on 3/8/13 for $38.09 per share. This is an addition to my current position, and brings my LO holdings up to a full 100 shares. The capital I used to make this purchase was partially from the recent sale of myUNS Energy Corp. (UNS) holdings. 

posted a little while ago about why I like LO as a medium-term investment. Although the number of smokers is declining here in the U.S., LO is taking market share from competitors, including Altria Group (MO), and also investing in the emerging e-cig products. Since I purchased my initial shares in LO, it appears the talk of potential negative regulation against its menthol products has risen. However, I view this is a very unlikely event. Potential negative tax revenues are a high possibility, but a larger looming side effect would be a black market for these products. That would only serve to cut out the government and give them a bigger, and unnecessary, headache.

My purchase comes with an entry yield of 5.77%, which is obviously very enticing in the low yield world we currently live in. This is backed by pretty solid dividend growth. They have a 3-year DGR of 17.3%, and recently raised the dividend by 6.5%

This purchase adds $88.00 to my annual dividend income based on the current quarterly payout of $0.55 per share. 

The valuation of LO shares is pretty attractive, likely depressed due to the already mentioned potential headwinds regarding further FDA regulation. Shares in LO are currently trading at a P/E ratio of 13.74. I used a Dividend Discount Model to value the shares and used a 5% long-term dividend growth rate with a 10% discount rate and got a Fair Value of $44 per share. This gives me a 15% margin of safety, which is pretty solid considering the market run-up.

I currently have 30 positions in my portfolio, as this was an addition to an existing holding.

Some current analyst opinions on my recent purchase:

*Morningstar rates LO as a 3/5 star valuation with a FV estimate of $43.00.
*S&P rates LO as a  4/5 star Buy with a FV calculation of $39.40.

I'll update my Freedom Fund in early April to reflect my recent addition.

Full Disclosure: Long LO, MO

What are you buying?

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