SNAP! An unsexy business I never thought about…

One of the nice things about visiting blogs and investing sites like SeekingAlpha/Motley Fool/Morningstar, is being exposed to things you wouldn’t think about.  There are a lot of industries out there and it actually takes time to figure out what the boring ones are.  Not because we don’t realize what sounds boring, but because we (at least I) don’t regularly think about boring industries and these positions are not something that pop into our heads when we think about dividend producing stocks.  What company do you think about when I say dividends?  ATT? MCD? KO? or maybe PG?

So I was reading some posts on SeekingAlpha and came across the article, Dividend Challengers (And Near-Challengers): 57 Increases Expected By New Year’s Day.

Snap-On (SNA)

Heard of this company before?  You may have seen their trucks leaving an auto repair shop like Firestone or Midas.  The truck is one of their mobile selling units and brings the tools to the location where they are needed.  This approach was pioneered by SNA.  SNA has been viewed for a long time as the vehicle repair tools company.  However, SNA, provides tools for aviation, aerospace, military, mining, power and others.  Additionally, they operate in 130 countries around the world, including; US, UK, Brazil, Russia and China.   They operate in 4 business segments:

  • Commercial and Industrial Group
  • Snap-on Tools Group
  • Repair Systems and Information Group
  • Financial Services

What about the dividend?

SNA has paid (and never lowered) a dividend since 1939.  They have raised it since 2009 and should be raising it again shortly for the 4th quarter payout.  Here is how dividends have looked since 2009:

Year Dividend ($) Raise (%)
2009 1.20
2010 1.22 1.6
2011 1.30 8.3
2012 1.40 7.7
2013 1.58 12.9
2014 1.32

With a current yield of 1.33%.

Not bad!  This is a Compound Annual Growth Rate (CAGR) of 7.12%.  While I like to see a longer dividend growth streak, if a company meets my other criteria then I am willing to lower the number of consecutive years.  SNA has a much longer history of paying dividends, but never lowering them, which I believe would qualify them for my portfolio.

Does SNA have what I’m looking for?*

When initially looking into a stock, I look at a few metrics to help me determine whether future research is warranted or should I just throw the stock away?

Payout Ratio < 60 %?  Yes, 26.7 for the TTM.  In fact it has remained below 40 since 2010.

Cashflow Payout Ratio < 60%? Yes, At the end of 2013, Cash Flow Per share was 5.45 and dividends paid was 1.58, which is about 29%.

Stagnant/Falling share count? Yes. Shares have remained between 58-59 million for the last decade.  They have repurchased shares each year for the last four years.

Growing Revenue? Yes. Revenue has grown from 2.4 billion (2004) to 3.057 billion (2013), with TTM revenue of 3.2 billion.  Revenue reached a low point in 2009 with 2.36 billion (~ 40 million less than 2004).

Debt Manageable?  Yes.  InterestCoverage Ratio is 12.  Total debt is approximately 1 billion and they have issued very little debt over the last 4 years (< 20 million per year).  In fact, they have payed back more than they issued in 3 of the last 4 years.

 Future Review Warranted

I like what I see.  They have payed dividends for a very long time (57 years), but have not raised it when the company couldn’t afford to do it.  This is a big plus in my book, the dividend has never been cut and is one of there selling points in there company report.  Their main market is very large (fixing cars) and is not going around anytime soon.

The main concern I have is that the starting dividend yeild is low 1.33% (< 2.5% I like).  This wouldn’t necessarily be an issue if they had higher consistent raises (like an SBUX for example), but that is not the case.  However, I will keep look into this company some more and may be a good candidate to add to on a pull back.

*Data provided by Morninstar

Have you found an interesting boring dividend growth company?

Disclaimer: T, MCD, KO, PG

Recent buys of the last few weeks

Wow… October is almost coming to a close and I have been busy. I meant to have this out a few days ago, but my parents surprised me by coming out to visit! So my weekend plans changed on a dime. I had a great time and it was worth deviating from my usual routine.  Work has been nuts.

I haven’t been able to comment as much as I would like, but I thank you all for stopping by! I’m still lurking.

Goal almost made!

I had been training for a half marathon and it took place last weekend as well. I ran a very good race and ended up a few seconds short of my goal of under 1:30:00 ( I ran 1:30:01!) How about that. I don’t feel bad about it at all.  I beat my previous Personal Record (PR) by 4:39, which is crazy and I averaged under 7 minute miles for the entire race.  Both are pretty fantastic accomplishments.

