Purchase: SBSI, Banking in Texas

It has been a busy few weeks for me.  I haven’t been able to do as much investing as I wanted.  A combination of being busy with the house, enjoying the nice weather and making up hours from a vacation that lasted too long (from works perspective).    However, I have had time to keep up with all the M&A action that has been going on.   One that struck me as particularly interesting was SBSI purchase of OMNI American.

OMNI American Bank is a small bank that is located in Fort Worth, Texas.  They have fourteen branches located throughout Fort Worth and its suburbs.  They have no presence within about 30 miles of Dallas.  They have about 1.4 billion in assets and had an EPS of .57 cents over the last few months.  SBSI agreed to buy them for ~.45 shares and 13 dollars per share of Omni.    Being that this is already a done deal,  I am not worried about whether or not they overpaid for the bank.  I personally don’t believe they did.

I look at SBSI and one aspect that I do not like about the bank is were most of its branches are located.  They are located in smaller towns with a token presence in Fort Worth and Austin, with two SBSI branches in town or in a suburb.  Cities like Dallas and Houston do not have any.  I have wanted SBSI to increase it’s footprint in at least one of the fast growing metro areas in Texas.  According the the census, four of the top 10 metro areas with the largest population growth were in TX.   These cities were Houston, Austin, Dallas and Fort Worth in that order.   It makes sense to expand in these areas from a banking perspective.

Texas has done very well in recent years.  Some large companies have been moving activity from other states to TX.  Chevron (moving personnel), Occidental Petroleum (LA to Houston) and Toyota come to mind.  The housing market did not collapse like it did in AZ or CA.  There was a rather modest fall from the peak of the housing bubble to the trough.   As we speak, the housing market is going gang busters in the Dallas Area and construction is booming.  As I walk around the area there are help signs practically everywhere I go.  Anecdotal evidence for sure, but sometimes that is good information.

In light of this move by SBSI, I re-evaluted my thesis and asked the question.  Does the purchase of SBSI add to the growth potential of this bank?  After reading, looking at macro factors and considering SBSI management track record, I chose to purchase additional shares of this company.   I placed a limit order yesterday, but did not have my order filled even though the price of SBSI hit my price! Frustrating for sure and it lead to me missing out on the ex-dividend date of today.

No worries though.  Today I purchased 42 shares of SBSI for a cost basis of 25.99 (including commission).  This will round out my position of SBSI to a little over 100 shares and add 35.28 to my yearly income.  After the 5% increase for SBSI recently and this new purchase my forward dividend income has now…

Broke 4k in forward dividends!

This is a great accomplishment and at this point I feel like my snowball with move forward without adding any additional outside funds.  However, I have no planes to not continue saving as much as I can.

Disclaimer: Long SBSI

Purchase: Proctor and Gamble (PG)

Well, to be honest it has been a discouraging month.  I had hoped to make 2-3 purchases in addition to DPS, TGT earlier this month.  However, Mr. Market has had other plans.  I would be lying if I said the overall valuation of the market didn’t affect my desire to make a purchase.  Given the current high valuations of most stocks in my portfolio (about 25 are large positions or exceeding some criteria), instead of looking for the absolute best value, I decide to add to a position that is smaller than I would like.

My exposure to makers of consumer goods is limited to PG.  I have wanted to add KMB and Clorox, but I haven’t done as much research on either and they do not meet my entry criteria (dividends, PE, cash flow) at the moment.  Which is double edged sword for me.  They don’t meet my criteria, so then I don’t research and a vicious cycle begins.

I made my first purchase of PG in June 2013 at 79.33 per share.  It is currently trading at 80.36.  Not much of a return, but at the moment given the market I feel like it would be a good candidate for additional funds.  Yesterday, I bought  15 shares at a cost basis of 81.80 (including commission) even though this probably wasn’t the best value in the market.  PG recently raised the dividend by 6.7% and reported a raise in profit for the most recent quarter.   This dividend raise increases their dividend streak to 58 years.

Do I believe this is the best value in the market right now?  I don’t know.  However, PG is one of those companies that I can own and be comfortable with regardless of the market.

Disclaimer: Long DPS, PG, TGT

Tagged

Loyal3 Purchase: DPS and TGT

After doing the most research per dollar invested ever (Round 1 and Round 2) the results are in!  Today I executed a trade in Loyal3 for both DPS and TGT.

I have been paid 55.31 in dividends for the first quarter and part of April.  The bulk of the dividends in this account will come in March, June, September and December.  With a few (KO,DPS) coming at the beginning of the following month.  Unless I add additional funds to the account, I will probably post only a few times per year after the dividends have been paid.

Making the trade

Loyal3 makes it very easy to purchase additional shares of a company (including fractional). On Sunday I logged into my account and placed the trades:

  • TGT : $27
  • DPS : $28

You are unable to use any cents when making a purchase with available funds.  However, if I had made a purchase with a credit card, then all available funds would be used prior to charging the card. That means that if I placed a single trade for $60, then $55.31 would be used from the Loyal3 account and $4.69 would be charged to my credit card.

Recently, Loyal3 made a change that would allow same day trades if using available funds and the trade was placed before 2pm eastern time.  When using a bank account or credit card, it takes about 2-3 business days before execution.  This is not really a problem, the market doesn’t usually change that much over a few days.

The lag time between placing a trade and execution can be frustrating.  I like my trades to happen instantly!  Half the time you will get it for a better price than your limit order with a specific price, but what’s a few pennies in the long run anyway?

The Purchase

After the trade executed, I purchased the following:

  • TGT : 0.4546 shares @ 59.39 (+$0.78)
  • DPS : 0.5451 shares @ 51.37 (+$0.89)

Raising my income by a total of $1.67 per year.

