First April Purchase

Last Tuesday I made my first Sharebuilder automatic purchase in April and I added to existing positions in the Industrials sector. I’ve been busy on a new project which I’ll talk about later although there are some big clues already on this site if you’re astute.

Around 9% of my total annual dividend income comes from the Industrial sector at the moment; I want that value to be nearer 10% per my dividend portfolio sector allocation so I’m adding to companies I hold in the Industrial sector. No More Waffles discussed the portfolio vs. dividend diversification topic recently too, so check his post.

The Industrial sector

The Industrial sector consists of companies involved in the production of products for building and manufacturing. The sector contains companies involved in the railroad, aerospace / defense, machinery, construction, tools and transportation among others. The sector typically follows the performance of the S&P index. The industrial sector YTD performance as of April 2015 is quite average and lies in the middle of all 10 sectors with 8.38%.

My industrial sector stocks

I currently own 6 companies in the Industrial sector: UPS, ADP, UNP, RTN, EMR and LMT.

United Parcel Service (UPS)

United Parcel Service (UPS) is the world’s largest freight transportation company at $87B. It operates in three segments – US Domestic Package (the largest at 62% by revenue), International Package and Supply Chain & Freight. 75% of UPS’ revenue is from the US.

In addition to effective marketing, UPS has increased its dividend for the last 6 years (they were frozen in 2009) and it is currently $0.73 for a yield of 2.8%. It has been consistent in dividend increases; increasing them in February each year. Its current TTM payout ratio of 89% is higher than typical for the last 4 years although low earnings in 2012 forced the ratio up to 273%. The last 5 years’ annualized dividend growth from 2009 to 2014 is 8.3%.

Its P/E of 29.4 is considerably higher than the S&P 500 average of 19.1, although lower than last year’s 33.9. Over the last ten years, the P/E value has generally been just a little higher than the S&P average; exceptions being 2007 and 2012 where low earnings caused a large spike in P/E. Its projected 5-year EPS growth is 9.3%.

Automatic Data Products (ADP)

Automatic Data Products (ADP) manages payroll, tax filing and HR outsourcing for companies. My current paycheck is processed by them, and it was the same at my previous employer. They’re a $40B company by market weight.

ADP has increased their dividend each year for the last 40 years and routinely every December at least as far back as 2004. The dividend is currently $0.49 giving a yield of 2.3%. Its TTM Payout Ratio is currently 65%, exceeding the last 4 years’ more typical range of 56-60%. The dividend growth over the last 5 years is an annualized 7.6% although the dividend may drop in the future now that the company is smaller.

ADP has a higher valuation than the S&P average with 28.9 vs. 19.1. Its valuation has been significantly higher than the S&P average every year since 2004 except for 2009 and this year looks to be no exception. Its projected EPS growth over the next 5 years is 10%.

Union Pacific Corp (UNP)

Union Pacific Corp (UNP) is the world’s largest railroad operator by its $94B market cap. Railways generally have a large ‘moat’ since its hard for a new company to start building railroads. They’re very efficient for cheaply moving large amounts of freight around – UNP move Agricultural, Automotive, Chemicals, Coal, Industrial products and Intermodal container traffic which includes international cargo from the West Coast.

UNP has increased its dividend every year for the last 9 years, although it is not consistent on scheduling the increases and they can come in any quarter. Its dividend of $0.55 provides a current yield of 2.0%. Payout Ratio is low and has hovered around or below the 32% mark for the last 10 years – it is currently 38%. Annualized Dividend growth over the last 5 years picked up steam (no pun intended) and was 27.5%.

UNP’s P/E is slightly lower than the S&P average with 18.6 compared to 19.1. Over the last ten years, UNP’s P/E tends to be higher than the S&P except for 2013, 2009 and 2006. Its projected EPS growth over the next 5 years is 13.7%.

Raytheon (RTN)

Raytheon (RTN) is a military contractor worth $33B, although it has been branching out into space related opportunities too. It consists of 6 segments – Integrated Defense Systems, Intelligence & Information Systems, Missile Systems, Network Centric Systems, Space and Airborne Systems and Technical Services. It’s involved in a range of subjects from missile defense to cyber-security that are often in the news headlines.

