Another Puff Of Philip Morris

PM Logo

PMI Logo

As the market continues its emerging market driven rout, a lot of great blue chip companies are seeing significant drops in price.  This is resulting in more of my limit orders being triggered.

When I checked the markets today Philip Morris was trading below 79 dollars, well below my $80.01 limit price.  My order was fulfilled at exactly $80 per share , resulting in a purchase of 32 additional PM shares at a cost basis of $2560.  This latest addition to my holding has a beginning dividend yield of 4.7%.

Philip Morris is now my largest individual equity position – ignoring my 401(k) index funds, which I don’t discuss on this blog.  I have a total of 92 shares with a current valuation of over $7,300.  This will result in an annual dividend payout of $345 into my Traditional IRA account.  Dividend Growth Investor has a great article on some of the merits of PM.

I still do have some uncommitted cash in that account, so could potentially buy more if the price continues to drop.  History shows that price drops in tobacco stops are just a chance to buy cheap and make even bigger returns in the future, and I am confident that this approach will hold true – however, I am not certain!  Given that I will try (and maybe even succeed) to resist the cravings to build this position further for now. Although, only 8 more shares would round my position to an even 100…

Hopefully if the markets continue to tank some of the other securities I’m pursuing will come into buying.  I have an order to add more KO at a limit of $36.77, compared to the closing price today of $37.90.  It does not seem inconceivable that this could trigger in the next couple of days if Mr Market continues with his present sour mood. I also hope to add some more Exxon-Mobil or Nestle if their prices dip down far enough.

 

More Coke? Yes Please

KO Logo

KO Logo

After much contemplation I decided today to increase my holding of Coke.  I’ve read a lot of articles and analyst research and have convinced myself that it is one of the few bluechip companies that are trading at a fair price.

Barring a significant rise in price in the near term, I anticipate making several such KO purchases when my supply of capital allow.  I am slowly converging on a list of core equities that I would like to build a large position in – KO, PM, XOM and NSRGY.  In the event of a significant market correction I will be scrambling to buy as much of these as I can!

One major factor for me in focusing in on Coca-Cola was a recent WealthTrack interview with Don Yacktman, who is very bullish on KO.  His funds have performed exceptionally well over the last 10 years, so his thoughts held a lot of weight with me.

With dividend reinvestment in place I’m hoping I will see a long term return in the neighborhood of 10 to 11 percent annually.  7% to 8% through earnings growth, plus the 3% from the reinvested dividend.  With Cokes ability to sell a few cents of syrup for a dollar or so a serving, and the strength of their brand around the world, I consider their moat and their profitability to be a relatively safe bet.

My original position from earlier in 2013 was 64 shares. Since then dividend reinvestment has boosted my hold to 65+ shares.  Taking advantage of todays price dip I purchased another 64 shares for $2510.08 at $39.24 a piece.

The Coca Cola holdings in my portfolio now total 129.112 shares with a new cost basis of $5082.54.  The yield is floating somewhere between 2.8% and 2.9%, so my annual KO dividend has now increased to roughly $145.

The Danger of Fear and Panic During a Stock Market Crash

One story I hear again and again about investing in equities, is how easy it is to lose a lot of money. While this is true to a certain extent, there are ways to mitigate these risks.

In the late 1990’s many investors got caught up in highly speculative tech stocks, when high prices of many issues were unsupported by their profit levels – or in many cases unsupported by any profits at all. With the benefit of hindsight, it is obvious that this bubble had to eventually burst.  Engaging in this kind of speculative investing in hopes of rapid short term gains is somewhat of a gamble, and a very easy way to squander a lot of capital.

Investing in the latest ‘sure thing’ may pay for a while, but eventually you are going to get burned.  For those willing to settle for slower but surer returns, purchasing positions in solid companies with a long track record – and preferably a wide moat protecting their business – at a fair or discounted value is a lot more likely to provide satisfactory results.

Of course, even prudent investors can find the value of their holdings go down considerably at times. During the financial crisis the S&P 500 dropped from a high of over 1500+ in late 2008, down to less than 700+ in 2009. While some companies – especially those financial firms dependent on leverage and mortgage based securities – suffered dramatic falls in share price for good reason, other non-financial firms also fell drastically.

Stalwarts such as Coca Cola – little impacted by troubles in the financial sector – traded as much as 25% lower in the depths of the financial crisis bear market than it did beforehand.  Did the intrinsic value of KO really decrease that much?  I don’t think so.  Earnings continued to grow, dividend were still paid out – and continued to increase annually.

