Monday, July 27, 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.
Quick update because this weekend was crazy. On Thursday, July 23rd I added more shares of 3M to my portfolio. One of my goals for the year is to build up positions rather than continue adding new ones to my portfolio and now that 3M is trading at a fair price I felt comfortable doing so. I purchased 7 shares of 3M Company (MMM) for $149.3599 each. After commission my per share cost basis comes to $150.07. Based on the current quarterly dividend of $1.025, this position will provide $28.70 in annual dividends and carry a YOC of 2.73%.
I previously owned 11 shares of 3M so my total position is up to 18 shares. I normally try to average down my cost basis but I ended up averaging up slightly with this purchase. I purchased shares for a 5.4% higher price than my original lot of shares.
One valuation technique is to use the Gordon Growth Model. The Gordon Growth Model uses any three of the current price, current dividend, expected dividend growth rate, and discount rate to calculate the missing item. Based on the current annual payout of $4.10, my cost basis of $150.07, and a discount rate of 10%, 3M would need to growth the dividend at 7.07% per year to justify the current price. The required growth rate is lower than the dividend growth rate of the last 5 and 10 years suggesting that shares could be undervalued. Earnings are forecast to grow 8.63% per year over the next 5 years and the current payout ratio is 49%.
Analysts followed by Yahoo!Finance have a 1 year price target of $165.92. Morningstar has 3M rated as a 4 star stock. S&P Capital IQ has a 1 year target price of $155.00 with a 3 star hold.
If you happened to notice this purchase was smaller than my usual purchase size. That's because I recently started a second brokerage account with TradeKing. The commissions at TradeKing are only $4.95 (Affiliate link) for stock purchases which means I can invest smaller dollar amounts to keep at my target "expense ratio" of 0.50% or less. Going forward I will be including all purchases within either of my portfolio's into just one portfolio on my FI Portfolio page.
My FI Portfolio's forward 12-month dividends increased to $6,050.71. Including the $56.71 from my Loyal3 portfolio brings my total taxable accounts forward dividends to $6,107.42.
The stock markets are becoming quite jumpy recently and rightfully so. There's still issues in Europe. The Middle East is always close to becoming unstable disrupting oil markets. China's economy and stock market are both going crazy. But there's no telling what will happen. I still plan to make purchases in excellent companies if the long term valuations make sense. I don't know if the markets will crash tomorrow. The bull run is long in the tooth, but it was also long in the tooth before the last 30% gain it's had. In other words, the future is unknown.
As long term investors you have to ignore the noise and focus on the fundamentals of companies and whether there's a good chance the company will continue to be around selling more products for higher prices. If they will and the shares are cheap compared to the future cash flows of the company then why not purchase shares? Some companies I'm looking to purchase are more 3M, Union Pacific, Toronto-Dominion, T. Rowe Price Group, and Johnson & Johnson. I know my plan is to not add too many more companies to my portfolio but there's some other intriguing options out available right now with J.M. Smucker, Caterpillar, Eaton, and BlackRock.
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 3M Company?
Image courtesy of Stuart Miles on FreeDigitalPhotos.net.