February Stock Purchase #4

This is the last of my 4 weekly stock purchases in February via Sharebuilder’s automatic purchase plan. This week I added to existing positions in two companies and started a new position in a third.

McDonalds

McDonalds (MCD) is the world’s leading global foodservice retailer. With a market cap of $91B, it operates 35,000 locations serving approximately 70 million customers in over 100 countries every day. The company reports based on geographic regions: US (31% FY13 Revenue), Europe (40%), Asia Pacific Middle-East & Africa (23%) and Other (5%).

MCD has increased their dividends each year for 39 years with the increase coming in their November dividend. The current dividend yield is 3.6% from a quarterly dividend of $0.85. The current 68% payout ratio has been slowly increasing from a low of 43% in 2008. MCD’s dividend growth over the last 5 years has been about 10%. Their 5-year average yield is 3.3%, below today’s yield.

The company has a P/E of 19.5 which is higher than the S&P’s 17.9. MCD’s P/E has historically been higher than the S&P average except for 2005, 2009 and 2013. Projected 5 year EPS growth is 6.4%.

Free Cash Flow has been positive in each of the last 10 years with a low of $2.3B in 2004 and a high of $4.4B in 2011. TTM cash flow is close to this level at $4.3B.

MCD pays 4.2% of my projected annual dividends, below my limit of 5%.

Recent News

Next month is the start of Steve Easterbrook’s position as CEO, after the previous CEO Don Thompson announced his retirement last month. He was formerly the company’s Chief Brand Operator.

MCD’s last quarterly EPS results beat analyst estimates by $1.22 to $1.20. Their next interim results are due on 4/28.

Qualcomm

Qualcomm (QCOM) is a $117B semiconductor company which operates in three segments: CDMA Technologies (QCT) (70% of FY14 Revenue), Technology Licensing (QTL) (29%) and Strategic Initiatives (QSI). They own a large number of patents in the area of CDMA technology used in 3G cellular connections as well as the Snapdragon processors used in smartphones. The company was founded in 1985.

QCOM as increased its dividend every year for the last 12 years, and currently pays $0.42 a share for a yield of 2.4%. Its dividend schedule is stable with dividend increases pay in May/June each year. Payout ratio is a low 34% and it’s been staying in the 30-40% range since 2009. Annualized dividend growth over the last 5 years is 19%. The 5-year average dividend yield is 1.9%, below today’s level.

Its P/E of 15.1 is lower than the S&P’s average of 17.9. The company’s P/E has been lower than the S&P for the last year; previously it’s always been higher than the S&P by a fair amount (at least 20%). Analysts project an 5-year EPS growth of 10%.

Free Cash Flow has been positive for each of the last ten years with a low of $2.1B in FY2005 and a high of $7.7B in FY2013. TTM Free Cash Flow is $7.2B.

This is a new position and so QCOM do not currently pay towards my projected dividends.

Recent News

After a setback from Samsung who declined to use the high-end Snapdragon 810 in their smartphones, QCOM announced next generation 620 and 618 processors this week that incorporate some of the high-end features from the 800 series.

QCOM have also resolved their China anti-trust lawsuit at the cost of a $1B fine and reduced royalty payments. This resolution was inline with expectations and should help with enforcement of royalty payments going forward. The company raised their forecast after the settlement.

QCOM’s 2015 Q1 results were posted last month and beat analyst expectations by $0.10 ($1.21 vs. $1.11).

Emerson Electric Co

I used to work at Emerson Electric (EMR) – it’s a $40B diverse industrial company with 5 segments – Process Management (44% of FY14 Earnings), Industrial Automation (18%), Climate Technologies (17%), Commercial and Residential Solutions (10%) and Network Power (11%). Emerson isn’t particularly aimed at consumers but you may have come across the company from its popular InSinkerator brand.

EMR is justifiably proud of its dividend history, having increased its dividend for the last 58 years. Its shares currently give a yield of 3.2% from a dividend of $0.47 per share. It has a consistent increase pattern, raising dividends each November. The payout ratio decreased 3% from 2013 to 2014 and is currently 58% which is the high end of its range over the last 5 years. The dividend growth over the last 5 years has been 5.8% and the 5-year average dividend yield is below the current yield at 2.9%.