During this time many 401(k) investors – seeing their balances decline by so much – sold all of the equity positions in their retirement accounts.  Now that the markets have fully recovered and now exceeded their former 2008 highs, these people have missed the opportunity for huge gains and will suffer in retirement accordingly.

For investors who have purchased shares in a quality blue chip company – KO is only one example, others are JNJ, PG, NSRGY, MCD – at a reasonable price, a stock market crash is not a time to panic and sell.  These firms are – barring catastrophe – not going away.  They sell products that people will continue to buy in good times and bad.

If the economy is down for some reason – recession, war, famine – the market as a whole might punish these firms out of fear they will not perform as well in the near team.  However, looking out into the future we can see from history these basic, somewhat boring firms, will continue to prosper and thrive when times improve.  In fact, with proper management, the down times can provide a quality firm the change to take market share from less sound competitors.

Rather than panicking and selling when your investment in Johnson and Johnson drops 20% due to some temporary bad news, stop and consider what is happening.  Is there some specific event that will truly impair the long term prospects of this particular company?  If not, take advantage of those panic driven sellers pushing down the price and increase your holding.

Don’t let fear and panic mess with your mind in the next stock market crash.  Hold the positions you have in quality companies and look for bargains to deploy any available cash you have.  If you can pick up ‘best of the best’ firms at a P/E of 15 of less – particularly during temporary periods of depressed earnings – then you have excellent odds of great returns when the psychology of the markets turns bullish once more.

Shell Games – RDSA Swapped for RDSB in IRA

RDS Logo

Shell Logo

I have spent some time thinking about how best to handle the Shell dividend issue I recently experienced.  As discussed earlier my RDSA dividends are subject to Foreign Dividend Tax, which is potentially a bit of a hassle for me to deal with.  Rather than cope with this I have learned that due to their setup RDSB are not subject to dividend withholding.

The RDS.A shares are not a good choice for an IRA account, as the foreign taxes cannot be reclaimed from the IRS.  The RDS.B shares, however, without this tax to deal with are a great choice for an IRA investment. See this article for a great discussion on the background of the two types of Shell shares and the benefits of investing in each using different vehicles.

Apart from the foreign tax issues, another item of import is that Shell pays a very generous dividend, currently yielding over 5 percent.  Given the choice of a Taxable or an IRA account for my various holdings, it seems logical – all other things being equal – to locate the higher yielding holdings in a sheltered account.  I’d rather pay tax on the dividend from a stock yielding 3% than one yielding 5%.

Based on both the foreign tax and dividend income tax considerations, I have decided to do a straight swap of my RDSA in my taxable brokerage account for RDSB in my Traditional IRA.  Today I sold my 38 shares of RDSA at $67.51 (2,565.34) and purchased 38 shares of RDSB at $70.81 ($2,689.07) – the two issues do not sell at identical prices.

The sale means I have a gain of roughly $1.50 from my initial purchase back in May.  This is probably going to prove taxable as short term capital gains, but I think any tax hit will be tolerable:)

Now this sale is completed I have a nice chunk of cash sitting uncommitted in my regular taxable brokerage account.  I have an urge to purchase some more Nestle, so I have placed a GTC limit order for another 36 shares of NSRGY at $70. It is hovering around $72 per share right now, but hopefully I’ll get lucky and have the opportunity to purchase on a future dip.

 

Purchase of NSRGY – Nestle

Nestle Logo

Nestle Logo

After resolving my block for trading Pink Sheet stocks – my Merrill Edge Safepass arrived in the mail – I have finally moved forward with my Nestle purchase.  The addition of the NSRGY ADR to my portfolio is a goal I’ve long targeted.

The bad news for me is that due to the delay caused by waiting on the security mechanism to arrive, the price of the security increased by roughly $5 per share.  I had set my limit order to $68.00, and sat and waited for the purchase to trigger. While I would have preferred a sub $65 price – where it was trading a while back – I still feel it is attractive at sixty eight.

Nestle is a Swiss based firm, largely focused on the food industry, that has in the neighborhoods of 30 billion dollar brands.  It is truly a huge company, and with the breadth and depth of its product offerings it will not be going away anytime soon.  Amongst its chief competitors are General Mills, Kraft, and Kelloggs.  The firm also has a large beverage division – particularly in the bottled water arena – so also competes to a certain extent with Coca Cola and Pepsico. As I have already purchased KO I now have multiple positions in the beverage industry.