Purchases

Mr. Market has been kind during October, I was very active at the beginning of the month.  After a few weeks, I found chose a few other positions to add and initiate.  Here’s how the last few weeks went for me.

Company Shares Income ($)
AFL 20 29.6
BP 25 59
MAT 4.1951 6.38
MCD .2739 .93
UL 3.7062 5.63

For a total of $101.54 to my yearly income. I have had a great month. I am glad that I had some time to do a little research to determine that BP would fit into my portfolio nicely and that I got to add to my AFL stake.

Going forward

I have continued to add to my Loyal3 account with weekly purchases and I do not expect that to stop this week.  I will make another purchase in a few days.  A few potential opportunities have opened up in both KO and MCD, but others still exist with UL and MAT.  I will see what I feel like, maybe even buy a little more than usual. (Loyal3 purchases come out of my budget).

I should have enough funds by the end of the week/early next week for another purchase through both dividends and capital infusions.   I have my eyes on a few companies to add to my portfolio. Foremost on my mind is IBM and WTR.   I have adopted the DGI strategy, but consider myself a seeker of value.  IBM seems to be presenting me an opportunity for with both respects (BP does as well).  Enough for tonight!

Take care!

Did you find an opportunity in the market over the last few weeks?

Disclaimer: Long AFL, BP, MAT, MCD, UL, KO, MCD

Recent Buys

It has been an interesting weekend to say the least!  Dallas had a quick but powerful storm Thursday night.  Gusts of 100 miles per hour!  I ended up loosing power and didn’t have any until late Sunday night.  As strange as it may sound, I had a pretty good weekend without it.  I spent lots of time outdoors, used a lantern, hung out with some friends, climbed a tree and cleaned up plenty of debris.  The wind even did me a favor and blew down a rotten portion of fence that I had been meaning to tear down and replace.   A few caveats though, it was a very cool weekend and I had hot water.  If it had been a month ago and this had happened, I may have been singing a different tune.

Purchases

Company Shares Income!
CVX 10 42.80
K .8169 1.60
MAT 1.5822 2.40
XOM 12 33.12

This adds a total of 79.92 to my yearly income.  Which brings me to about 4,435.  Well below my goal of 5k, but the year is not over yet.

Buying some oil stocks

Oil has had a rough quarter.  The price of oil has fallen steadily over the last quarter, most of my oil companies hit a high around that time and then are steadily falling.  I took the opportunity to add to both XOM and CVX.  I had wanted to add to XOM recently and I took advantage of the price weakness of CVX to add another bite to my overall portfolio.  CVX is one of my larger positions so I may wait a while before I add to it again, unless of course Mr. Market provides me with another shot.

Mr. Market starts to deflate a bit

I am happy to see the market slowly down and even falling a bit.  I have a few other positions I want to add additional funds to.  They include:

  • PG
  • UL
  • COP
  • BAX
  • JNJ
  • AFL

A pretty solid basket right there.  I am looking to add to those(some) positions in probably the next month.  I may get a little more aggressive with some backup funds depending on what happens over the next few months.  There is no time like the present, so I plan on spending some time over the next few weeks looking over my positions and ones I do not currently own.  A few I do not own that are on my radar are:

  • ADP
  • GPC

I am looking to add a little higher growth to the portfolio in the 2.5 to 3.5% yield range.  My YoY increase is a little lower than I would like, so I will probably be looking for positions that are growing dividends at the 8+% range.

Happy buying!

What are you considering buying?

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.  

Walmart: How I approach investing

As describe previously, I have held Walmart (WMT) for a very long time.  My Grampa was the real investor there, I simply held it as instructed.  After learning how to invest better ( with much to learn), it is time for my annual deep dive into WMT and I will describe the methods I use to look over my investments.  These posts will be a record as the years go on and will provide a snapshot for future reference!  Lets take a dive!

Overview

Walmart is the largest retailer in the United States. They have over 4000 stores in a variety of formats.  These stores have been historically large (Walmart, Super Walmart), but Walmart has been building smaller stores called Neighborhood Market (grocery) and even smaller stores called Express.  Walmart operates in three divisions: Walmart US, Walmart International and Sam’s Club.  Walmart operates in 26 countries around the world.

