Friday, February 28, 2014

Is There Value In Dr. Pepper Snapple Group Inc.?

Earnings season is in full swing and with each new release comes some more data points on both past and future results.  On February 12th management at Dr. Pepper Snapple Group, Inc. (DPS) announced 4Q 2013 and full year results.  Last week I looked through both The Coca-Cola Company's earnings report as well as PepsiCo, Inc.  So why not go for the trifecta an get the third major player in the domestic soda market; and tear through Dr. Pepper Snapple Group's report and update their valuation.  On Friday, February 21st, Dr. Pepper Snapple Group closed trading at $51.74 giving a forward dividend yield of 3.17%.

DCF Valuation:

Analysts followed by Yahoo!Finance expect Dr. Pepper Snapple to grow earnings 6.90% per year over the next five years and I've assumed they can grow at 5.18% (75% of 6.90%) for the next 3 years and at 4.50% per year thereafter.  Running these numbers through a three stage DCF analysis with a 10% discount rate and summing over 30 years yields a fair value price of $59.36.  This means the shares are trading at a 12.8% discount to the discounted cash flow analysis.

Click here to read the rest of the analysis.

Wednesday, February 26, 2014

Earnings per share or free cash flow: What's the difference?

The quick and clean method of determining a dividend's safety is by the payout ratio.  The payout ratio is calculated by taking the dividends per share and dividing it by the earnings per share (EPS).


It's fairly easy and straight-forward and can be found on just about any financial website.  Of course there's all sorts of variations on the payout ratio as you can take the trailing twelve months payout ratio, forward twelve months payout ratio, a blend of the two...  The only thing that changes between those is what kind of dividends and earnings per share you're using, the calculation is the same.  But for some industries the traditional method just isn't all that useful.

Let's start with the difference between earnings per share and free cash flow per share.  Earnings are derived from the net income of a company.  Essentially you take the revenue of a company subtract certain expenses such as administrative, depreciation, interest expenses, cost of goods, taxes, and a whole host of other items.  That leaves you with the net income for that company and to get the earnings per share you just divide by the shares outstanding.  All earnings per share information and calculations can be found on a company's income statement.

Tuesday, February 25, 2014

Recent Buy

Well I just couldn't help myself this past Friday and made another purchase.  It wasn't that long ago that I had doubled up my position in PepsiCo, February 14th to be exact but the price continued to decline so I added some more.  I was fairly impressed with their 4Q and full year 2013 results and really like their outlook going forward.  Despite being named PepsiCo, they are much more than a soda company.  Besides the namesake brand of cola they have several other soda, tea, coffee, and juice brands under their control as well as a hefty snack division.  Like a lot of the large cap US consumer staple companies, the domestic market is pretty much fully developed and in some instances, like soda consumption, declining.  Fear not though as PepsiCo has a large presence in the developing and emerging markets and that's exactly where the real growth will come from.

Monday, February 24, 2014

Valuation of PepsiCo Inc. - The Long Case Looks Strong

Last week management of PepsiCo. Inc. (PEP) announced earnings for 4Q and full year 2013.  The results were fairly mixed with revenue increasing around 1% over 2012.  North American soda consumption continues to be a drag on the growth of the company as international beverage and snacks show solid growth.  The Board of Directors also announced a huge 15.4% increase in the quarterly dividend from $0.5675 to $0.655, although the new dividend rate doesn't start until the June payment.  PepsiCo Inc. was trading around $78.00 on Thursday, February 20th giving a forward yield of 3.36% based on the new dividend rate.

DCF Valuation:

Analysts followed by Yahoo!Finance expect PepsiCo to grow earnings 7.86% per year over the next five years and I've assumed they can grow at 6.29% (80% of 7.86%) for the next 3 years and at 4.50% per year thereafter.  Running these numbers through a three stage DCF analysis with a 9% discount rate yields a fair value price of $111.09.  This means the shares are trading at a 29.8% discount to the discounted cash flow analysis.

Graham Number:

The Graham Number valuation method was conceived of by Benjamin Graham, the father of value investing, and calculates the maximum price one should pay for a company given the earnings and book value.  PepsiCo Inc. earned $4.32 per share in fiscal year 2013 and ended with a book value per share of $15.96.  The Graham Number is calculated to be $39.39, suggesting that it is overvalued by 98.0%.

Click here to read the rest of the analysis.