While not a hugely popular holding for individual investors in the US, many people hold them in their 401k accounts due to its presence in a large number of major index funds.  The main listing for the company is on the SIX Swiss Exchange, and one side effect of this is that many of the US based financial statistics aggregating sites have bad information for the firm.  Sites like Yahoo finance and Google finance should not be relied upon for dividend data for these international firms, it is best to go direct to the source – i.e. the firms’ corporate website.

Nestle, being a non-US forms, has some unique characteristics that makes it different to my other holdings.  For one, it only pays a dividend once a year, rather than every quarter.  Also, the dividend is paid in Swiss Francs (CHF) which is of course converted into USD for the ADR.

This means the size of the dividend – and of course the price of the underlying security- will vary over the years depending on the underlying CHF-USD exchange rates.  This does expose me to some foreign exchange risk, but since Nestle sells products worldwide I am not concerned about this.  I had a lot of trouble finding accurate historical information on the Nestle Dividend, this is probably the best reference (straight from the source) as it eliminates confusion caused by taxes and currency conversions.

With this firm I am exposed to every currency – some of which will be strong and some weak in any given year.  The major concern I would have is if I were forced to liquidate my position at a particularly unfavorable time – when the Dollar is weak against the Franc.  I plan on holding this stock for life however.

Purchase of 37 shares of NSRGY at $67.98, for a cost basis of 2,515.26. Dividend yield at time of purchase 2.71%. Dividend Reinvestment enabled. Initial dividend income $67.17 annually.  Note – this yield reflects 15% withholding.  My research indicates I should get credit for this at tax time, if this proves to be the case I will come back and adjust the yield upwards accordingly.

 

 

 

 

Completion of KO Position

KO Logo

KO Logo

After failing to purchase NSRGY earlier today, I instead used a portion of my funds to complete my position in Coca Cola. I needed to purchase a little over a thousand dollars’ worth to achieve my desired cost basis of $2500.

While KO was a little cheaper earlier in the week, I am content with my price of $38.62 for 37 additional shares.  This gave me a very slight ‘averaging down’ in the price per share of my whole position – bringing it down to $39.52. Overall I believe this was a reasonable price to buy, but not a huge discount to fair value. I am confident that their business will continue to produce solid returns, and my position has a solid chance of being very lucrative in the long term.

My earlier Coke trades are documented first here, and second here.

With this soda company purchase complete, I will put my thoughts of buying to buy PEP (Pepsi) or DPS (Dr Pepper) on the back burner.  While they appear reasonably valued, I would like to diversify my portfolio into some other sectors with my next few purchases.

Overall position is 64 shares of KO at $39.52, for a cost basis of 2529.28.  Overall dividend yield at time of completion of position is 2.83%. Dividend Reinvestment enabled. Initial dividend income $71.68 annually.

UPDATE – added to KO position!

Trading Requirement – Merrill Edge SafePass®

I finally decided to purchase a chunk of Nestlé S.A. ADR today (NSRGY), I signed into my brokerage to place the order and ran into a little bit of a roadblock.  To purchase Nestle in my brokerage account there are some additional security requirements.

Due to Nestle being a Pink Sheet ADR, my ML self-directed account prompted me to enroll in their SafePass program – the SafePass® card is required in order to trade Over-The-Counter and Pink Sheet securities.  This card is a physical card that produces a code authorizing a trade.

Merrill apparently considers Nestle to be a high risk security.  I do understand the thinking, as since NSRGY is not officially US listed they could in theory have all sorts of funny stuff going on in their accounting.  I am not at all worried however, as it doesn’t get much more blue chip than Nestlé!

I went ahead and enrolled for a SafePass®, now I have to wait for it to arrive before I can authorize the purchase of NSRGY. Hopefully the price will not go up in the interim!

UPDATE: The Safepass device arrived from Merrill roughly a week after ordering.  It is a small credit card sized/shaped gadget that has little touch sensitive panel you hold down to generate a 6 digit number in a small display. The envelope included instructions for activating the device – which walks you to the appropriate screen on your Merrill Edge account and has you generate and enter two random numbers using the card.

I have placed my Safepass with my sock drawered credit cards – I used it once to place my NSRGY limit order – as I won’t need to use it often but want to be sure I can find it when needed!

 

Moving My McDonalds Holdings to Make Space for Nestle

I have been doing some thinking about how best to split my portfolio amongst my Taxable brokerage account, my Traditional IRA (an old 401k rollover) and my Roth IRA account.

I have a surplus of uncommitted funds in my Traditional IRA, and a shortage of free cash in my Taxable account. This is proving a bit troublesome as some of the companies I have an interest in – namely RDSA (Shell) and NSRGY (Nestle) are best purchased in a non tax advantaged account.