Walmart’s economies of scale enable it to provide goods at a lower cost than other retailers.   Generally, their stores are the largest of their type and can provide a large variety of goods.

The data below is provided from a combination of sources. Including Morningstar, Google Finance and the Walmart company report.

Story for ownership

There are certain items that people need.  Food, clothing and maintenance products.  These are largely recession proof items and WMT is the biggest seller of them in the US.

Is debt under control?

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: 12
Current Ratio: .83
Quick Ratio: .22
Debt/Capital: ~40%
Is maturing debt spread out?: Yes

Walmart can easily handle it’s interest expenses, with an Interest Coverage Ratio of 12, it has it well under control.  Their interest expenses have remained consistent over the previous decade.

Normally, I like to see a current ratio above 1, which is a measure of a companies ability to handle short term expenses.  WMT has a Current Ratio of .83, which is low but WMT has been around .9 over the last decade.  WMT has a Quick Ratio of .22 (current ratio excluding inventories), which is terrible.  If WMT had issues with inventory turnover this value would concern me, but they don’t.

With a debt to capital ratio of 40%, 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.  Looking at the maturity dates of various bonds, WMT has them well spread out and should be able to manage maturing debt and interest without concern (with respect to current debt).

How does WMT spend your(my) money?

  • Dividends:  WMT pays out approximately 62% of FCF as dividends (~35% of EPS). WMT currently has enough cash on the balance sheet to pay 4 quarters of dividends and is yielding 2.5% as of today.
  • Share Buy Backs: Over the last 10 years, WMT has bought approximately 2.5% per year.
  • Capex: WMT consistently spends about 50% of operating cash flow back into the business.

This is very shareholder friendly.  Revenues have been increasing each year which should make it possible for WMT to continue raising dividends.  EPS has been enhanced by both share buybacks and increasing revenues.

The only downside is that WMT currently spends more on these three items than they have Operating Cash Flow.  As a result, cash on hand went down and they issued debt in the most recent year.  This is not a concern to me, because it is not out of historical norms for them to do this and their level of debt remains in the same range as it has over the last few years.

Valuation

I am still trying to determine what would be the best way to value a position.  The goal of buying high quality companies and holding for a significant window diminishes the need to place a precise value on it.  I currently look at historical metrics to determine if a position has deviated significantly from the mean.  At this time, WMT is trading at about it’s historical averages (PE, Price-to-sales).  With a dividend of 2.5, which is about 10% higher above average.

Concerns

Walmart is in the process of building new stores in smaller formats.  I think these can be a potential driver of growth. These stores appear to be popular in my area, however a case study of one doesn’t prove anything.  The main concern will be if these don’t take off and WMT wastes money.

Walmart pulls a lot of its shoppers from the lower income brackets and they are very sensitive to price.  A massive bout of food/energy inflation could potentially hurt the sale of the higher margin add-on items in the store.  It’s hard to gauge inflation, but I think food and energy inflation is higher than the official estimates say.

Doug McMillon took over as the new CEO at the end of Fiscal 2013. He is a 22 year veteran and previously ran Sams and Walmart International.  I will need to watch over the next year to see how/if he changes strategies.

Recent Developments

Walmart recently raised their dividend.  It was a disappointing 2%, or a penny per share.  The raise came on the heels of a disappointing Q4.  The results were blamed on weather and reductions in government payouts.  Blaming the weather will be validated (or disproved) when the next quarters results are in.  Personally, I can see how people would make fewer trips and would not buy as many “why not” items.

Walmart announced a plan to begin buying used games.  I like this move, it will be interesting to see how that impacts sales.  The goal of this maneuver is to increase store traffic and to sell additional items.  Used games have higher margins than new games, but I don’t expect this to be significant.  I doubt that WMT will be able to create the same atmosphere that Gamestop (GME) can without having knowledgeable employees.

Conclusion

WMT in my opinion, based on my analysis, would be a good position to hold at this time.  I like the exposure WMT gives me to other businesses through variety and necessity of the products it sells.  WMT is a good defensive play, but I may not be adding to my position because WMT is currently 3.5% of my portfolio, its yield is on lower end and recent growth has been low.  At this time, I feel like I can find a higher yielding investment with more growth.  However, if the economy heads south I may look into adding to my position.

Disclaimer:  Long WMT.  The purpose of this article is to keep a record of information I find valuable, which will be used in the future to help me with my investing decisions