If you practice asset allocation and dollar cost averaging, as I do, having cash set aside to purchase stocks with no clear buy from an allocation standpoint certainly presents a quandary. When I am faced with this situation, I evaluate what is most important to me and continue to look for that.
In evaluating a dividend stock there are some items that I will not compromise on, such as:
- NPV MMA Differential: It must be positive and greater than $500.
- Free Cash Flow Payout + Debt To Total Capital < 100%: Cash is the life blood of dividend increases. If a company, is paying out most of its cash as dividends and/or is carrying high levels of debt, a dividend cut is very likely.
- Dividend Yield: Too high or too low of a dividend is risky. Too high and the company has a hard time maintaining it; too low and the company will have a hard time growing it at high enough rate to make the numbers work.
It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price. -- Warren BuffettWith that in mind I currently categorize stocks that are potential purchases into two tiers:
Tier I: Four and five Star stocks that are trading below my calculated fair value with a yield above my preset minimum. These are the stocks I categorize as "buy" stocks.
Tier II: Four Star stocks that are trading less than 5% above my calculated fair value with a yield above my preset minimum. These are my "wonderful stocks at a fair price."
Sure I would like to buy them below fair value, but that is not always possible. If your holding period is forever, will an extra 5% make a lot of difference in 20 years? Consider these stocks I currently categorize as Tier II stocks:
Genuine Parts Co. (GPC) - Analysis
Genuine Parts Co is a leading wholesale distributor of automotive replacement parts, industrial parts and supplies, and office products.
- Calculated Fair Value: $34.27
- Recent Price: $35.59
Emerson Electric Co. (EMR) - Analysis
Emerson Electric Co. primarily makes backup power equipment for telecom and Internet providers and users, climate control components, and electric motors.
- Calculated Fair Value: $38.39
- Recent Price: $39.38
Procter & Gamble Co. (PG) - Analysis
The Procter & Gamble Company (P&G) is focused on providing branded consumer goods products. The Company markets its products in more than 180 countries.
- Calculated Fair Value: $55.27
- Recent Price: $55.64
It is important to remember that just a few short months ago everyone was looking for a bottom. There will be other opportunities to buy great companies at a large discount.
Full Disclosure: Long GPC, EMR, PG. See a list of all my income holdings here.
(Photo: Steve Woods)
Tags: [EMR] [GPC] [PG]