Tuesday, January 5, 2016

Watsco WSO first 2016 Money Madam Stock Pick



This after Christmas Sale on stocks provides opportunity.  Volatility benefits the disciplined income investor who always has extra cash on hand because we like to have a couple a years of expenses in cash and can jump on an opportunity.  Disciplined investors reduce the emotional impulses that can lead to poor investment returns.



I continue to emphasize how important it is to secure a growing source of income.  Dividend stocks play a big part of that goal for me.  With that in mind, I am going to begin my 2016 portfolio with Watsco, symbol WSO.

Watsco WSO

Watsco is a very large HVAC company. Much, but not all of its business is in the US.   They also serve markets in Canada, Mexico and the Caribbean.   Note here that WSO should not suffer from Asian and European slow growth problems.

2016 Portfolio Fundamentals

This morning Wednesday 1/6/2016 WSO is trading around $115 which is well below the 52 week high of 133 but up from the low of $103.  WSO just declared their next quarterly dividend of $.85 and will be ex dividend on January 13.   Forward annualized dividend yield is 2.95% at $115.   This yield meets one of my 2016 criteria.  My first post this year defined the criteria I will use for stocks that go into the 2016 model portfolio; the minimum yield is to be 2.75%.

WSO Income Stock

Watsco is an interesting income stock.  WSO paid a regular, and increasing dividend and when in 2012 it appeared tax on dividends would be lower in 2012 than in 2013, WSO paid out a whopping $5.00 per share in addition to its quarterly dividend of $.62 per share in 2012.  They paid several quarters ahead and then resumed regular dividends at $.25.   Since then, dividend growth has been stellar with a recently announced increase to $.85 per share that averages out to 8.9% per year average dividend growth. Clearly WSO meets my primary goal of “retiring with income that grows.”  Dividend growth minimum is 4% per year for 5 years.


WSO Revenue Growth

Revenue growth has exceeded expectations growing over 30% per year over the past four years which settles a third criteria which is a minimum revenue growth of 4% per year for at least three years.  I think you need revenue growth to feel comfortable about dividend growth.


WSO Debt to Equity Ratio

Debt to equity ratio is probably more important than income growth as we always want to be as risk averse as we can while securing a solid source of growing income.  D/E ratio is the measure I use.   WSO sports a low D/E ratio of .32 which is well below the maximum of 1 that is part of my 2016 criteria.

WSO Covered Call Options

WSO has no covered calls as of this writing.   However, WSO has in the past had some very good calls and I am hoping that during 2016 I will be able sell at least one call to add at least 1% additional income from the call premium.

History is on my side.  WSO was a 2011 and 2012 Money Madam Dividend Machine.  I bought at that time.  I held WSO from October 4, 2012 through August 18, 2013.   The table below shows you how I did.   During the time I was long WSO I received a special dividend of $5.00 as well as three quarterly dividends and a whopping $3.32 premium from a covered call.   


If revenues continue to grow, I believe a call opportunity may emerge.  If not, I am stuck with a good income stock with little risk.

I think it is time to reestablish a position in WSO.  The strengths of serious devotion to dividend distributions to the shareholders, vigorous revenue growth and low D/E ratio outweigh, in my mind, the slightly hi PE ratio (price to earnings ratio) of 20.




M* TheMoneyMadam