Sunday, May 27, 2012

Emerson Stock Analysis

Last week was a slow week for the blog because work was really busy, so I figured I'd give y'all another stock analysis. This time I decided to take a look at Emerson Electric Company (EMR). Emerson closed on Friday 5/25/12 at $47.28.

Company Background:

Emerson Electric Co. operates as a diversified technology company worldwide. It engages in designing and supplying products and technology, and delivering engineering services and solutions to industrial, commercial, and consumer markets. The company’s Process Management segment offers customers products and technology, and engineering and project management services for precision measurement, control, monitoring, and asset optimization of oil and gas reservoirs and power generating plants, as well as for food and beverage, pulp and paper, pharmaceutical, and municipal water supply industries. Its Industrial Automation segment provides integrated manufacturing solutions for products, such as motors, power generating alternators, power transmission solutions, and fluid controls and materials joining equipment. The company’s Network Power segment designs, manufactures, installs, and maintains products, which offer grid to chip electric power conditioning, power reliability, and environmental control for telecommunications networks, data centers, and other critical applications, as well as provides comprehensive data center infrastructure management solutions. Its Climate Technologies segment offers products and services for the climate control industry, including residential heating and cooling, commercial air conditioning, and commercial and industrial refrigeration. The company’s Tools and Storage segment provides a range of professional and do-it-yourself tools, storage solutions, and appliances and components. Emerson Electric Co. operates primarily in the United States, Canada, Asia, Europe, Latin America, the Middle East, and Africa.

DCF Valuation:

Analysts expect Emerson to grow earnings 11.32% per year for the next five years and I've assumed they can continue to grow at 3.00% per year thereafter. Running these numbers through a DCF analysis with a 10% discount rate yields a fair value price of $70.40. This means that at $47.28 the shares are undervalued by 33%.

Thursday, May 24, 2012

The Intelligent Investor

It's time for another installment in my The Intelligent Investor series.

On page 294, Graham writes "One of the most persuasive tests of high quality is an uninterrupted record of dividend payments going back over many years. We think that a record of continuous dividend payments for the last 20 years or more is an important plus factor in the company's quality rating. Indeed the defensive investor might be justified in limiting his purchases to those meeting this test"

Friday, May 18, 2012

McDonald's Stock Analysis

It's about time for another stock analysis. This time I decided to take a look atMcDonalds (MCD). McDonalds closed on Thursday 5/17/12 at $89.62.

Company Background:

McDonald’s Corporation, together with its subsidiaries, franchises and operates McDonald’s restaurants primarily in the United States, Europe, the Asia Pacific, the Middle East, and Africa. The company’s restaurants offer hamburgers and cheeseburgers, Big Mac, Quarter Pounder with cheese, Filet-O-Fish, chicken sandwiches, chicken McNuggets, chicken selects, snack wraps, french fries, salads, shakes, desserts, sundaes, soft serve cones, pies, cookies, soft drinks, coffee, and other beverages, as well as full or limited breakfast menu. As of December 31, 2011, it operated 33,510 restaurants in 119 countries, including 27,075 franchised restaurants and 6,435 company operated restaurants.

DCF Valuation:

Analysts expect McDonalds to grow earnings 9.93% per year for the next five years and I've assumed they can continue to grow at 3.00% per year thereafter. Running these numbers through a DCF analysis with a 10% discount rate yields a fair value price of $112.88. This means that at $89.62 the shares are undervalued by 20%.

Graham Number:

Over the last 12 months, MCD's EPS were $5.35 and it's current book value per share is $14.43. The Graham Number is calculated to be $41.68 which means that at $89.62 the shares are overvalued by 115%.

Average High Dividend Yield:

MCD's average high dividend yield for the past 5 years is 3.45% and for the past 10 years is 3.16%. This gives target prices of $81.14 and $88.63 respectively based on the current annual dividend of $2.80. These are overvalued by 10.5% and fairly valued, respectively.


Average Low PE Ratio:

McDonald's average low PE ratio for the past 5 years is 13.98 and for the past 10 years is 14.15. This would correspond to a price per share of $79.55 and $80.52 respectively based off the analyst estimate of $5.69 per share for the fiscal year ending in December 2012. The 5 year and 10 year low PE price targets are overvalued by 11% and 12.5%, respectively.

