Recent Buy (14)

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 and some sales that we've made.  Although I'm hopeful to start making at least one regular purchase each month starting in September!

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.

August's mini market swoon has opened up some value and I've already made 3 purchases this month: Altria (MO), 3M (MMM), Cisco Systems (CSCO).  I added one more tranche of Pfizer (PFE) to make it an even 4 buys thus far.

I purchased an additional 30 shares of Pfizer on August 20th for $34.75 per share.  After commissions, the total cost basis comes to $1,047.45 or $34.92 per share.  Based on Pfizer's most recent dividend payment of $0.36 per share, this lot carries a YOC of 4.12% and I can expect to receive $43.20 in dividends over the next year.  Pfizer is a Dividend Challenger with 8 consecutive years of dividend growth.  

The share price had declined ~11% since I initiated a position in Pfizer at the end of July so I felt it was time to average down my cost basis.  I now own 60 shares of Pfizer at an average cost basis of $37.04 per share.  My entire position in Pfizer carries a YOC of 3.89% and I can expect to receive $86.40 in dividends over the next year barring any future changes to their dividend policy.



Due to this purchase my FI Portfolio's forward 12-month dividends increased to $7,350.60.

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.  Pfizer's dividend history isn't the cleanest; however, they do have a solid history of both paying and growing dividends to shareholders.  
 

*A full screen version can be found here.

Despite Pfizer's 50% cut in 2009, they've still maintained a positive 10-year growth rate for each of the 30 10-year periods.  Dividend growth has been much slower over the last decade; however, the dividend is still well covered by free cash flow with a payout ratio of ~68% over the TTM.  

Of the 30 10-year periods, Pfizer's annualized dividend growth has ranged from 0.6% to 20.9% with a median growth rate of 11.5%.  Although since the dividend cut the average 1-year dividend growth rate has come in at just 8.0%.

The 1-, 3-, 5- and 10-year rolling dividend growth rates since 1980 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.

The 5-year moving average dividend yield for Pfizer currently sits at 3.53% while the YOC for the latest lot is a very healthy 4.12%.  Based on dividend yield theory that suggests a fair price of $40.79 or roughly 17% higher than my purchase price.

Based on a quick and dirty Gordon Growth Model calculation Pfizer needs to grow the dividend at 5.64% per year in order to generate 10% annual returns which I believe is achievable for Pfizer over the long term.

When examining the valuation multiples of Pfizer things are a bit hit and miss.  Based on the TTM earnings shares are trading at a 15.9x P/E.  Looking ahead to the current year's estimate and shares carry a 12.3x P/E while shares have a 12.4x multiple based on 2020's estimates.  By P/E ratios Pfizer looks attractively valued.

I've also started looking at multiples using enterprise value.  The reason I like using enterprise value is that it encapsulates purchasing the entire business, both the equity and the debt net of cash.  I think this better encapsulates the true cost to own the business.  Using EV/EBIT, Joel Greenblatt's Magic Formula valuation metric, Pfizer is trading at a 17.1x EV/EBIT multiple or a 5.9% EBIT yield.  Looking at EV/EBITDA it's 11.5x or a 8.7% EBITDA yield.

My preferred EV multiple is the EV/FCF.  Pfizer looks somewhat expensive on a free cash flow basis as well with a 19.1x EV/FCF ratio or a 5.2% FCF yield.  In other words, before accounting for a premium to buy the entire business and assuming that free cash flow would remain consistent then you would generate a 5.2% annual cash return.

Conclusion

There's a lot of concern about Pfizer and specifically its dividend payment and the possibility of it getting cut.  The reason being that Pfizer will be completing a spinoff/merger of its Upjohn unit with Mylan.  Time will tell what exactly happens, but I have a feeling that over the long run the remaining Pfizer and the merged/spunoff Upjohn/Mylan will pay out plenty in dividends.

Pfizer is my only pure-play pharma company at this time, although Johnson & Johnson has a sizable foothold in pharma.  I don't expect to add any more shares of Pfizer to my portfolio unless the share price retreats further to around $30 per share which would push the starting yield up to 4.8%.

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.  Pfizer'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 Pfizer?  Did you add any shares on further weakness?  Do you already own shares?