Recent Buy (7)
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?
Armed with some cash from trimming my position in McDonald's (MCD), I wasted no time putting some of that capital back to work. It took me nearly 7 years to add shares of Altria to my portfolio, but I've now made 3 total purchases since March 2018.
On June 28th I purchased an additional 25 shares of Altria at $47.4904 per share. The total cost basis, including commissions, for this lot came to $1,192.21 or $47.69 per share.
Altria is a Dividend Champion with 49 consecutive years of dividend growth. Based on the current quarterly payout of $0.80 per share the YOC for this slug of shares is 6.71% and I can expect to receive $80 in dividends over the next year barring any future increases, which I fully expect will be coming later this year.
I now own 69.619 shares of Altria at an average per share cost basis of $51.66. My entire position in Altria can be expected to produce $222.78 in dividends over the next year and carries a YOC of 6.19%.
Due to this purchase my FI Portfolio's forward 12-month dividends increased to $7,025.20.
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. With a 49 year streak of rising dividends I'd say that Altria is doing a superb job on that front.
Altria might not be a rapid dividend grower seeing annual growth i the 15%+ area; however, there's something to be said for its consistency. Dating back to 1999, excluding the 2007-2009 period when Altria spun off other companies, Altria's dividend growth has ranged between 6.5% and 14.9% with an average of 9.2%. Consistent dividend growth in the high single digits coupled with a higher than average starting yield can do wonders for your wealth given enough time.
The 1-, 3-, 5- and 10-year rolling dividend growth rates can be found in the chart below.
One valuation method that I like to use is dividend yield theory. The idea behind dividend yield theory is that large, stable companies will see their dividend yields revert to their mean over time. So when the yield is higher than "average" shares are undervalued and when it's lower than "average" shares are overvalued.
Shares of Altria are currently offering some of the highest dividend yields seen over the last 30 years and are well above the 5 year moving average for the dividend yield which currently sits around 4.3%. Dividend yield theory suggests that Altria is undervalued by roughly 50%.
This is where some discretion needs to come in because while dividend yield theory suggests shares are significantly undervalued, I don't think the "right" yield would be as low as 4.3% even in the continuing low yield environment. That being said I do think something closer to the 5% yield area would be a more realistic target which still suggests shares are undervalued by roughly 30%.
As another quick valuation check Altria's 5 year average P/E ratio is 17.0x according to Morningstar. Against the earnings estimates of $4.03 for FY 2019 and $4.43 for FY 2020 Altria is trading at just 11.8x and 10.7x forward P/E ratios, respectively.
For a rough guess at the return potential we can use the earnings growth forecast plus the dividend yield. On average analysts are expecting Altria to have 7.2% annual earnings growth over the next 5 years adding that to my starting yield of 6.7% and the estimated returns are 13.9% annually over the next 5 years.
I'm not sure what the "fair value" is for Altria, but at this time all signs are pointing to it being too cheap.
We're still several months away from being able to get back to regular monthly investing so this small purchase that I made using the proceeds from my position trim felt good. I love being able to invest capital and look for new ideas that offer better value prospects. As a dividend growth investor there's not much better, at least investing wise, than being able to put your money to work and see those forward dividends rise.
I've started compiling the dividend history, growth rates and dividend yield theory for many dividend growth companies. Altria's can be found here and the remaining companies that I've already gathered the data on can be found here. As new companies are added the list will be updated.
What do you think of my purchase of Altria? Are you interested in adding shares of this dividend growth legend?