Average Low P/S Ratio:

McDonald's average low PS ratio for the past 5 years is 2.74 and for the past 10 years is 2.20. This would correspond to a price per share of $75.92 and $61.08 respectively based off the analyst estimate of $5.69 per share for the fiscal year ending in December 2012. The 5 year and 10 year low PE price targets are overvalued by 18% and 46%, respectively.

Dividend Discount Model:

For the DDM I assumed that MCD will be able to grow dividends for the next 5 years at the minimum of 15% or the lowest of the 1, 3, 5 or 10 year growth rates. In this case that would be 10.67%. After that I assumed MCD can continue to raise dividends by 3.00% annually and used a discount rate of 7.5%. Based on this MCD is worth $89.81 meaning it's fairly valued. While I think that McDonalds can continue to increase it's dividend by more than 3% per year after 5 years it's a good estimate to use to give a conservative valuation.

PE Ratios:

MCD's trailing PE is 16.75 and it's forward PE is 14.33. The PE3 based on the average earnings for the last 3 years is 19.26. Compared to it's industry, MCD seems to be undervalued versus Yum Brands (21.51) and undervalued versus the industry as a whole (22.43). All industry and competitor comparisons are on a TTM EPS basis.

Fundamentals:

MCD's gross margin for FY 2010 and FY 2011 were 40.03% and 39.57% respectively. Their gross margin is very high at ~40% and consistent too. I like to see both of those when looking at potential dividend growth stocks since it means they have pricing power and costs under control. Their net income margin for the same years were 20.55% and 20.38% respectively. I like the net income margin to be at least 10% and preferably rising. McDonalds is doing great on the net profit margin with 20+%. The cash-to-debt ratio for the same years were 0.21 and 0.19. Their cash-to-debt ratio is the only thing really lacking on the fundamentals front.

Share Buyback:

MCD has bought back an average of 3.5% of their shares outstanding annually since 2006.


A negative number for the % change value means shares were bought back by the company and a positive value means the shares outstanding increased.

Dividend Analysis:

McDonalds is a dividend champion with 35 consectutive years of dividend increases. Their average increase has been for the last 1, 3, 5 and 10 years 10.67%, 10.95%, 13.30% and 27.85%. While the dividends have been increasing their annual payout ratios have been pretty consistent since 2002 averaging 43.03%. As we all would, I wish their payout ratio was lower to allow even more room for dividend increases, but a 50% ratio with as much potential earnings growth that McDonalds has, it is definitely safe.


The FCF payout ratio is a little troubling. Since 2003 they've only had 5 years with a FCF payout ratio less than 100% and have been over 100% since 2009. Their average FCF payout ratio since 2003 is 93.51%. Monitoring their FCF and FCF payout ratio will let you know a lot more about the stability of the company since dividends are paid from cash.

Return on Equity and Return on Capital Invested:

MCD's ROE and ROCI have had awesome growth since 2001. I like to see a stable or increasing value for both and they have gone from 18.20% ad 9.5% to 38.20% and 20.7% respectively.


Revenue and Net Income:

Since the basis of dividend growth is revenue and net income growth I've added a new section to my stock analysis. Here you can see McDonalds history of revenue and net income since 2001. MCD's net income margin has started to level off, but not to worry it's at a hefty 20%.


Average Price and EPS:


MCD's average share price has tracked their EPS growth. This means that their PE ratio has been fairly consistent in that time period and hasn't expanded or shrunk considerably. The values are based solely off the average high and low prices for the fiscal year meaning that it doesn't truly show the value opportunities that are present throughout the time period.

Forecast:


The chart shows the historical prices for the previous 10 years and the forecast based on the average PE ratios and the expected EPS values. I have also included a forecast based off a PE ratio that is only 75% of the average low PE ratio for the previous 5 years, 10 years or 16 whichever is least. I like to the look to buy at the 75% Low PE price or lower to provide for additional margin of safety. In this case the target PE is 10.5 which in my opinion is way too low for McDonalds to sell for. If anything it should sell at a premium to most companies. Currently McDonalds is trading at a $30 premium to the forecast entry price. The entry price based on the average low PE10 is $95.07 which means it's selling at a $5.50 discount.

