Tuesday, August 27, 2013

Recent Buy

As I mentioned in my stock analysis on Visa (V), I was very interested in purchasing some shares even before yesterday's pullback.  If you're wanting to invest in Visa you have to go into it knowing that it's going to give good dividend growth but it's much more of a total return investment.  I've been wanting to add a few more high dividend growth companies to my portfolio and Visa fits the bill quite nicely, as well as my recent IBM purchase.  I'm quite bullish on the company and expect to see lots of continued growth.



The price per share of Visa, and IBM as well, is really prohibitive to building large positions.  While I know that stock splits don't change anything for the company or investors' valuations, I would like to see a 2:1 or 3:1 split just because it makes it easier to build 100 share positions for calls or easier to sell puts against.  At current levels, a $175 strike put option would require $17,500 to purchase the shares if the option was executed.  Ouch!  Only 15% of the world's retail transactions are not transacted in cash, including 50% in the US and 99% in India.  That's a lot of growth potential for the global leader in credit/debit card processing.

Let's get on to the details.  I purchased 9 shares of Visa for $175.43 each.  After commission my per share cost basis came to $176.31.  Based on the current annual dividend of $1.32, these shares will provide only $11.88 in yearly dividends before reinvestment or future increases.  Yep, that's a very small YOC of 0.75%.  I expect the dividend growth to continue in the mid to high teens.  I will get to receive the dividend payment in December which is also when Visa last increased the dividend, so my YOC should be getting a nice boost soon.

While my cost basis is 22.3% higher than my target entry price; it's still 1.3% less than the average valuation and 18.6% less than the high valuation.  It's not a steal at these prices but I feel that it's around fair value and the growth potential as I mentioned above is pretty enormous.  If Visa can grow it's earnings and dividends at the rates I assumed in my stock analysis I can expect 10% annual returns over the next 10 years, even with PE compressing to 15 from it's current 21.

This is going to be the last of my purchases until around mid-September which is kind of upsetting.  I should have some excess capital to maybe make another purchase but I'm going to do my best to practice some patience.  Although I'll pretty much be forced to since I don't have any free capital in my brokerage account currently.  I don't like carrying such a low cash position and generally want to have 5% of my portfolio value in cash for special situations.

This increased my forward 12-month dividends to $2,901.05 which is 82.89% of the way towards my goal of $3,500 by the end of 2013.  The last third of the year should see most of my free capital getting invested into my FI portfolio once again which is exciting.

I've updated my Portfolio page to reflect this addition.

10 comments:

  1. Hi PIP,

    V is at the top of my list to add as a new position. The yield is low but so is the payout ration, this leaves a LOT of room for dividend growth going forward. I do need to add some higher growth companies to the mix. My average yield is 3.92% so I don't mind bringing it down a little. I was looking at them versus MA and AXP but I feel more confident with the brand I use the most which is V. They have a great business model and should do well for years to come.

    ReplyDelete
    Replies
    1. AAI,

      I think V is a pretty compelling purchase. Obviously I'd like a higher yield but the payout ratio is low and there's plenty of expected growth going forward to carry on a very high dividend growth rate. It wouldn't surprise me to see them be able to have a 20%+ annualized rate 10 years from now like MCD was able to accomplish. Especially since their business model requires very little capex which means they can return a large portion of cash flow to shareholders. Even better that they essentially have no debt obligations so shareholders are first in line.

      While my yield isn't as high as yours I'm expecting further weakness in the markets, or at least a more volatile next few months, to let me boost my YOC a bit and I plan to add some REITs over the next few months to boost my real estate exposure. I'd like to get it up to 5-10%, probably closer to 7% for now, so I can have 2 companies. O is currently 1% but it's going to take a jump up most likely in December as the put should be exercised. So the REIT exposure will help to boost my YOC after my recent IBM and V purchases lowered it.

      Thanks for stopping by!

      Delete
  2. Pursuit,

    I was looking at V around $95/share a while back and it made one of my watch list articles at that time. I'm obviously kicking myself for not buying it.

