Recent Buy (11)

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 for 2019 is to build up the positions rather than build out the number of positions.  Essentially I want to increase my exposure to the companies that I own instead of many smaller 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 is done upfront; however, I still think that in general the less the better.

The markets started August off with a bit of weakness which opened up the opportunity for me to average down my cost basis in Altria (MO).  On August 7th I purchased an additional 25 shares of Altria for $45.25 per share.  The total cost basis, including commissions, for this lot came to $1,136.20 or $45.45 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 7.04% and I can expec to receive $80 in dividends over the next year barring any future increases.

I now own 95.348 shares of Altria after first initiating a position in March of 2018.  The average per share cost basis for my Altria position is $50.01 and the entire position carries a YOC of 6.40%.  My Altria position can be expected to produce $305.11 in annual dividends.  



Due to this purchase my FI Portfolio's forward 12-month dividends increased to $7,287.65.

Dividends

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.  Altria's 49 year streak of rising dividends sure does confirm that, at least historically, Altria has been very shareholder friendly.
 

*A full screen version can be found here.

Altria's days of consistent double digit annual dividend growth are likely in the rearview mirror; however, that doesn't mean a solid 4-7% can't be obtained.  Dating back to 1999, excluding the 2007-2009 period when Altria spunoff Phillip Morris and Kraft, Altria's dividend growth ranged between 6.5% and 14.9% with an average of 9.2%.  Consistent dividend growth in the mid to upper single digits will be more than adequate given the initial yield just over 7%.

The 1-, 3-, 5- and 10-year rolling dividend growth rates since 1990 can be found in the chart below.  

*A full screen version can be found here.

Valuation

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.

*A full screen version of this chart can be found here.

Altria's 5 year moving average dividend yield currently sits at 4.35% which is well below the yield at my purchase price of 7.04%.  This suggests that shares are undervalued by roughly 61%.  I'm not that optimistic; however, I could easily see a return to a "normal" dividend yield in the 5-6% range which still suggests a "fair value" range between $53-$64 per share. 

For some perspective regarding the current dividend yield that Altria is offering, the YOC of 7.04% at my purchase price is in the 95th percentile dating back to November 1988. 

Based on a quick and dirty Gordon Growth Model calculation Altria needs to grow the dividend at 2.76% per year in order to generate 10% annual returns.  Or in other words the expected return assuming 6% annual dividend growth is 13.5% per year.  Not bad at all.

Altria is currently trading at a 11.3x EV/EBIT multiple or a 8.9% EBIT yield.

Conclusion

We've made some good headway on the debt reduction and one of the car loans will be paid off either before the end of August or sometime in September.  Once that car loan is gone the current plan is to transfer enough savings each month to make one purchase, ~$1k, with the remaining cash flow going to debt reduction and building up our cash reserves.  So needless to say I'm pretty excited about what the remainder of 2019 can bring.

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?  Have you been adding shares in this historically great company?