Conclusion:

The average of all the valuation models gives a fair value of $86.61 which means that McDonalds is currently trading at a 3.50% premium to the fair value.

With the recent pullback to under $90 McDonald's is a buy at these levels. The overall macro outlook is poor which is actually good for McDonalds. With a current yield of 3.12% you are getting a solid yield on a company with great growth prospects and has shown it's willingness to increase the dividend. If they can continue to increase dividends by 10% per year for 10 years you're looking at a YOC around 9% in 10 years. I expect the dividend increases to be average higher than 10% over the next 10 years. If it happens to dip down to the 3.50% yield level, price of $80, I would be buying like crazy. It's definitely the time to scale into a position in McDonalds.

Wednesday, May 16, 2012

Shopping List

Now that my debt is gone it's time to start compiling my shopping list. Especially since it's looking like the sell in May and go away might be showing up. The DOW is currently 4.40% off it's 52 week high while the S&P 500 is down 5.39% from it's 52 week high. These are both good signs for what might turn out to be great timing on my part out of sheer luck. When I had previously started investing in my financial independence fund it happened to be around the time of the market swoon around October 2011 and now that my debt is paid off and funds will be flowing to the market again it seems to also be hitting at a great time. Hopefully we can get an even bigger pullback in the stocks that I'm looking for. Currently my shopping list includes Aflac, McDonalds, Nucor, Johnson & Johnson, Vodafone and many others as well as adding to my current positions. I'll be compiling my entry prices and hopefully setting some limit orders in less than a month. Adding fresh capital and increasing my dividend stream is going to be awesome.

What are you looking to buy?

Monday, May 14, 2012

ConocoPhillips (COP) Dividend Announced

On May 9th, the board of directors at COP announced the next installment of their quarterly dividend. As promised before the spinoff, the quarterly dividend rate has stayed the same at $0.66 per share. The dividend will be payable on June 1st for shareholders of record on May 21st. Keep bringing the dividends, especially since their rate is staying the same but the share price has dropped due to the spinoff. My YOC for my COP shares is now 5.16%.

Debt is almost gone

Earlier this month I charged almost the rest of the balance of our high interest debt off. This month I charged a total of $9.766.39 to my credit cards to pay off our debt. I left a little bit on for next payment so they take the full amount with the interest to have the exact amount taken to be paid off. I cash flowed $2,987.00 and raided my emergency fund to pay off the other $6,779.39. The emergency fund raid took savings down to just over 2 months of expenses. However, it will be back to just under 5 months after June is done. Of course my emergency will also cover more now that my required expenses will be dropping since this debt will be gone. I still have some personal loan debt from family that I need to pay off but that won't be a big issue and I can make a steady monthly payment to that now. It feels so good to know that come June 1 that high interest debt will done with and I can start back on my path toward financial independence. My savings rate will hopefully be staying right around what I've averaged so far this year, 73.53%, but the majority of that will go towards investing. June will be an awesome month since the high interest debt will come off and of course my marriage coming up on June 24th. Plus I'm looking forward to my bachelor party in Vegas. So many exciting things are on their way.

And the best part about charging it on my credit card and paying it off in full is that I get to take advantage of my cash back and mileage programs on the two cards I used. I was able to get 1.10% cash back and an extra 6,779 miles. All in all it feels great to get this just about done with.

Saturday, May 12, 2012

The Intelligent Investor

I've been reading Benjamin Graham's book The Intelligent Investor and have been amazed by some of the insights that he had.

On page 204, Graham introduces something we've all heard before, the Mr. Market parable.

"Imagine that in some private business you own a small share that cost you $1,000. One of your partners, named Mr. Market, is very obliging indeed. Every day he tells you what he thinks your interest is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often, on the other hand, Mr. Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short of silly."

If you've been investing for any amount of time you have surely heard this quote or a paraphrase of it before. Don't let the short term price fluctuations influence your moves and don't get caught up in the fear or fervor that Mr. Market sometimes likes to bring about. The fear only serves a point to let foolish people get caught up in it and provide the intelligent investor a chance to get bargain prices on quality companies.

I highly recommend reading through The Intelligent Investor if you haven't already done so.  I've highlighted some of the information in the book, but there's so much more to learn.

