Friday, June 26, 2015
Whenever I make a new purchase for my portfolio I feel it's only fair to get a post written giving all of the juicy details. I want to be as transparent as possible with my journey to reach financial independence through dividend growth investing. Being open about the moves I make allows for better discussion with all of you and helps spread ideas around as well as letting me create my own "investing journal" to chronicle why I purchased a company in the first place and that way I can revisit if something changes and make the decision on whether to continue owning the company or not.
In my last post I mentioned that I was close to purchasing more shares of ExxonMobil, T. Rowe Price, and Johnson & Johnson. Well, Mr. Market took JNJ a bit higher than I'd like to pay for shares; however, the price of XOM shares has drifted lower. Yesterday I purchased 12 more shares of ExxonMobil for $84.43 per share. After commission my per share cost basis came to $84.84 per share. Based on the current quarterly dividend of $0.73 this lot of shares will provide $35.04 in annual dividends and carry a YOC of 3.44%.
I've been doing my best to hold off on adding to the oil and gas sector due to my employment also being tied to the industry; however, this kind of valuation on a best of breed just doesn't come around very often. For starters you don't get an initial yield approaching 3.50% for shares of XOM very often. The following chart shows the historical dividend yields.
Using a Gordon Growth Model calculation we can estimate the fair value of a company's stock price using our required rate of return, initial dividend, and the estimated dividend growth rate. Assuming a dividend growth rate of 7% per year with the current annual dividend of $2.92 and a discount rate of 10%, the fair value price of XOM works out to $104.15. You can also rearrange the formula to solve for the required growth rate given a target price. Using the same discount rate and dividend from above with my cost basis of $84.84, XOM would need to grow the dividend 6.34% per year to be fairly valued. Considering the growth rates are below what XOM has historically been able to provide and the likelihood of higher profitability for XOM in the future I feel confident that the current share price represents solid value.
Unfortunately the energy sector isn't quite as smooth sailing as the consumer staples. However, we must keep in mind that that means there's more opportunities for truly undervalued situations due to overblown fear of the current state of affairs continuing on indefinitely into the future. Just like $120+ for a barrel of oil was unreasonable so was $40. I have no idea where oil prices will go from here but I'm very confident in the supermajors being able to weather the storm and come out stronger once prices rebound.
Back in April I wrote about how both Chevron and ExxonMobil shares fared during and after the last crashes and neither one of them have disappointed. I don't see the world's consumption of oil and other petroleum products decreasing anytime soon, in fact they're forecast to continue rising, which should ensure that oil and gas producers and refiners will continue to be in demand.
My FI Portfolio's forward 12-month dividends increased to $5,943.57. Including the $55.98 from my Loyal3 portfolio brings my total taxable accounts forward dividends to $5,999.55. Just about at $6,000 in forward dividends. That works out to $500 per month!
Other companies that I'm looking at potentially adding to are T. Rowe Price, Union Pacific, Phillip Morris, and potentially Chevron. I'd also like to add another financial company or two to my portfolio with insurance companies and a Canadian bank being in the mix as well.
What companies have you been buying? What companies are on your watch list for purchase? What do you think about the long term investment prospects of ExxonMobil?
Image courtesy of Stuart Milest on FreeDigitalPhotos.net.