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As promised in my latest blogpost Passive Income Review 2016 and Preview I will to give you a brief overview on the stock purchases I made this year.
In 2016 I invested the amount of Swiss Francs 16’600 (CHF; trades more or less at parity to the USD) into stocks of following five companies: Coca Cola, Walt Disney, Diageo, HSBC and Bayer.
I target a year over year growth of my dividend income of at least 15 % whereas
- half of that growth is expected to come from organic growth (dividend hikes) plus dividend reinvestments and
- the other half derives from new acquisitions.
According to my projection, the five stock investments I made this year will increase my 2017 dividend income by at least CHF 500. I expect that amount to grow by around 7.5 % each year due to organic growth and dividend reinvestments.
In 2016, Bayer, Diageo (I collected one of two semester dividend payments in 2016) and HSBC (I collected two of the quaterly dividend payments in 2016) already contributed to my income in the amount of CHF 205. In 2017 I will get dividends from Coca Cola’s and Walt Disney’s for the first time.
Now my considereations regarding the stock investments.
In December, 76 shares were acquired at a price of USD 40.3.
I view consumer staples and health-care shares as the backbone of my portfolio. I took some exposure into cyclical sectors and raw materials in the last two years as I saw attractive oportunities. In the long run though I want to give my portfolio a more defensive shape. There are some companies in these sectors I find interesting (e.g. J.M. Smucker) but stock prices are yet not there where I would feel comfortable.
I’ve had an eye on Coca Cola for some years. The stock has been trading in a range between USD 38 and USD 48 since 2012. I saw USD 40 as an interesting entry price and put a corresponding electronic order which was executed in December 2016.
I am well aware that the phenomenal earning per share (EPS) and dividend growth of the last decades are not likely to be replicable, but Coca Cola is still a very solid business with attractive prospects. More than half a century the company increased its dividends year over year. I don’t view a stagnant stock price over some years per se as a bad thing especially not when you reinvest the dividends and benefit from the compound effect.
Coca Cola’s payout ratio stands between 60 and 70 % which is higher than the decades before. It is very obvious that EPS-growth did not not keep up with the dividend increases of the last few years.
But the company has a strong balance sheet which has even improved in the last years. Coca Cola is sitting on over USD 20 Billion in cash. So, plenty of options for acquisitions (like the bottling operations from SABMiller in Africa) and future growth.
In November, 40 Shares were acquired at a price of USD 91.8.
I had an eye on Walt Disney for months and wrote about the company in one of my blogposts in October (Disney is a wonderful company but is the Price fair?). Since then, the price came down quite a bit and I made the purchase slightly above USD 90. Certainly not cheap but I am fine with that price.
In June, 132 shares were acquired at a price of GBP 20.75
Spirits and beer producer Diageo is a consumer staples company I have been looking at for several months. It has a great product portfolio with brands such as Johnnie Walker, Smirnoff, Captain Morgan, Baileys, Guiness Beer etc.
Unsurprisingly, you almost never see that company becoming really cheap. There is a wide economic moat and growth perspectives look very promising to me. I consider my purchase as “acquiring a piece of an attractive business for a fair price”.
In June, 466 shares were acquired at a price of GBP 4.6
A relatively large portion of my portfolio already consists of bank stocks. From the perspective of a long-term investors (I want to hold my investments for decades unless fundamentals significantly deteriorate) I have quite mixed feelings concerning banks. There are
- some few undervalued jewels,
- several fine businesses trading at an attractive price and of course
- many value traps.
I think the banking industry as a whole is one of the very few investment segments where shareholder value has been destroyed over decades.
Fair enough. When I saw the stock price of HSBC being beaten down ahead of the Brexit vote I just couldn’t resist. In my view, HSBC is one of the very few banks to consider as solid businesses to invest in, of course always under the condition that the price is right and that there is a sufficient margin of safety.
When I made the investment in May 2016, the stock price was significantly below book value and price earnings ratio looked attractive to me. HSBC’s debt profile is robust and the bank’s core capital has been significantly strengthened. In August 2016, HSBC announced to start a share buy-back plan in the amount of USD 2.5 Billion (to finish early 2017) and to hold dividends steady.
In January, 30 shares were acquired at a price of EUR 103.
Bayer operates in four segments: pharmaceuticals, crop science, animal health and consumer health with well-known brands such as Aspirin, Alka Selzer, Bepanthen, Elevit, Supradyn, Rennie etc.
Bayer showed good performance in the past with strong eps-growth and nice dividend history.
I had an eye on the company all trough 2015 and was particularily pleased to see the stock price coming down from EUR 140 to around EUR 100 in January 2016 at the time when I entered the position.
In May 2016, Bayer publicly disclosed to make an all-cash offer of USD 62 Billion to acquire the agriculture company Monsanto. The offer was increased to USD 66 Billion when Bayer and Monsanto finally came to an agreement regarding the merger. The closing of the transaction is expected by the end of 2017. Over 85 % of the offered amount has to be financed by a combination of debt and equity. Bayer will carry over USD 40 Bn in debts after the merger and promised to start deleveraging quickly.
There is no doubt, that Bayer has a track record of sucessfully acquiring companies, but this is by far the largest one ever. Bayer knows when there is an attractive investment oportunity, but from a perspective of a shareholder I see some downsides:
- the combined company will be more subjected to cyclical factors, the generation of profits and cash will become more volatile.
- the relatively high debt load will be a drag for the next years to come. Bayer promised to strictly deleverage after the merger which is fine, but there is less room for dividend hikes.
- financing in part with equity will lead to a dilution for shareholders.
I take a long-term view in regard to my investments (ten to twenty years from now) and unless there is a severe recession (such as the last one we saw from 2007 to 2009) the combined compay has the potential to deliver double digit EPS-growth in future and – hopefully – shareholders will be compensated appropriately for their patience.
What do you think about the companies I invested in? Which investments have you made in 2016? Feel free to share your thoughts.
You are responsible for your own investment and financial decisions. This article is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.