Friday, May 11, 2012

Thursday, May 10, 2012

General Mills Stock Analysis

It's about time for another stock analysis. This time I decided to take a look atGeneral Mills (GIS). General Mills closed on Wednesday 5/9/12 at $38.91.

Company Background:

General Mills, Inc. manufactures and markets branded consumer foods worldwide. It also supplies branded and unbranded food products to the foodservice and commercial baking industries. The company offers ready-to-eat cereals, refrigerated yogurt, ready-to-serve soup, dry dinners, shelf stable and frozen vegetables, refrigerated and frozen dough products, dessert and baking mixes, frozen pizza and pizza snacks, grain, fruit and savory snacks; and a range of organic products, including soup, granola bars, and cereals; and ice cream and frozen desserts, and grain snacks. It sells its products through its direct sales personnel, as well as through broker and distribution arrangements to grocery stores, mass merchandisers, membership stores, natural food chains, drug, dollar and discount chains, commercial and noncommercial foodservice distributors and operators, restaurants, and convenience stores.

DCF Valuation:

Analysts expect General Mills to grow earnings 7.15% per year for the next five years and I've assumed they can continue to grow at 3.00% per year thereafter. Running these numbers through a DCF analysis with a 10% discount rate yields a fair value price of $43.43. This means that at $38.91 the shares are undervalued by 10%.

Wednesday, May 9, 2012

Dividend Increase

On Monday, Intel (INTC) announced a 7.14% increase in their quarterly dividend to $0.225 starting with the dividend payable in the 3rd quarter of 2012. The previous quarterly rate was $0.21.





Dividend Increase
Symbol Old Quarterly Dividend New Quarterly Dividend Increase (%) Old YOC New YOC
INTC $0.210 $0.225 7.14% 3.55% 3.84%


My portfolio's YOC increased from 2.47% to 2.49%.

Tuesday, May 8, 2012

Net Worth Update - April 2012

April was a bad month for my net worth. It actually decreased this month which was the first negative move since July 2011. The markets being down for the month didn't help the net worth out either. I also had just over $5,000 come out of my savings to make some payments for the wedding. Of course that's why we saved up for it instead of going in to debt so I don't feel bad about it. I was able to contribute just over $1,200 to my 401k including the company match and around $600 for my ESPP. From my take home pay I was able to save $802.25 and use $3,350 for debt service. All that combined with the change in the markets put me at a -$220.59 for the month. I'm very happy to see that with the $5,000 wedding payment my net worth was able to stay pretty much unchanged for the month.

Monday, May 7, 2012

Dividend Increases for My Portfolio

In the time since I started my portfolio I've had several stocks announce dividend increases.




Dividend Increases
Company Old Quarterly Dividend Newest Quarterly Dividend % Increase
Bank of America (BAC) $0.01 $0.01 0.00%
Waste Management (WM) $0.340 $0.355 4.41%
Wells Fargo (WFC) $0.12 $0.22 83.33%
SORL Auto Parts (SORL) -- -- --
Pfizer $0.20 $0.22 10.00%
EOG Resources (EOG) $0.16 $0.17 6.25%
ConocoPhillips (COP)* $0.66 $0.66 0.00%
Coca-Cola (KO) $0.47 $0.51 8.51%
Procter & Gamble (PG) $0.525 $0.562 7.05%
McDonalds (MCD) $0.61 $0.70 14.75%
AT&T (T) $0.43 $0.44 2.33%
Intel (INTC) $0.21 $0.21 0.00%
Alcoa (AA) $0.03 $0.03 0.00%
Halliburton (HAL) $0.09 $0.09 0.00%
Tower Group (TWGP) $0.13 $0.1875 44.23%
JP Morgan Chase (JPM) $0.25 $0.30 20.00%
Average of Increases -- -- 20.09%
Average of All -- -- 13.39%

This table shows the value of investing in dividend growth companies. Despite 6 of my 16 current holdings between my brokerage and Roth IRA not increasing yet, I have still received an average pay raise of 13.39%. I expect the rest will continue their past of dividend growth but we're just not at their usual increase date yet. I know it's a little skewed this year because of the large increases from 3 of my financial holdings but it is what it is.

*I don't expect a dividend increase prior to the completion of the spinoff. However, management has stated that they will keep the $0.66 quarterly dividend for the Conoco stock and that the Phillips 66 spinoff company will have an initial dividend of $0.20 per quarter with planned annual increases of 5%.