Saturday, February 22, 2014

Weekly Roundup - February 22, 2014

What a busy week, although that's the norm right?  But I'm striving to really slow down that busy-ness level, especially since it's not devoted to doing things I really want to pursue.  Don't get me wrong, I actually like my job, but there's times where it absolutely sucks.  We should be able to finish up here sometime this weekend and then I'll be headed back home.  I can't wait to be back home with my wife, now if only she could be off work whenever I was off work and things would be even better.

It was a great week as far as the portfolio is concerned with dividend increases from Coca-Cola, Lorillard, and Wal-Mart.  I was a bit disappointed with the WMT increase but not really surprised given their results from the last quarter.  So far five of my ownership stakes have announced increases this year with one more expected next week.  I calculated the overall dividend growth of my holdings and I'm quite happy with the results.  It only accounts for dividends paid through the end of 2013 but the weighted growth rates are all over 10%.  I hope to keep that up but I expect it to work its way down to the 7-10% range over the long-term so I'll ride it while it lasts.

Wednesday, February 19, 2014

The Long Case for the Coca-Cola Company

The Coca-Cola Company (KO) will be announcing earnings on Tuesday, so what better time than the present to get an update on its current valuation.  There's not much needed to be said about a company as great as Coca-Cola.  It has the number 1 and number 2 brands in terms of sales in Coca-Cola Classic and Diet Coke as well as a huge stable of other recognizable brands in Sprite, Powerade, Vitaminwater, Minute Maid and many more.  The Coca-Cola Company closed trading on Friday, February 14th at $38.93 giving a current yield of 2.88%.

DFC Valuation:

Analysts followed by Yahoo! Finance expect The Coca-Cola Company to grow earnings 5.55% per year for the next five years and I've assumed they can grow at 4.5% per year thereafter.  Running these numbers through a two-stage DCF analysis with a 9% discount rate yields a fair value price of $44.65.  This means the shares are trading at a 12.8% discount to the discounted cash flow analysis.

Graham Number:

The Graham Number valuation method was conceived of by Benjamin Graham, the father of value investing, and calculates the maximum price one should pay for a company given the earnings and book value.  The Coca-Cola Company earned $1.93 per share in the last twelve months and has a current book value per share of $7.28.  The Graham Number is calculated to be $17.78, suggesting that it is overvalued by 119.0%.

Click here to the read the rest of the analysis at Seeking Alpha.

I've updated my Stock Analysis page to reflect the most recent analysis.

Tuesday, February 18, 2014

Recent Buy

I'm a bit late on this update but it was a crazy weekend with lots of work and other writing that I wanted to get done.  The markets have started to turn things around in February and I have no idea which was the head-fake, the dip or the subsequent recovery.  What I do know is that a company I wanted to own was trading at a price I was comfortable with so it was time to add to my position.  Out of the carbonated beverage makers, Coca-Cola was the first one I bought and for the longest time it was the only one of the two soda giants that were in my portfolio.  That all changed back in early December when I finally started to build my position in PepsiCo (PEP).  I knew I wasn't getting the best price at the time of the first purchase but I felt that it was a decent price to start building the position from.  Luckily Mr. Market gave me an opportunity to average down my cost basis and buy some more shares on Valentine's Day.  How sweet Mr. Market.

Monday, February 17, 2014

Dividend Growth Checkup

A little over a year ago I wrote a post discussing how to properly calculate the dividend growth rate of your portfolio.  Most likely each company you own makes up a different weight in your portfolio so just using a straight average won't suffice.  A quick summary of the method is a weighted average 1 year, 3 year, 5 year and 10 year growth rate as well as a weighted average of the weighted averages.  I'm not going to go into detail on how the calculations are made, but I recommend you check out my post detailing that if you're interested.    The whole point of dividend growth investing is to become a part owner in companies that continue to improve their operations and in turn pay you, the owner, a piece of the profits.  Ideally I'd always be able to improve the growth rates of my holdings, but I know that won't be the case.  I feel it's important to at least do quarterly checkups on each company that you own and for me an annual review of the overall portfolio dividend growth seems about right as most companies only increase the dividend once each year.

Sunday, February 16, 2014

Blog Milestone - 300,000 pageviews!

To some of the bigger blogs this might not seem like that big of an accomplishment but it always amazes that anyone would come by to get my thoughts on dividend growth investing and financial independence.  I started this blog back in November 2011 to chronicle my journey as I strive to reach financial independence.   It was slow going as far as readers in the beginning as it took me just over a year to cross the 10,000 total pageviews mark.  However, during the end of 2012 traffic started to pick up and 2013 saw traffic growth really start to ramp up here.  2013 saw me cross the 100,000 total pageviews level in June and then also got me past the 200,000 mark in the November.

