Every “X” number of weeks or months, an investor has a certain amount of money available. He or she then must choose which stocks to buy.
That is the premise we at Daily Trade Alert used to set up the Income Builder Portfolio.
Just as many investors don’t have large sums of money available to buy stocks whenever they want, neither do I, as the IBP’s caretaker. DTA has allocated $2,000/month to be divided between two purchases to be made two weeks apart.
In this way, the IBP Business Plan forces me to face situations similar to those encountered by young people and others new to Dividend Growth Investing – folks either unable to commit significant capital or uncomfortable doing so.
Moving With Mr. Market
That will happen occasionally when one has a set amount to invest at a designated time.
Sometimes the market will be up, and sometimes it will be down.
As a result, the early returns for AMGN and, especially, MMM have been less than stellar.
How’s that for a nice way to say “bad”?)
The good news is that we don’t worry too much about short-term, price-related results with the IBP – a multiple-year project whose focus is on building a stable, reliable and rising income stream. We are confident that AMGN and MMM will help reach that primary goal; secondarily, we also believe they will do well from a total-return standpoint over time.
The other good news is that the correction created a better entry point for the third company selected for the portfolio: Altria (MO). The cigarette maker was trading at more than $70/share on Feb. 2, but it pulled back about 10% the following week.
The market did recover some, and on Tuesday, Feb. 13, I executed an order for 15 shares of MO at $65.15. Including the $4.95 brokerage commission, the total paid was $982.20.
Last August, Altria announced its 48th consecutive annual dividend hike, an 8.2% raise to $2.64 (or 66 cents per quarter). The IBP’s shares were bought at the 4.05% yield point, which is just a touch higher than MO’s 5-year average.
Because this order was placed before the next ex-dividend date (it hasn’t been announced yet, but it figures to be around March 20), the Income Builder Portfolio will receive $9.90 in “Divvy Dollars” on about April 10.
As mandated by the IBP Business Plan, all dividends are to be reinvested right back into the companies from whence they came. A few minutes after executing the MO purchase, I instructed the brokerage to enable the fee-free option commonly called “dripping.”
The $9.90 the IBP receives in April automatically will be used to buy new Altria shares. If MO is still trading at about $65, that would add .152 shares.
Then, three months later, the Income Builder Portfolio would receive dividends based upon the new share total of 15.152 – making the June payment $10.00. And so on and so on, with the share total compounding for years.
The analytical service most bullish on Altria’s valuation appears to be CFRA. It is forecasting 23% price appreciation over the next year.
Ford Equity Research also believes MO is undervalued and due to rise, short-term.
Morningstar, meanwhile, says Altria is fairly valued.
According to Value Line, Altria has a target price range of $75-$100 (as circled in green below), meaning MO could appreciate more than 50% in value over the next few years. The stock research outfit also assigned MO a 1.18 “Relative P/E” (blue circle) and a 3 for “Timeliness” (red).
Timeliness is VL’s measure of expected price performance for the coming 6-12 months, relative to the 1,700 stocks Value Line covers; it’s a 1-5 scale, with 1 being most timely. MO’s Relative P/E of just over 1 indicates that its P/E ratio is slightly higher than the average of companies in VL’s analytical universe.
In addition, Value Line has placed Altria in its model portfolio of “Stocks With Long-Term Price Growth Potential,” which concentrates on projections 3-5 years out. MO is by far the highest-yielding company in that portfolio, which includes “growthier” names such as Facebook (FB), UnitedHealth (UNH) and Visa (V).
Lastly, let’s use the FAST Graphs valuation tool, which employs a metric its founder, Chuck Carnevale, calls “blended P/E ratio.”
As you can see by the numbers circled in red, Altria is trading a little above its normal P/E for the last 10 years. To further illustrate it, the green circle shows that the current price (black line) is at a P/E level somewhat higher than normal (blue line).
Wrapping Things Up
Historically, the best time for a long-term investor to buy Altria has always been “right now.” Nevertheless, as the saying goes, past performance does not guarantee future results – not even for an incredible past-performer such as MO.
Although Altria is one of the largest positions in my personal portfolio, and a welcome addition to the IBP, I highly recommend each investor conduct his or her own due diligence before buying MO or any other stock.
A fourth company will be added to the Income Builder Portfolio in two weeks.
— Mike Nadel