Saturday, May 5, 2012

Income Update - April 2012

April turned out to be a pretty good month. I did a good job of lowering my expenses. My minimum expenses were down to just $1,541.22 which is really good. This month was $114.59 less than the average through March. My total expenses saw an even better improvement being $139.57 less than the average through March. Total expenses for the month were $1,751.22. Potential Retirement Income for the month totaled only $28.77 and my FI changed to $126.11. These replace, based on my current minimum expenses, 1.87% and 8.18%. The replacement amount is slowly creeping up which is great to see.


*Minimum Expenses are only the expenses related to rent, utilities, car, food, minimum payment on debt and other necessities. In other words, the required amount of replacement income I would need for financial independce.
*Total Expenses are the total monthly outflow of money.
*Potential Retirement Income is income received from dividends, interest, cash back from credit card purchases and any other source of income not related to my job.
*FI is my liquid assets invested at the 30 year treasury bond yield at the end of each month divided by 12 to get monthly income.


Monthly Income
Category Amount
Paycheck $5,074.90
Expense Check $738.57
TOTAL $5,813.47


Monthly Expenses
Category Amount
Rent $480.00
Utilities $161.55
Gas $141.09
Car Insurance $90.00
Groceries $183.14
Restaurants $130.91
Entertainment $56.69
Cell Phone $75.00
Other $24.83
Miscellaneous $142.48
Debt Payment $265.53
SAVINGS
Extra Debt Payment $3,350.00
Roth IRA $450.00
Emergency Fund $212.25
Gifts $50.00
TOTAL $5,813.47

Wednesday, May 2, 2012

Mattel Stock Analysis

After seeing a few articles about Mattel after selling off due to a weak 1st quarter, which is fairly typical seeing as how they sell toys and after the Christmas season spending is usually light, I decided to run Mattel (MAT) through my screening process to see where it currently stands. Mattel closed on Wednesday 5/2/12 at $33.88.

Company Background:

Mattel, Inc., together with its subsidiaries, designs, manufactures, and markets various toy products. Its products comprise fashion dolls and accessories, vehicles and play sets, and games and puzzles. The company offers its products under the Mattel Girls and Boys brands, including Barbie, Polly Pocket, Little Mommy, Disney Classics, Monster High, Hot Wheels, Matchbox, Tyco R/C, CARS, Radica, Toy Story, WWE Wrestling, and Batman; Fisher-Price brands comprising Fisher-Price, Little People, BabyGear, View-Master, Dora the Explorer, Go Diego Go!, Thomas and Friends, Mickey Mouse, Sing-a-ma-jigs, See ‘N Say, and Power Wheels; and American Girl Brands, such as My American Girl, Bitty Baby, McKenna, and the newest Girl of the Year. It also publishes advice and activity books, as well as magazines comprising American Girl. The company sells its American Girl products directly to consumers through catalogue, Web site, and retail stores in the United States and Canada. Mattel sells its other products directly to retailers, including discount and free-standing toy stores, chain stores, department stores, and other retail outlets; wholesalers; and distribution centers worldwide.

DCF Valuation:

Analysts expect Mattel to be able to grow earnings 9.05% per year for the next five years and I've assumed they can continue to grow at 3.00% per year thereafter. Running these numbers through a DCF analysis with a 10% discount rate yields a fair value price of $43.94. This means that at $33.88 the shares are undervalued by 22.89%.

Graham Number:

Over the last 12 months, MAT's EPS were $2.17 and it's current book value per share is $7.76. The Graham Number is calculated to be $19.46 which means that at $33.88 the shares are overvalued by 74.06%. If you calculate the Graham Number based off the expected EPS, $2.41, for the fiscal year 2012 ending in December and keep the book value per share constant you arrive at a fair value price of $20.51. Either way MAT is overvalued quite a bit according to the Graham Number calculation.

Average High Dividend Yield:

MAT's average high dividend yield for the past 10 years is 4.51% and for the past 5 years is 5.24%. We'll use the 5 year yield since Mattel has grown their dividends for the past 4 years. This gives a target price of $23.65 meaning Mattel is overvalued by 43.24%. The following chart shows the historical high and low dividend yield as well as the current yield.