Conclusion

This has been a valuable exercise for my investing career.  I filtered a watch list, analyzed each security and chose the two that I felt provide the best value at the time.  I currently have 12 positions in the account and probably will not look outside these twelve in the future.  There are a few positions I added to the watch list, but none of those are that close to getting a spot in my portfolio.

Thank you for reading!

Disclaimer: Long DPS, KO, TGT.  My holdings are visible in the Portfolio tab.

Purchase: General Mills (GIS)

In late MarchI added General Mills (GIS) to my portfolio as I mentioned in my March Recap.  Here I provide the reasoning and metrics that enabled me to make my decision.

If something seems amiss, call me out.  I can’t learn without knowing I made a mistake!

Overview

General Mills (GIS) is a US based food company.  They sell a large variety of leading brands. Including Cheerios, Nature Valley and Yoplait.  You could easily eat all your meals from GIS!  Like this delicious looking Cheeseburger Crescent Casserole.  Many of their brands are 1 or 2 in their category.  GIS has seven product categories:

  • Small Planet Foods
  • Snacks
  • Big G Cereals
  • Baking Products
  • Frozen Foods
  • Yoplait
  • Meals

GIS has a moat that consists of the brands and the scale of its distribution.  For example, Cheerios has a 14% market share in the cold cereal market.  Brand recognition is key for GIS and they advertise accordingly.

GIS gets approximately 60% of its revenue from the US. The remaining 40% is collected internationally.

Story for ownership

With strong recognizable brands and a large variety of foods, people are going to eat.  GIS makes many foods that are convenient and inexpensive.  GIS gets about 40% of its revenues from outside the US. Increasing living standards in other countries will benefit GIS as people begin to spend money on a larger variety of foods.  GIS is focusing on growth in non-US markets.

Is debt under control*?

*Note: I am using data provided by Morningstar based on the TTM results and the FY14 Q3 report.

When I am analyzing a stock, I want to ensure that they can manage their debt.  I look at the following ratios:

Interest Coverage Ratio: 9
Current Ratio: .81
Quick Ratio: .52
Debt/Capital: ~54%
Is maturing debt spread out?: No

GIS can easily handle it’s interest expenses, with an Interest Coverage Ratio of 9.  Their interest expenses have slowly declined over the last decade from a high of 537 mil to 334 mil (FY13).  While their interest expense declined, the operating income has risen. Burning the candle from both ends!

Normally, I like to see a current ratio above 1, which is a measure of a companies ability to handle short term expenses.  GIS has a Current Ratio of .81 at the end of FY13, which is lower than than it has been over the last five years (greater than .9).  However, in Q314, the current ratio has returned to .97, which is in line more with historical standards.  GIS has a Quick Ratio of .52 (current ratio excluding inventories).  This could be a problem if they had to pay their debts quickly, but with a steady cash flow I don’t see this as an issue.

With a debt to capital ratio of 54%, I do not think that they hold a large amount of debt.  In fact, total debt has remained fairly steady over the last few years.  One note of concern, is that the bulk of GIS bonds mature before 2025, I believe they will be able to handle maturities with their cash flow and benefit from the current low interest rate environment (at least for a few more years).

How does GIS spend your(my) money?

  • Dividends:  GIS pays out approximately 52% of FCF as dividends (60% of EPS based on TTM EPS and new payout). GIS is currently yielding 3.2%.
  • Dividend Streak: 11 years
  • Share Buy Backs: GIS has 654M shares outstanding, which is down from 768M shares in 2004. 29M shares have been purchased F14 YTD.
  • Capex: GIS spends about 600M per year in capex.

Revenues have been increasing each year over the last decade.  EPS has dipped twice in 2006 and 2012, but rebounded the following year.  GIS fared well during the early part of the recession and managed CAGR of 4.4% from 2007 to 2010.

GIS oscillates between spending more on capex + dividends + buybacks than operating cash flow, this difference can only be made up by borrowing additional funds.

Valuation

I currently look at historical metrics to determine if a position has deviated significantly from the mean.  At this time, GIS is trading above it’s historical averages (PE, Price-to-sales).  GIS is trading above its historical dividend rate of 2.9%.

Concerns

GIS has to spend a lot on advertising in order to keep their products in the minds of consumers.  I don’t think this is foreign to the other competitors in the space.  GIS has begun to advertise more online each year, which is good and applicable for younger generations.

With a weakening consumer, the temptation to buy generic store versions of goods can cause an erosion of sales.  For the most part, I think that the product variety reduces the risk because store brands don’t offer the breadth of products that GIS offers.  I can’t even tell you what the generic version of Cheerios is.

A final concern is the potential for a lack of innovation and missing trends.  For example, GIS has done a good job creating Gluten free offerings and will hopefully monitor these trends as consumers tastes change.  I suppose this type of concern is generic and can really be applied to any business with a product or service.

Recent Developments

GIS recently raised their dividend 8% and which increases their dividend growth streak to 11 years.  They have shown a consistent desire to raise their dividend and have done so through a tough recession.

Fiscal Year 2013 is shaping up to be a good year.  Overall, US sales where flat, while the international segment has grown 8% YTD.  The driver for future growth will be the foreign markets that they are operating in.  GIS is partnering(or acquiring) with companies to reduce the risk of entering these markets.  I like this approach because it requires patience and is very deliberate.  This could of course get out of hand if they acquire poorly run businesses regardless of how familiar they are with the market.

Conclusion

GIS has shown a willingness and ability to increase shareholder returns each year.  They are making good moves to ensure that their market share increases in each product line.  Even though GIS is slightly overvalued based on historical measures, I feel like buying an initial position was a good move.  If the price falls somewhat and their aren’t more interesting options out there, then I will consider buying more shares.

Disclaimer:  Long GIS.