Recent Buy - Rollover IRA (5)

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.

Much like my previous 2 purchases this month for my Rollover IRA, I know I'm paying up for quality with this purchase with a pretty sizable premium.  That

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 bought 6 shares of Ecolab (ECL) for $194.54 per share.  After commission the total cost basis for the position comes to $1,172.19 or $195.37 per share.  

Ecolab is a Dividend Champion with 27 consecutive years of dividend growth.  Based on the current quarterly payout of $0.46 per share these shares will provide $11.04 in dividends over the next year and carry a YOC of 0.94%.  

Due to this purchase my Rollover IRA's forward 12-month dividends increased to $2,200.28.


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.  Ecolab has done a remarkable job growing their dividend payments to owners.

*A full screen version can be found here.

Ecolab's dividend growth streak started back in 1993 and now sits at 27 years.    

Of the 27 1-year periods during Ecolab's dividend growth streak, annual dividend growth has ranged from 3.9% to 20.0%.  The average annual dividend growth rate works out to 12.0% with a median of 12.2%.

Of the 23 rolling 5-year periods during Ecolab's streak, annualized dividend growth has ranged from 7.8% to 16.3%.  The average annualized dividend growth rate over all 5-year periods is 12.1% with a median of 12.1%.

The 18 rolling 10-year periods are equally impressive.  Annualized dividend growth over all 10-year periods has ranged from 10.0% to 14.2% with an average of 11.7% and a median of 11.6%.

The 1-, 3-, 5- and 10-year rolling dividend growth rates since 1989 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.

Ecolab's 5 year moving average dividend yield is 1.14%.  With a current annual dividend of $1.84 per share, dividend yield theory suggests that a fair price for Ecolab would be around $161.  My purchase price of $195.37 suggests ~17% downside to the average yield.  

The fair value range based on dividend yield theory is between $146 and $179.  At a current price in the $196 area that suggests that shares are still pretty expensive.  

Ecolab is due for a dividend raise to be announced in December and paid in January.  If Ecolab raises the dividend to $0.50, just a 8.7% raise, then the dividend yield theory fair value range bumps up to $159 to $194.  

That's in the ballpark of my stock analysis on Ecolab where I pegged a fair price in the $145-$175 range.

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 than companies that carry high debt loads.

Unfortunately using enterprise value multiples Ecolab still appears to be quite expensive.  Using TTM data, the EV/EBIT multiple is 28.5x or a 3.5% EBIT yield.  The EV/EBITDA multiple is 20.0x or a 5.0% EBITDA yield.  Likewise, the EV/FCF multiple is 39.9x or just a 2.5% FCF yield.

Even looking at more traditional valuation multiples Ecolab is far from a screaming buy.  Analysts expect Ecolab to have $5.91 for FY 2019 and $6.63 for FY 2020.  At my purchase price that puts the P/E ratios at 33.1x and 29.5x, respectively.

The dividend is well covered by earnings and free cash flow.  Looking at TTM data, Ecolab's net income and free cash flow payout ratios are 35.1% and 32.3%, respectively.

Over the next 5 years analysts expect Ecolab to show earnings growth of 13.6%.  Assuming that comes to pass the estimated annual returns based on my purchase price are 14.5% before accounting for valuation changes which I fully expect to see some valuation compression.


Similar to the recent purchases of Becton, Dickinson and Stryker, I knew full well that I was paying up to get a stake in Ecolab.  However, I wanted to get a stake even if it wasn't at the most opportune valuation because I believe in the business long term and its ability to continue to generate wealth over time.

For this lot of shares I fully expect valuation compression to be a drag on the returns that are generated.  However, given enough time I believe that Ecolab can grew into and through that valuation compression.  

Another reason for the purchase was that I tend to do better with looking for opportunities to add shares whenever I already have a stake in the business.  With the ultimate goal of investing ~$10k in capital in Ecolab at better valuations I was content to add shares here to keep me focused on when the share price moves to more attractive levels.

I've started compiling the dividend history, growth rates and dividend yield theory for many dividend growth companies.  The Ecolab'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 Ecolab?  Do you think I paid up too much for quality?


  1. PiP -

    Exactly, love the information and getting to the point - buy quality, always. Even moreso when investing small amounts. Congrats!



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