Average Low PE Ratio:

Mattel's average low PE ratio for the past 5 years is 10.41 and for the past 10 years is 11.87. This would correspond to a price per share of $25.08 and $28.60, respectively. The 5 year and 10 year low PE price targets are overvalued by 35.07% and 18.46%, respectively.

Dividend Discount Model:

For the DDM I assumed that MAT will be able to grow dividends for the next 5 years at the minimum of 15% or the lowest of the 1, 3, 5 or 10 year growth rates. In this case that would be 10.58%. After that I assumed MAT can continue to raise dividends by 3.00% annually and used a discount rate of 7.5%. Based on this MAT is worth $34.67 meaning it's undervalued by 2.27%.

PE Ratios:

Matttel's trailing PE is 15.61 and it's forward PE is 12.89. The CAPE for the previous 10 years is 23.73. Compared to it's industry, MAT seems to be overvalued versus HAS (13.55) and fairly valued versus the industry as a whole (15.48). All industry and competitor comparisons are on a TTM EPS basis.

Fundamentals:

MAT's gross margin for FY 2010 and FY 2011 were 50.46% and 50.20% respectively. Their gross margin is very high at 50% and consitent too. I like to see both of those when looking at potential dividend growth stocks since it means they have pricing power. Their net income margin for the same years were 11.69% and 12.26% respectively. I like the net income margin to be at least 10% and preferably rising. MAT passes both of my criteria for net income margin. The cash-to-debt ratio for the same years were 1.35 and 0.91. I much would much rather see Mattel get their cash-to-debt ratio back to at least even but at 0.91 it's still manageable.

Share Buyback:

MAT's shares outstanding have been falling thanks to their share buyback program.


Dividend Analysis:

The biggest drawback that I see in Mattel is that it's dividend growth history is spotty. They've only increased their dividend for 4 consectutive years including this year's raise. Despite the fact that the dividend growht is a little suspect their 10 year growth rate is still high at 37.86%. Its growth rates for the past 1 year, 3 year, 5 year and 10 year are 34.78%, 18.25%, 10.58% and 37.86% respectively. While MAT isn't the most consistent divdend growth stock, 2007 - 2009 all had a $0.75 annual dividend, it makes up for it with bigger increases when available. They increased their dividend 700% from $0.05 to $0.40 per share in 2003 and most recently increased it from $0.92 to $1.24.


Their payout ratio is still in what I would consider a safe zone around the 50% mark. Since 2003 the payout ratio has average 46.31%. The FCF payout ratio is a little troubling. Sicne 2001 they've only had 6 years with a FCF payout ratio positive and less than 100%. The highest it's been in that time was in 2007 with a 750% ratio.

Return on Equity and Return on Capital: Invested

MAT's ROE and ROCI have been relatively consistent and generally trending upwards since 2001. I like to see a stable or increasing value for both.


Average Price and EPS:


MAT's average share price has tracked their EPS almost perfectly in terms of growth rate since 2008. This means that their PE ratio has been fairly consistent in that time period.

Forecast:


The chart shows the historical prices for the previous 10 years and the forecast based on the average PE ratios and the expected EPS values. I have also included a forecast based off a PE ratio that is only 75% of the average low PE ratio for the previous 10 years. I like to the look to buy at the 75% Low PE price or lower to provide for additional margin of safety. Currently Mattel is trading at a $15 premium to the forecast.

Conclusion:

The average of all the valuation models gives a value of $31.52 which means that MAT is currently trading at a 7.50% premium to the fair value.

Overall I think that MAT is slightly overvalued at today's prices. If you can get into Mattel with a 4.00% YOC it might be tempting to take a chance on. That would mean a cost basis of $31.00 even. This wouldn't give you a good margin of safety but could still prove to be a solid beginning point. However do keep in mind that this might not be a great dividend growth stock due to their past inconsistencies in raising the dividend. But every company started at one point having just 4 years of consistent dividend growth. I would definitely want to check in on their latest earnings call to see what management had to say.

ConocoPhillips Spinoff

Yesterday the ConocoPhillips spinoff into two companies went through. Phillips 66 (PSX) was spunoff from the parent company of Conoco (COP) to create value for shareholders. Phillips 66 is now comprised of the refining and pipeline business while Conoco is now the largest pure exploration and production company. Shareholders received 1 share of PSX for every 2 shares of COP.