Saturday, February 15, 2014

Weekly Roundup - February 15, 2014

We're now into week 3 of February which is crazy.  This past week was extremely busy for me between finishing up a job, going home for a few days, and coming back to work to start a new job up.  It's good to be back at work though and have things settle down a bit.  Don't get me wrong, I'd love to be at home all the time but for some reason they won't pay me to not work.  If only I could figure out a way to convince them that would be best for all parties.

Thursday, February 13, 2014

Net Worth Update - January 2014

While cash flow is more important when it comes to financial independence, it's still good to look at the balance sheet too, which is why I provide these net worth updates.  Well the markets decided to take a bit of a breather and pull back some during late January.  That's bad for the net worth value but great for the long-term investor since we can buy more shares with the same amount of money.  I was surprised to see how much of a drag the markets took on my net worth, but as more and more of my financial life is tied to the markets eventually a bad month would outweigh the fresh contributions.  I was disappointed to see a net worth decrease since I saved over $5,300 from my after-tax paycheck, $1,400 in combined 401k contributions, $1,000 in ESPP withholdings and of course, my favorite, dividends.  For January it came out to be a -$1,065.01 change in my net worth.

Tuesday, February 11, 2014

Don't Worry About the Credit Card Breach at Target Corporation

The decline in the share price of Target Corporation (TGT) has been well documented by several dividend growth disciples.  The share price has been on a continuous decline since hitting its 52 week high back in July 2013.  Share have declined almost 30% since then and are down almost 12% YTD.  Target has lost more than $10 billion off its market cap in that time.  The credit/debit card data breach has led to the most recent selloff noted by the steep decline in share price since 2014 began.

Credit/Debit Card Data Breach

In mid-December, Target management learned that a hacker had breached their system and stolen some customer information including names, mailing addresses, email addresses and phone numbers.  The key though is that social security number were not taken as well.

Click here to read the rest of the article.

Monday, February 10, 2014

Income Update - Janaury 2014

 I'm a big proponent of tracking every single penny that comes into your hands if you're really wanting to make a change to your finances.  Mental accounting is too difficult to keep track of and the mundane everyday expenses get forgotten.  Once you keep a detailed history you can see that you're really spending $400 per month on restaurants or $100 on coffee or whatever little expenses that are fine by themselves but add up quickly to destroy a budget.  This is why I like to keep track of all of my expenses to help keep myself accountable and looking to see what areas I'm just plain doing poor in.  If you want to improve your finances, then please track everything for a 3 month span and then take action to make positive changes.

Saturday, February 8, 2014

Weekly Roundup - February 8, 2014

February is now well under way and continuing to just fly on by.  I had a lot of catching up to do this week with several posts that I just haven't been able to write up but I'm glad I did.  It's also been a lot busier for my portfolio that I expected it to be.  I was hoping for a calm start to the year, but the end of January and beginning of February didn't want any part of that.  My option income so far in 2014 has been pretty great and I'm currently about 29% of the way towards my goal of $1,500 for the year.  I also sold 2 put options late last week, one on Coca-Cola and one on Phillip Morris.  As of now they're both looking good as the markets have started to climb, but there's still a lot of time left for Mr. Market to get in a sour mood.  Wal-mart looks like a buy at current levels and since it had been a while since I had reviewed it, it was well overdue.  Don't try looking for it here though, I wrote it over on Seeking Alpha and it was my first premium article.

Friday, February 7, 2014

Wal-Mart Stores, Inc. Dividend Stock Analysis

The markets have continued to be much more volatile than they were throughout 2013. The good thing is that that's bringing more value into the market, which is great for any long-term buy and monitor investor. Lower prices now = better returns in the future. One company that has caught my eye during this drop has been Wal-Mart (WMT). I've been looking for a chance to pick up shares at prices lower than my cost basis and currently I'm sitting on a 3% paper loss. Wal-Mart closed trading on Tuesday, February 4th at $72.73 and was offering a current yield of 2.58%.

Check out the rest of the analysis here.

I've updated my Stock Analysis page to reflect the most recent analysis.

Wednesday, February 5, 2014

What's been causing my frustration: Rental Propportunity

The name of my blog is Passive-Income-Pursuit and up until now it's been focused solely on investing in some of the best companies in the world in search of dividends and dividend growth.  Well it's time to branch out a bit to cover another form of passive income.  I'm sure most of you have noticed by now that I'm excited about some of the rental property opportunities, or propportunities, that I've been finding.  This is a big goal of mine for the year as interest rates continue to be low in a historical perspective and the monthly cash flow can be awesome thanks to using leverage, i.e. debt.  I'm sorry if I've been bombarding all of you in my comments and posts but I'm trying to keep the goal fresh in my mind to keep me from running through my cash.

