Recent Buy (5)
Purchases for my FI Portfolio have been few and far between the last few years. That's not for lack of opportunities or desire rather it had to do with our lives being on a roller coaster. However, there's a light at the end of the tunnel as our main goal for this year is to get rid of all non-mortgage debt and then refocus our energy towards building up the portfolio.
We aren't contributing fresh capital to our investments just yet as we're focused on getting rid of our non-mortgage debt. However, that doesn't mean that we're not able to make new purchases thanks to the dividends that keep rolling in from our other positions.
One of my goals for my FI Portfolio in 2019 is to build up the positions rather than build out the number of positions. Essentially I want to get more exposure to the companies that I own instead of many small positions that make it hard to be motivated to monitor the company. With the dividend growth strategy I still think it's fine since the bulk of the work should be done upfront; however, why invest more capital into your 20th or 30th best idea if one of the top 10 is attractively valued?
Well best laid plans of mice and men am I right? I decided to add a new position to my portfolio this time initiating a position in a Dividend Challenger.
On February 21st I purchased 20 shares of Cisco Systems (CSCO). The total cost basis, including commissions, came to $989.95 or $49.50 per share.
Cisco Systems is a Dividend Challenger with 8 consecutive years of dividend increases. Based on the dividend rate of $0.35 at the time of purchase the YOC for this position was 2.83% and I can expect to receive $28 in dividends over the next year.
Due to this purchase my FI Portfolio's forward 12-month dividends increased to $6,832.27.
As a dividend growth investor any potential investment must Jerry Maguire me, i.e. "SHOW ME THE MONEEEEEEYYYY!!!!". I judge that based on a company's history of both paying and growing dividends to shareholders. Cisco's dividend growth streak might not stretch into the decades; however, they've raised it every year since initiating a dividend in 2011. So they're on their way.
I like to examine the dividend growth rates over varying time periods. Since many businesses see their operations ebb and flow this smooths out the dividend growth and can give an idea of how things could look in the future across the entirety of a business cycle.
The 1-, 3- and 5-year rolling dividend growth rates can be found in the chart below.
The dividend also appears quite safe on both a net income and free cash flow basis. Over the last 5 years, including the TTM period excluding the fiscal year ending in July 2018, the net income payout ratio has averaged 48%. While the FCF payout ratio over the last 5 years, including the TTM period, has averaged 41%.
This wasn't my best value purchase; however, I've had my eye on Cisco for several years and never pulled the trigger. I was busy letting the enemy of good be perfect and missed out on some great opportunities that weren't quite perfect. This is just a starter position for me hence the really small purchase of just $1k total basis.
While this might not be my best value purchase it still looks pretty good all things considered. Analysts expect Cisco to have earnings of $3.07 for the current fiscal year ending in July and for earnings of $3.38 for the fiscal year ending July 2020. That puts the P/E at just 16.1x and 14.6x, respectively.
Also before accounting for any valuation change we can come up with a rough estimate of annualized returns by adding the starting dividend yield to the expected growth rate. With my purchase at $49.50 the starting yield is 2.83% and analysts expect Cisco to grow earnings 7.3% per year over the next 5 years. That puts the return estimate, before valuation change, at roughly 10.1%. I think I can live with that.
The Gordon Growth Model valuation lines up pretty well with the return estimate. Using my $49.50 per share cost basis, a $1.40 forward annual dividend and a 10% required rate of return the Gordon Growth Model shows that Cisco needs to grow by 6.97% to generate a 10% return. That's in line with growth forecasts so I'm pretty happy with how things look.
Armed with some cash I've been nibbling a bit in the markets to get the capital invested and working for me once again. This purchase was the 5th that I've made this year for my FI Portfolio, although each buy has been smaller than I'd like due to limited capital. I still have my eye on a few other companies, as well as some old ones; however, the rebound in the markets during January and February has made many investments less compelling. I have no plans to make any more purchases for the time being in my FI Portfolio until I get our taxes completed to make sure that I can transfer some of the cash in our brokerage account over to the Roth IRA.
What do you think of my purchase of Cisco Systems? Do you think Cisco can become a Dividend Champion in the future? What companies have you been watching or buying?