Recent Buy - Rollover IRA (3)

Dividend Growth Investing | Recent Buy | Financial Independence | Stocks
Back in March I decided to largely forgo the options trading strategy that I had been employing in my Rollover IRA.  It's not that it wasn't profitable, rather it was a decision based more on efficiency and effort.  When I was actively trading options, primarily around dividend growth stocks, I was constantly having to look for new ideas and manage existing positions and frankly it just took a lot of time.

Contrast that with the core dividend growth investing approach which is some combination of buy, hold, collect, reinvest and monitor once a quarter, semi-annually or annually.  That's much less of a time commitment and frees up a lot of mental energy.

As such I've backed off on my options trading and have converted a good portion of the portfolio as more of a "classic" dividend growth portfolio.  I also began reporting my dividends for the portfolio since it's adopted the same approach, for the most part, of my FI Portfolio.  That doesn't mean I won't trade options, but the pace and intensity is backed way down.

I kicked off September with 2 purchases in the health care sector.  Neither one of these purchases was large, by any means, or even all that cheap.  So why buy shares?  Well I was reading the comment stream on an article on Seeking Alpha and it really kind of stuck with me.  
I have seen too many portfolios where people's best performers were small in size and they didn't take advantage of the company's out-performance. Ask them why and they say the company was always overvalued. No it wasn't! It was simply selling at a premium, a premium that was justified due to the company's performance. - Chowder
That's something that I've come to realize in my nearly 8 years of dividend growth investing.  The smaller your purchases the less importance that needs to be paid to valuation and the more importance that needs to be placed on quality.  

That doesn't mean that valuation shouldn't play a role in your purchase decision and we should still be after "reasonable" valuations; however, I think "hitching your wagon" to great companies is more important over the long term.  

I'll cover one of the purchases today and the other over the next week.  The first company I purchased was Becton, Dickinson & Company (BDX).  The position in new to my Rollover IRA although I've owned shares in this great business for several years now in one of my other portfolios.

I bought 5 shares of Becton, Dickinson & Company for $249.50 per share.  After commission the total cost basis for the position comes to $1,252.45 or $250.49 per share.  

BDX is a Dividend Champion with 48 consecutive years of dividend growth.  Based on the current quarterly payout of $0.77 per share the shares will provide $15.40 in dividends over the next year and carry a YOC of 1.23%.  

Due to this purchase my Rollover IRA's forward 12-month dividends increased to $2,156.04 .


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.  Throughout Becton, Dickinson's history they've consistently rewarded shareholders with higher payouts.  

*A full screen version can be found here.

Becton, Dickinson's dividend growth streak started back in 1972 and now sits at 48 years.  And if it weren't for the one year break in 1971 the dividend growth streak would date back to at least 1962.  

Of the 48 1 year periods for BDX's dividend growth streak, annual dividend growth has ranged from 2.2% up to 40.0%.  The average raise has come in at 11.9% with a median of 10.9%.

Of the 38 rolling 10-year periods since BDX's dividend growth streak started the annualized dividend growth has ranged from 8.3% to 16.7%.  The average 10-year annualized growth rate has come in at 11.7% with a median of 10.9%.

Those are some truly remarkable numbers.  What's really amazing is how consistent the annualized dividend growth rate for any given decade has been.  Even if BDX can only manage mid to high single digit growth rates going forward I'll be more than happy, although I fully expect to see high single digit or low teens to be the norm.

The 1-, 3-, 5- and 10-year rolling dividend growth rates since 1962 can be found in the chart below.  

*A full screen version can be found here.


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.

Becton, Dickinson's 5 year moving average dividend yield is 1.51%.  Based on the current annual dividend of $3.08 the share price would need to decline to ~$204 to give that starting dividend yield.  Since these shares were purchased at a 1.17% dividend yield that suggests roughly 19% downside potential.  

The fair value range based on dividend yield theory is between $185-$226.  That jives with my stock analysis on Becton, Dickinson from last year where I pegged a fair price around $160-$200.

I've started using enterprise value when looking at multiples for companies rather than just the market cap.  The concept is the same, but enterprise value accounts for the debt that a company carries and backs out the cash on the balance sheet.  In other words, using enterprise value multiples will reward strong balance sheets and cash rich companies with lower multiples that companies that carry high debt loads.

Becton, Dickinson doesn't necessarily look cheap here using the enterprise value multiples.  Using TTM data the EV/EBIT multiple is 32.8x or a 3.1% EBIT yield.  The EV/EBITDA multiple is better at 21.2x, but still just a 4.7% EBITDA yield.  Similarly the EV/FCF multiple is a hefty 38.4x or just a 2.6% FCF yield.  Nothing here screams value purchase at these levels.

That being said Becton, Dickinson in the middle of a transformation of sorts while they pay down some debt, primarily from the acquisition of C.R. Bard.  That acquisition was funded with approximately $1.7 B of cash, $10 B of debt and $4.5 B of equity.  

Using earnings estimates the valuation is much more attractive.  Analysts expect BDX to have full year EPS of $11.68 for the current year and $12.95 EPS for 2020.  That puts the P/E ratio at 21.4x and 19.3x, respectively, based on my purchase price.  Even better is that the current dividend payout of $3.08 per year is well covered by the estimates and represent just 26% and 24% payout ratios, respectively.


I know I harp a lot on valuation, or at least I do internally, so this purchase was a bit out of the norm for me.  It was far from being my best value purchase by a long shot.  

That being said I think it's a reasonable place to start building up a position in an excellent company.  Dividend growth might be a bit on the slow side for BDX compared to their usual while they work through reducing their debt, but that's just fine by me.  

I've started compiling the dividend history, growth rates and dividend yield theory for many dividend growth companies.  The Becton, Dickinson & Company'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 Becton, Dickinson & Company?  Do you think the price was too high or on the high side of fair value?