Of course the markets decided to sell off so far in 2014 and finally we're seeing some great values in the market.  I've already made several purchases including shares of Chevron, Target, Phillip Morris, and on Monday I picked up some Unilever (UL).  There's so many more companies that I want to add to in order to average down my cost basis, but doing so depletes my capital for the rental property.  I'm leaning towards adding some shares of Phillip Morris because I'm currently down over 10% on the position so it's a great chance to lower the cost basis.  I wanted to share with all of you one of the propportunities that I've found and why it's causing some frustration for me.

Tuesday, February 4, 2014

Lots of options

No this post isn't about all the great investment opportunities that Mr. Market is giving us, it's about all of my recent option trading/selling activity.  There's been a lot more activity on this front than I expected to be reporting.  My goal is to receive $1,500 in profit from option selling this year and I'm getting off to a decent start.  I've got two closed/expired positions to update all of you on as well as two new positions.

This past Friday marked the expiration date for the call option I sold on Halliburton (HAL).  Every quarter I receive more shares of Halliburton through the ESPP program at work so I want to try and divest those funds into other investments.  I prefer to sell calls until the shares are called away to generate extra income on top of the dividends that they provide.  On January 22nd I sold the $51 strike call option expiring on January 31st.  In return for selling the option I received $46.00 in option premium to do as I wanted.  The shares were trading below $51 on expiration so I got to keep the full option premium as profit.  This is a $46.00 / $5,100 = 0.90% return in about 1.5 weeks.  That's equivalent to at 36.60% annualized return.  If only I could do that every 10 days and I would be one happy investor.  I expected the shares to hover around the $51 mark and would then just sell another call if the shares weren't called away, but we all know how the markets decided to end January.  This brought the price of Halliburton down into the $48.50 range so in hindsight I left some money on the table.  I'll still look for opportunities to sell another call option because I need the capital from those shares for other investments, possibly a rental property.

Monday, February 3, 2014

Dividend Update - January 2014

Well 2014 is now well under way with January already having come and left us.  The markets started to be much more volatile with earnings season in full swing and the Federal Reserve announcing further tapering.  I still don't know why tapering is such a bad thing unless you believe that the economy and markets will collapse without the infusion of that capital.  Plus, it's not like they've completely stopped the bond buying program, they're still buying over $65 billion, per month.  When the markets are volatile and routinely giving -100 or more point days is when you find out if you're cut out to withstand the worse losses that will come in the future.  It might be today or tomorrow or 10 years from now, but at some point we'll see another 25-50% sell off.  For the month the DJIA gave up 5.3% and the S&P 500 retreated 3.6%.

This was music to my ears, and I know to a lot of my fellow bloggers as well, although it came about month earlier than I would have liked.  I made several purchases throughout the month by adding to existing positions in Chevron, Phillip Morris, and Target.  I'm looking very closely at Coca-Cola and Wal-Mart as well.  Overall I was able to add almost $140 in dividends before any further reinvestment or dividend increases.

Sunday, February 2, 2014

Another buy

Well the markets continued their difficult start to the year by selling off again to end January.  They started off really bad to start the day with the DJIA dropping over 200 points before clawing it's way back to just a 100 point loss and closing in the middle with a 149 point loss.  Quite a hectic day in the markets.  Well Chevron announced 4th quarter earnings and things were disappoint with a double miss on both earnings per share and revenue.  Global oil and natural gas production declined 3.4% year over year.  But the bright spot in an otherwise disappointing earnings announcement is that management is keeping their capex plans in place to continue to increase their production.  Other big oil companies have slowed their capex due to weakness during 2013, but Chevron is staying the course which I like because their business is managing depleting resources while constantly having to seek out more reserves.  You can only do that by spending money.

Saturday, February 1, 2014

Weekly Roundup - February 1, 2013

It's funny how the markets have their first down month since August and now the markets are going to collapse?  Despite how 2013 went, the markets don't normally go straight up.  I think what has really been surprising is the volatility so far to start the year off.  It's -200 point days for the DJIA, then +160, then -140, then +150, then -300.  When the volatility creeps back in, I get excited because that can lead to some great opportunities for long-term investors.  Unfortunately for me, this sell-off couldn't have come at a worse time.  There's always competing uses for capital, but I need to save up between $20-30k for a rental property if I want to take advantage of that opportunity, but it's been a while since we had some decent to good value propositions in the markets.  I've nibbled a bit here and there and sold a few options, which I hope to get a post up about soon.