Its P/E of 18.7 is higher than the S&P Average of 17.9. The P/E has always been higher than the S&P’s average for each year since 2004 however and the current value is lower than last year’s 20 and 2013’s value of 25. Its projected EPS growth over the next 5 years is 8.3%.

Free Cash Flow has been positive over the last 10 years, with a low of $1.7B in FY2005 and a high of $2.9B in FY2014. The TTM Free Cash Flow is a little lower than last year at $2.8B.

EMR pays 4.2% of my projected annual dividend income, below my 5% limit.

Recent News

Emerson posted its Q1 FY2015 results earlier this month with first quarter EPS of $0.75, beating the average analyst estimates and also last year’s $0.65 results. Net sales were flat however and total revenue was down 0.3% being impacted by currency rates and the sale of its Connectivity Solutions business unit.

Rationale

I wanted to increase my dividends from the Technology sector, but my current holdings of MSFT contribute nearly 7% of my projected dividends. My other position, INTC, have been put on the bench for not increasing their dividend last year (although this year’s dividend has increased). So it was time to diversify and QCOM look reasonably priced at the moment and should have long term value due to their wireless intellectual property and royalty income. If the Internet of Things ever becomes a reality the company is in a good position to take advantage with its low-power wireless chipsets.

MCD does have issues with a flat revenue and a larger trend towards healthier eating. It’s recently announced plans to introduce new packaging, launch social media campaigns and other initiatives to take attention away from its brand name. I think its dividend remains safe for now and the company is still committed to increasing shareholder value. The CEO shake-up should further revitalize the company.

EMR looks good value to me below $60 and the current price is below my average cost basis, so I took the opportunity to buy some more.

February Stock Purchase

So my purchase this week was

1.4095 shares of QCOM @ $70.947 ($100)
1.0509 shares of MCD @ $95.156 ($100)
1.7169 shares of EMR @ $58.244 ($100)

With a average yield of 3.1%, this purchase adds $9 to my projected annual dividend income.

 

Quote of the day

Success is not final, failure is not fatal: it is the courage to continue that counts.

0 thoughts on “February Stock Purchase #4”

  1. Probably the most thorough write-up I’ve ever seen for $300 worth of purchases! 🙂

    Either way, I own two of the three companies (MCD and EMR) and thought about the picking up QCOM after it dropped when the Chinese lawsuits began. The challenge with QCOM is while they are the clear mobile chip leader, it doesn’t take much for a manufacturer to switch to different chips, as Samsung has shown they aren’t afraid to do. Still a company on the watchlist, just not something I’m jumping into just yet.

    1. Hi W2R,

      Ha, yes that’s probably true but I enjoy reading about companies so it’s all good!

      Most of QCOM’s revenue is from licensing deals rather than processor sales – every phone manufacturer using 3G technology must pay them royalties for using Qualcomm’s patents. While they don’t have the same level of IP in 4G LTE devices, since the 4G standard is backward compatible they will still obtain a fair amount of royalty payments going forward.

      Best wishes,
      -DL

    1. Hi DivGuy,

      Thanks. I agree about MCD being controversial, it’s certainly facing some headwinds. I guess the first thing for a company to do is admit they have a problem then work out a plan. MCD are doing both so I’m confident in the long term.

      Best wishes,
      -DL

    1. Hi DFG,
      QCOM certainly has good cash flow based on its licenses and it shows why IP / patent ownership is so critical now as they get paid every time a cellular device is manufactured. Longer term cash flow isn’t likely to be as high due to the 4G LTE rollout, but I’m sure they’re heavily invested in research and patents for 5G technology as demand for cellular devices and data throughput will only ever increase each year.

      Best wishes,
      -DL

  2. Some great pick ups for the week. MCD has been on a tear the last week too. I like the EMR buy as I picked some up not too long ago. This week I added some TD and RY increasing my exposure to the large Canadian banks. Thanks for sharing. Look forward to your next update.

    1. Hi DivHut,

      Thanks. EMR’s current price is still below my average price so I may pick some more up later this month.

      I do like the Canadian banks you bought – I’m interested in adding some this month so I’ll be using your research as a starting point 🙂

      Best wishes,
      -DL

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