Let's go through the calculations to figure out your new cost basis.

Original Shares of COP - 21

Original Cost for COP shares - $1,386.88

Next we wait need the closing price from the 1st trading day, May 1st in this situation.

COP - $56.51

PSX - $32.76

Now you need to know the split ratio. For every 2 shares of COP you received 1 share of PSX.

Shares of new companies are easy enough to calculate. You retain the original amount of shares in COP and the new shares in PSX are multiplied by the spinoff ratio.

New Shares of COP = Original Shares of COP = 21

New Shares of PSX = Original Shares of COP * Split Ratio = 21 * 1/2 = 10.5

To calculate the % of your cost basis that relates to the 2 companies you calculate as follows:

COP % = COP Close / (COP Close + PSX Close / 2) = $56.51 / ($56.xx + $32.76 / 2) = 77.53%

PSX % = (PSX Close / 2) / (COP Close + PSX Close / 2) = $32.76 / ($56.51 + $32.76 / 2) = 22.47%

So the proportion of the original cost basis for each company is then:

Cost Basis COP = COP % * Original Cost = 77.53% * $1,386.88 = $1,075.22

Cost Basis PSX = PSX % * Original Cost = 23.xx% * $1,386.88 = $311.66

Your cost basis per share is now easy to calculate as follows:

Cost Basis per Share COP = Cost Basis COP / New Shares of COP = $1,075.22 / 21 = $51.20

Cost Basis per Share PSX = Cost Basis PSX / New Shares of PSX = $311.66 / 10.5 = $29.68

Fractional shares will not be issued in this situation. Meaning that we calculated we should receive 10.5 shares in PSX but when you check your brokerage account it will only show 10 shares. Don't fret because you will receive cash in lieu of fractional shares. In other words, you will receive the cash value of the fractional share portion of your PSX stock. In this case that would be the cash value of 0.5 shares.

Your final numbers would look like this.

21 Shares of COP with a total cost basis of $1,075.22 or a cost basis per share of $51.20.

10 Shares of PSX with a total cost basis of $311.66 or a cost basis per share of $29.68.

Cash in lieu of fractional shares of 0.5 shares * Close of PSX = $16.38.

I hope this helps you out because I had forgotten about the spinoff happening yesterday so it was a nice surprise when I checked my brokerage account. When I tried looking online for how to calculate the cost basis all I could find was how to calculate it based off a 1:1 spinoff which doesn't help in this situation. I calculated it that way and it was giving a cost basis per share of PSX around $50.00 which was definitely not right because you would be starting off with a $20 / share loss.

My final numbers play out like this.

Shares of COP = 16.296
Shares of PSX = 8
Total Cost Basis COP = $834.37
Total Cost Basis of PSX = $241.85
Cost Basis per share COP = $51.20
Cost Basis per share PSX = $29.68
Cash in lieu of fractional shares = $4.85

Also, your cash in lieu of fractional shares can actually be reported as a capital gain instead of being taxed as ordinary income. In my situation it doesn't matter because I originally purchased the shares of COP less than a year ago. But for anyone with a long term capital gain situation that could save you some money albeit not that much since at most your looking at the capital gains based off of 0.999 shares.

Tuesday, May 1, 2012

Dividend Update - April 2012

April was back down to a low month. Once I can start investing money again I'm hoping that there will be some good bargains on stocks that payout on the January, April, July and October schedule because that group is severely lacking for me right now. Of course I'll take whichever one's I feel are the best value at the time, hopefully it works out that I can pick up some that pay out on that schedule. For the month, I had two stocks payout in my brokerage account and one in my Roth IRA.




Dividend Income 2012
Company Dividend Amount Shares Purchased
EOG Resources (EOG) $0.68 0.006
AT&T (T) $8.93 0.278
April Total $9.61
2012 Total $118.10




Roth IRA - Dividend Income 2012
Company Dividend Amount Shares Purchased
JP Morgan Chase (JPM) $6.04 0.139
April Total $6.04
2012 Total $25.93


May will be another slow month for dividends paid out. Only 3 stocks across both of my accounts are scheduled to payout in the month.