RTN has increased its dividend every year for the last 11 years, currently giving $0.61 a share for a yield of 2.2%. It’s likewise a very stable and consistent dividend growth stock, with dividend increases arriving in April each year. Its low current TTM Payout Ratio of 37% is consistent with the values over the last 4 years in a range of 31-37%. Annualized dividend growth over the last 5 years is 14%.

With a P/E of 15.1, it beats the S&P’s average of 19.1. Historically over the last 10 years, its P/E has been lower than the S&P average except for 2004 & 2006. This year, its P/E is lower than the S&P as it has been for the last 5 years. Its projected EPS growth over the next 5 years is 8.2%, a drop from the estimates last year which were in the order of 13%.

Emerson Electric (EMR)

I used to work at Emerson Electric (EMR) before moving to Detroit last year. It’s a $40B company with 5 segments – Process Management, Industrial Automation, Climate Technologies, Commercial and Residential Solutions and Network Power.

EMR is justifiably proud of its dividend history, having increased its dividend for the last 57 years. Its shares currently give a yield of 3.4% from a dividend of $0.47 per share. It has a consistent increase pattern, raising dividends each November. The payout ratio of 60% is in line with the 50-60% range held over the last few years. The dividend growth over the last 5 years has been 5.8%.

Its P/E of 17.7 is lower than the S&P average of 19.1 and this is the first time in a long while when this has occurred. The P/E has always been higher than the S&P’s average for each year since 2004. Its projected EPS growth over the next 5 years is 7.8%

Lockheed Martin (LMT)

The third largest US defense contractor behind Boeing and United Technologies, Lockheed Martin (LMT) has a market capitalization of $62B. LMT operates in 5 segments: Aeronautics (33% of FY14 operating sales), Information Systems & Global Solutions (17%), Missiles and Fire Control (17%), Mission Systems and Training (16%) and Space Systems (18%).

LMT has increased its dividend for the last 12 years and it currently pays $1.5 a share per quarter for a yield of 3.0%. It has been consistent in dividend increases; increasing them in February each year. Its current TTM payout ratio of 53% is on the high end of its normal range over the last 5 years which has varied from 36 to 52%. The last 5 years’ annualized dividend growth from 2009 to 2014 is 18.6%.

Its P/E of 17.7 is lower than the S&P 500 average of 18.4. Over the last ten years, the P/E value has always been lower than the S&P average. Its projected 5-year EPS growth is 8.9%.

Choosing new stocks to consider

My sector holding is full (with 6 stocks) so I only looked at stocks that I currently held in my portfolio.

What to buy?

UNP’s dividend yield is too low at 2%, I look for at least 2.25% as a minimum; it’d would be more attractive at a lower price.

All other stocks are fairly similar. RTN is penalized by its lower yield which barely meets my criteria and UPS is penalized by its high payout-ratio. This leaves ADP, LMT and EMR who I’ve been buying quite a bit recently because of its lower price.

I’m starting to reach the income limit with EMR who are currently at 4.4% of my income, but on the other hand I still think it’s a good value for a 3.4% yield.
My holding in LMT is tiny as it’s from a partial sharebuilder purchase and I’d like to increase it; their 3% yield is more attractive than ADP’s 2.3% and their dividend payment is likely to grow faster.

Here’s the outcome visually.

#Yr Yield DivGr5 P/O% EstGr5 Projected Score Status
UPS 6 3.03 8.3 89 9.3 20 36 Buy
ADP 40 2.28 7.6 65 10 15 40 Buy
UNP 9 2.01 27.5 38 13.7 14 27 Buy
RTN 11 2.25 14.3 37 8.2 14 36 Buy
LMT 12 3.02 18.6 53 8.8 20 39 Buy
EMR 58 3.38 5.8 60 7.8 22 49 Buy

My purchases this week

So my Sharebuilder purchases on Tuesday earlier this week were:

  • 0.497 shares of LMT @ $201.207 ($100)
  • 3.5527 shares of EMR @ $56.295 ($200)

This purchase should increase my projected yearly dividend income by $9.8.