    I'd love to buy into V. I love the business, but that yield gives me the shakes. When I was looking at it way back when the P/E was closer to around 24 and the yield was near 1%. If I passed then, I don't know how I can buy now.

    Great company and great growth prospects. Maybe I'll have to make an exception for this one.

    Best wishes!

    ReplyDelete
    Replies
    1. DM,

      I keep remembering the prices that were available just 1-1.5 years ago and my mouth waters.

      The yield is worrisome but I figure that it's a pretty small investment and the growth potential is huge. I'd say right now it's at a little bit better value than then as the TTM PE is only 21 and the forward PE is a little over 19, although the yield is even lower. It's not for everyone, but I think the long-term growth of Visa is going to be pretty remarkable, or at least it has the potential to be, so throwing a little bit of capital that way seemed fine by me. And the difference between a 3.5% yield vs 0.75% yield isn't that big on a $1,600 investment, only about $40, but it'll shrink as Visa's DG should be much higher than your average 3.5% yielder. Although quality 3.5% yields are coming harder and harder to find, especially ones that can continue to grow the dividend.

      Thanks for stopping by!

      Delete
    2. Pursuit,

      Hmm. I'll have to check the financials. I usually use Google Finance for my snapshots, and it shows V at a P/E of 30. They must have this one wrong.

      At a P/E of just over 20 with that kind of growth, that makes for a compelling investment.

      Best wishes!

      Delete
    3. DM,

      M* shows 21.7 ttm and 19.6 forward and yahoo shows 21.3 and 19.7. My guess is that google finance is off because tjose 2 show the same and my spreadsheet calculates in that area too. Is the 30 on ttm or forward? Just checked and google has eps at $5.80 whereas m* and yahoo have $8.23 fully diluted eps.Upon further inspection it looks like the shares outstanding is the issue. Google has 924 for the last quarter and m* has 651. Thats why i alwaus check at least 2 sources and usually 3. The low PE for that good of growth is great and one of the reasons I purchased shares. The low yield is a negative but they should be able to get 15% annualized DG pretty easily over the next 10 years. Now if only we could pick up some shares for a 1.25-1.5% yield, although I don't expect to see that happen. Who knows though with Syria looming, the debt ceiling issue and Fed tapering. Personally I'd love more volatility because we could get some bargains on super high quality companies. Pickings have been a little slim through late spring and so far this summer.

      Thanjs fir stopping by!

      Delete
    4. Pursuit,

      Google has outstanding shares at 645 million, which is close but still incorrect.

      I just visited Visa's investor relations and tallied up the last 4 earnings reports and got $7.27 EPS TTM. That gives a P/E ratio of ~24. Still not bad considering the growth, although that yield is probably the biggest hang-up for me.

      I look forward to seeing how this turns out for you. As well, I still may make an exception for V. I'm an idiot for not buying under $100.

      Best wishes!

      Delete
    5. DM,

      Where are you finding Google's shares outstanding? According to the financials for V on both quarterly and annual it's showing 900+. Oh I see, on their summary page. I wonder why the quarterly/annual reports have it so far off? Fact checking is obviously very important.

      The yield is a let down but if this is one of my "risky" non-traditional DG stocks I think I'll do just fine with this one. Should be fun to see what happens in a few years time.

      Thanks for stopping by!

      Delete
  3. V is a sound purchase in my opinion. The key with this one is to ignore price fluctuations over time (and they are not inconsiderable). I'm in at an average entry at about $120 or so. I expect by the time I pass this stock on, I'll see a few doubles in total return on this one. They could pay an effective yield of about 2% given their payout and growth. I expect the stock to attain these levels in terms of payout with time.

    Nice purchase, I think you've backed a winner here.

    ReplyDelete
    Replies
    1. Integrator,

      I wish I had a $120 cost basis on my V position. I also think V will continue to raise their dividend considerably and the DG and growth of the company will just continue to push the price higher. The high yields will probably end up coming right around when the dividend increases are announced. What I like a lot is that they require so little CAPEX to continue to grow the company so their dividend can grow substantially.

      Thanks for stopping by and glad to be a fellow shareholder!

      Delete