Monday, March 10, 2014

New Purchase

A check will be sent to TD Ameritrade tomorrow and should show up in the account this coming Friday afternoon. There will be enough cash in the portfolio, at that time, to purchase another position in the Roth Ira. ... That new position will be T.

The portfolio currently has a position in VZ and I want to add another high quality telecom.

The first thing I look at in the stock selection process is the company's financial strength. If a company doesn't pass this test, I go no further in my research.

I look for companies that rate a 1 or 2 for safety by Value Line, or a BBB+ rating or higher with Morningstar, or a B+ rating or higher with S&P Capital IQ.

Value Line shows a safety rating of 1, a Financial Strength rating of A++ and Morningstar shows a Credit Rating of A-. This is the type of company I prefer to own over the long term.

In looking at the company earnings, S&P Capital IQ shows operating earnings at 5.0%. I place telecom companies under the utility umbrella and a 5.0% earnings growth is a number I look for. So, T qualifies there as well.

Looking forward regarding total return results, S&P Capital IQ thinks that over the next 5 years T will show total annualized returns of 12.0%. Value Line thinks 12.0% is the low number and thinks T now has the potential to show a total annualized return of 14.0% on the high side.

When looking at valuations, T has a PE of 10.1 and the historical PE over the last 10 years has been 16.2. That would indicated that T is undervalued based on historical performance. However, Morningstar thinks T is fairly valued at $32.00 and Capital IQ thinks fair value is $29.10.

I am willing to buy "high quality" companies at fair value, and companies don't get higher grades for quality than what Value Line assigns to T.

According to Jefferson Research, a company who rates as one of the top companies for accuracy when assigning buy, sell or hold ratings for T, has a Buy rating at this time.

They list Earnings Quality as Strongest. ... Cash Flow Quality as Strong. ... Operating Efficiency as Strongest. ... Balance Sheet as Weak, but up from Weakest. ... Valuation as Least Risk.

In looking at their Balance Sheet rating, they say T shows the ability to pay its bills and fund future growth. Their cash position has increased from $1,480M to $3,445M and with more cash on hand, T is better able to meet its financial obligations including its dividend. T has increased the amount of current assets relative to current liabilities.

Fidelity has an analysts rating system called StarMine who shows an Equity Summary Score (ESS) for each company. The ESS system rates various investment firms for their accuracy in making buy, sell or hold calls for the following 6 to 12 months after they make their call.

The ESS system then takes the views from the various investment houses and comes up with a score from 1 to 10.

9.1 to 10 = Very Bullish
7.0 to 9.0 = Bullish
3.0 to 6.9 = Neutral
1.1 to 2.9 = Bearish
Below 1.1 = Very Bearish

I have been tracking T for a couple of months and back on 12/23 the rating was 5.5. The rating rose in January and on 1/30 the rating was 6.8. Following the most recent earnings report, the rating has risen to 8.5 ... Bullish.

Value Line has a Timeliness Rating from 1 to 5 with 1 being best. Anything rated 1 or 2 for Timeliness means they expect the company to outperform the other companies they cover over the next 6 to 12 months. They assign T a rating of 2.

So, ESS and VL say now is the time to purchase T. Since T meets most of the metrics required, the only thing left is the yield and dividend growth.

T has raised the dividend for 8 consecutive years. It has a current yield of 5.60% which is well above the minimum requirement. It's 5 year compounded annual growth rate of the dividend is 2.37%.

When I'm looking at utilities, and I place telecom under the utility umbrella, I look for a total dividend return (yield plus 5 year dividend growth) of  8.0%. ... T currently has a rating of 7.97%. It's close enough for me given the high quality of this company.

With this in mind, as soon as the funds hit the account, T is the next purchase!






















13 comments:

  1. thanks, chowder, for such detailed analysis of new purchase. it's very helpful for us who's still in learning curve.
    your son is very lucky to have a loving dad.

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  2. Chowder, doesn't it concern you a little bit that T has basically done nothing for years despite having a de facto duopoly in the wireless telecom space? I've been watching this stock for 3-4 years, and I just can't see a reason to own it when there are other companies actually growing their revenues and dividends at a much more meaningful pace. What happens if/when T-Mobile and Sprint join forces to create a 3rd powerful player in the space?

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    1. I'm looking at T for the amount of income it can produce. T has a reliable dividend. The company is financially sound and the dividend is not in jeopardy. I'm willing to compound that 5.7% yield, plus whatever dividend growth is tossed off. I'd be happy if share price only advanced 3% to 4% per year This is a defensive play that generates decent income. I'll take it.

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    2. So I guess that's a roundabout way of saying that you're not concerned about increased competition in the space and what that might mean in terms of cash flow growth for them? Interesting, thanks

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    3. Actually, I'm not concerned about increased competition. T and VZ will be hard to catch up on with cap spending to expand.

      I think what I like most about T is the low expectations from most people. A lot of negative news is already priced in, and when you have a financially sound company with low expectations, it allows the dividends to be reinvested at very good value. This should work out well over the long term.

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  3. Josh of M* sold KMI and KMP!
    please tell us again you won't do the same, chowder!

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    Replies
    1. No, I have no intention in selling any of the Kinder products.

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  4. T doesn't pass the Chowder rule. Swimming in debt. Capital intensive industry. Slow growth and low, low, low dividend growth.

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    1. I put telecom under the utility umbrella, a different set of criteria.

      I don't mind the slow growth, in fact I welcome it. I'm looking for steady returns, a safe dividend with a reasonably high yield, and a leader in their industry. T passed the utility test, thus it was added to the portfolio.

      Every position isn't going to make the starting team. A team can't succeed without a steady and reliable bench. T is a great bench player.

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  5. Chow--

    I just noticed that T's Valueline Timeliness rank was downgraded to a 3 on 3/28 and VZ's Timeliness rank was raised to a 1 on 6/13--which I found slightly surprising. Do you think T's downgrade has to do with the DTV acquisition or simply the increase in share price? VZ also seems fully valued, so it's recent upgrade in Timeliness was also rather interesting. T's Starmine rating is at an 8.9 now and VZ is a neutral 3.5. How much weight do you put into these two metrics, and does it matter to you if they have conflicting ratings? Which of them would you add money to today?

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    1. Yes, I think the timeliness rating for T has dropped due to the Direct TV merger. It's going to take about a year for that to play out and until there is more certainty to knowing whether the deal goes through or not, price is probably going to be range bound for the next 6 to 12 months.

      I think T and VZ are both worth owning, but I think if I could only buy one today, it would be VZ. If VL is accurate regarding their timeliness ratings, then VZ won't present as much of a value six months from now as opposed to T who still may.

      This decision is only based on whether the timeliness of the purchase is important, which is what I think you were asking.

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  6. thanks chowder--yes, that's what I was asking re. timeliness. In addition, if the top Starmine/ESS ratings say "Sell" but Valueline gives a stock 1 or 2 for Timeliness, does this discrepancy bother you?

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    Replies
    1. The quality of the company, the price to fair value, the dividend, and the dividend growth all have priority to the timing of the purchase. Timing is way down the ladder.

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