 

Quote of the day

In school, you’re taught a lesson and then given a test. In life, you’re given a test that teaches you a lesson.

0 thoughts on “First April Purchase”

  1. Two great purchases I think! I would also love to receive more from industrial companies. BAE Systems is my main source in this regard, was eyeing up Cobham, although I’m unsure about them. Of only the US$ weren’t so high against the £!

    Cheers

    1. Hi M,

      Both BA. and COB have great dividend histories, with COB having yearly growth for more than twice as long as BA. COB has just changed its dividend policy in their F14 annual report however; I take that to mean smaller increases going forward as they rebuild their dividend cover and assimilate their Aeroflex acquisition.

      Cheers!
      -DL

      1. Yes, that is why I have not bought them yet. I’m still looking to buy higher yielding companies at the moment, before moving to some more average ones, once my portfolio has gotten off the ground a bit more. Since I bought BAE last year, the price has gone up so much, I am loathe to buy it… although it’s actually still really good value.

        Cheers

  2. I really want to bump up my exposure to healthcare but it’s been hard to find value there.

    Regarding the industrials here I really want to add UNP and UPS to my portfolio in the future but both seem a bit rich right now. ADP will probably find it’s way into my portfolio during the next recession because that seems to be the only time it gives decent value. EMR looks like the best current value and that 3.4% yield is nice. They only account for 2.3% of my dividend income so I could probably afford to increase my weight there.

    Lots of solid companies here and I hope to add more to my portfolio once I get capital flowing again. Thanks for the update.

    1. Hi JC,

      I’ll definitely be interested in any healthcare stocks that you end up picking – mine are split between JNJ and PFE and I’d like to add another company or two eventually there.

      EMR’s been under a lot of pressure recently so I’ve been trying to add to it while the price is under my average cost. Their average 5-year yield is 2.9%, so a 3.4% current yield is hard to resist.

      Best wishes for you and your family, especially Luke!
      -DL

  3. Nice purchases, DL. Really liking the industrial sector now – and suprisingly some decent valuations considering that most stocks in the US are expensive.

    Best wishes
    R2R

    1. Hi R2R,

      Yes I’m happy with EMR in particular; even if the price is down because of lower forecasts, the yield is good and they’ve been through worse economic conditions before during their dividend history.

      Best wishes,
      -DL

    1. Hi Divorcedff,

      UNP is a company I like, however there are other good dividend paying companies with higher yield; so as long as the dividend looks to be sustainable I’m usually going to favor the higher yield (within reason anyway 6% is my upper limit).

      I’ll be keeping them in my watchlist as I think the railroad industry still has a long future as it’s the cheapest way of shipping bulk goods around.

      Thanks for stopping by!

      Best wishes,
      -DL

  4. Nice purchase. Really like the look of Lockheed Martin. They used to have a small office in my teenage home town. I never quite worked out why it was there. It was replaced eventually.

    Rather like M I have little in this particular area (but I don’t even have BAE Systems). I think you’re right about Cobham. Slower growth going forward. We will see though!

    1. Hi DD,

      Time will certainly tell! That’s funny about the remote office in your hometown…sometimes I think companies get so big they forget about smaller departments or locations or think it’s not worth the cost of closing. Certainly the efficiency of a large company is substantially less than that of a small one.

      Best wishes,
      -DL

  5. Nice purchases DL.
    EMR has been on my radar for a while now and lot of dividend investors are getting it lately. I am debating between stocks like EMR, XOM or WFC for my next new position. Need to make a purchase soon as I haven’t made any big purchase in April yet.

    1. Hi DGJ,

      I’d probably lean towards XOM. XOM’s short-term growth will likely be the lowest of all three, but then I expect the savings / consolidation they go through while oil prices are low will pay them back when prices increase.

      Either way, I’ll be interested to read what you finally picked and why.

      I do have to look at the financial sector again though as it’s falling behind. I don’t own WFC as I hold JPM and that’s enough banking for me.

      Best wishes,
      -DL

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