Word on the interwebs is that the Nestle dividend is subject to partial withholding, but that those moneys can be recovered at tax time. To do this however, the ADR must be held in a taxable account. Is this accurate? I’m not sure – but I’m going to assume so for now,

To this end I have decided to liquidate my partial position in McDonalds from my regular brokerage account, to free up this cash for a possible Nestle purchase. At the same time I will use some of the uncommitted cash in my tIRA to establish a full MCD position in that account, taking advantage of the dip in price of Mcdonalds in the last week or two.

The net result of this change will be:

  • MCD moves from partial to full weighting in my portfolio.
  • Roughly $1000 will be freed up in my brokerage account for a possible future purchase of NESTLE – or another company that similarly benefits from placement in that account.
  • I no longer have to scrimp and save my ‘new’ investable capital to finish building out my MCD position.

I may end up doing something similar with my KO holdings one day, but for now I will leave them as is.

I have placed the orders for these two MCD trades to execute tomorrow. They will be fee free thanks to my brokerage firm – well, if I ignore the 2 cent sales fee from the SEC.  I will post a McDonalds positions update to reflect this once the trades have gone through.

For portfolio tracking purposes I will adjust my cost basis in MCD to whatever value Merrill Lynch shows me. This won’t reflect the fact I lost a bit of money since my initial purchase, but I can live with that slight discrepancy in the name of keeping things simple.

Purchase of CLX – Bleach and Bags from Clorox

CLX Logo

CLX Logo

I’ve had a goal of purchasing one of the major consumer staple companies since first starting to build this portfolio a few months back.  Unfortunately, for the time I’ve been monitoring these companies most of them are very generously valued by the market – which makes me doubt the wisdom of buying in at these prices.  I purchased a full position in Clorox (CLX) today.

CLX (Clorox), PG (Proctor & Gamble) and NSRGY (Nestle) are all on my watch list.  While I consider NSRGY to currently offer the best value for money, I wish to purchase it for my taxable brokerage account.  Given the dearth of free cash in that account – and my ongoing attempts to complete my KO and MCD positions – Nestle is currently not on the table for me.

Proctor and Gamble seems to be experiencing a period of transition and uncertainty; switching back and forth between Lafley, then McDonald, and now Lafley again as CEO.  I have high hopes they can improve execution going forwards, but would like to see a discount in the share price while they sort things out. Failing that it is not on my immediate purchase list.

I recently placed a limit order for CLX at $85.12, and this price triggered with todays’ broad based drop in the markets.  Interestingly my trade confirmation says it executed at $85.04, but that I paid $85.27.  My trades are commission free, so I am not entirely sure why the discrepancy – this was my first triggered limit order, so I imagine I will learn about the intricacies of pricing for these as I gain more experience. UPDATE – following morning I received my official confirmation, and I did pay $85.04, not sure what the $85.27 amount was referring to.

For now some more on Clorox and why I find it appealing. Firstly, it is the only firm in this corner of the Consumer Staples sector that Morningstar is currently rating as a buy. I found their research arguments solid and could see nothing obvious to disagree with.

I do know when I go to the store and see the price of Clorox Bleach now I am amazed at how much prices have gone up. I used to buy a lot of bleach for my pool back before I had it converted to saltwater, and it used to be a lot cheaper.  The $4+ bottles of bleach at my local Kroger are mind bogglingly expensive to my eye, but presumably they are still selling them successfully!

Dividend confidence is important to me, and I have a very high degree of confidence that consumers will continue to buy Glad trash bags and Clorox bland breach no matter what the state of the economy.  I really don’t see anyway CLX can slide into bankruptcy or meet any other similarly disastrous state.

The dividend earnings payout ratio for Clorox is a little higher than I’d like at 66%.  Due to this I anticipate relatively small dividend growth in the next few years. I’ll be happy if the company achieves a DGR of around 7% per year over the next decade.

I do not feel I got a great purchase price on this investment, but it was at least not grossly overvalued.  I really wanted exposure to one of these type firms, and right now they only way to get it was to pay a little more than I really wanted too.

I should now be able to put off any future purchases off this type – PG, KMB, JNJ, NSRGY – until a time that the valuations are more attractive.

Purchase of 30 shares of CLX at $85.04, for a cost basis of 2,551.20. Dividend yield at time of purchase 3.33%. Dividend Reinvestment enabled. Initial dividend income $85.20 annually.