Underlying Security Symbol: JPM

 

One never wants to be desperate when investing but I am ever on the search for income and in this case I used JPM to demonstrate my flexibility.

(1) As they say buy when no one else wants to buy.  

JPM hit a 52 week low today.  Their earnings report was not well received.  And, their leader was making lots of excuses including war and Covid.  None of that is over so the street expects more trouble and more excuses to come.  But, revenues did grow.  And often times the street over reacts.  So I acted on the opportunity to buy when no one else wants to.

I filled out a lot at $127 which makes my cost basis on this lot an average of $130.

 

 

 

 

 

 

 

 

 

 

 

(2) Let them take it.

I sold an at the money call.  I don't care if they take it and in fact, I hope they do.  I booked $4.62 for that call.  That gives me a 3.55% yield immediately.  I will receive no capital gain if the call buyer does take my shares.  This proves I am in this trade because I love income; one could say I'm desperate for income.

I don't do this very often, but I like to keep my "options" open.

Good Income Investing,

MM MoneyMadam 

Data from Schwab.com and Marketxls

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Added JPM @ 52 week low and sold a call

Underlying Security Symbol: JPM

 

You're suppose to own banks when inflation is raging.  The reasoning is that interest rates go up during times of inflation and therefore banks can lend out money and get more income from that loan.  Today is an oddity.  Due to Ukraine's invasion by Russia and the risk that imposes, I think there was a flight to the safety of the U.S. backed bond....any U.S. bond.   More buying of the bond makes the cost of the bond increase and the interest rate go down.  That is how JPM got to it's 52 week low.

I added today because I believe in the long run, interest rates will go up and JPM will benefit.  In the meantime, it's nice to make a living in a down market.   Moreover, JPM has nice 3% yield which is another source of income while we wait for things to settle down.

 Today's call:

 

 

 

 

 

 

 

 

 

 

 

 

MM MoneyMadam

Data from Schwab.com and Marketx

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Shouldn't P/E ratios be really low if this is a buying opportunity for ordinary investors?

• Stocks were over valued as measured by P/E ratios
• Markets were heading higher on P/E ratio expansion
• Looking for low P/E stocks in the Dow 30 reveals eight stocks to consider
• Dividend Fundamentals remain of utmost importance

If you follow my blog, you know I have been writing about Dividend stock investing since just after I retired as an investment adviser in 2009.    To say I have been through this before more than once is accurate; to suggest I am immune to the pain is wrong.  However, I know that even with my shortened life expectancy, I am 11 years older than I was in 2009, quality stocks will continue to deliver the income I need to live my lifestyle.

FEAR NOT; BE PREPARED

I always advised my clients to have a debt free house to live in as one goal and to have money in stocks and bonds that are highly likely to continue to pay the income needed to support their lifestyle and in stocks that will increase that income over time.

I also advised my clients to have their rainy day fund always in safe, liquid assets even if it is painful to receive virtually no income from that stash.  For clients who have more cash than they need and for clients who expected to receive cash in the form of a bonus, or tax refund, or gift from Uncle Henry, you have to be willing to add stocks in downturn.

WHICH STOCKS?

Today I am looking at the Dow 30 stocks to find something of value.  Here are my criteria:

• Good balance sheet, I use D/E ratio and interest coverage ratio
• Dividend yield of more than 3% 
• Dividend history during previous market disruption in 2009
• Price correction that mirrors the overall market
• P/E ratio under 15

Looking at each of these criteria I begin with balance sheet.  Companies have been adding debt because debt is cheap.  The old saying goes that you should borrow when you can not when you need to.   What are they doing with added debt.  Apple for example has a ton of cash around so they borrowed at cheap rates and used that additional liquidity to pay investors dividends.    Home Depot borrowed the money to buy back stock and increase the value of the shares held by investors.

Debt matters if the company cannot pay the interest on the loan and cannot pay out our precious dividends.  Therefore, looking at a combination of D/E ratio and interest coverage is a good guide for the ordinary investor.

It used to be that dividend yield needed to beat the 10 year U.S. Treasury but in today's world those metrics are unreliable as Treasury yields are so low, no one can live on them.  A more reliable yield for me is 3%.  If I get 3% on my portfolio, I will not suffer but I also will not be accumulating cash from the difference between my income and my expenses.  Yield is very personal and each investor needs to do their own math to determine the minimum yield they need.

Dividend growth is more significant for the long term investor who does not work for a living.  In 20 years everything will cost about double what it does now.  If you don't believe me, go back twenty years and look at the cost of ground beef, or your car insurance or your home owner's fees.  Even if a stock did not increase the dividend during the 2007-2009 debacle but resumed dividend increases after the crises abated, you are probably okay with that investment

Why buy a stock that has not corrected as much as the market?  Hard to find one of these but I do have an example.   This is a two handed assumption.  On the one hand, if you are buying during a market crisis, you certainly want a bargain.   On the other hand, if you find a stock that has held up well, maybe you have a winner that can weather any storm.  Again, investing is an individual process and only you can decide if a stock meets your personal criteria.

That lead's us to P/E ratio which the ratio of the price of a stock divided by the earnings.  Zacks reports the average long term P/E ratio of the Dow Industrials is about 16.  Ycharts shows a P/E of 22.29 on 12/27/2019.   Other sources show a range of as low as 7 and as high as 30.  In 2009 the Dow's P/E was about 15.  Hence, I picked 15 as a cut off.  

Note that while the DJI (Dow Industrial Average) is just that, you can find average P/E's for each stock you are considering.

I was quite surprised to find stocks that I have liked in the past but found to too expensive to buy or to hold to still have higher P/E's than I like and some with dividend yields below the 3% goal.  Johnson and Johnson carries a P/E/ of 24.23 and a yield of only 2.88%.  Apple carries a P/E of 21.13 and a yield of 1.21%.   Great businesses but I have to stick with my disciplined approach.

Here are the stocks  in the Dow industrial average that today meet the P/E criteria and the dividend yield criteria.  Some have higher D/E ratios than I like but all have positive interest coverage ratios.  Anything interest coverage ratio that is under 1 is too risky.  

Symbol	Price	P/E	D/E	Int.Cov.	Yld	Other Factors
JPM	$88.92	8.72	1.42	2.7	3.00%	Neg Int Rates
CAT	$90.97	9.69	2.58	19.6	3.23%	World Recession
IBM	$104.48	11.15	3.27	8.6	4.83%	No Rev Growth       but new CEO
TRV	$106.33	11.71	0.25	10.1	2.62%	Less than Dow        correction
PFE	$30.78	11.78	0.83	12.2	4.18%	No Rev Growth
VZ	$51.93	12.01	2.17	5.8	4.23%	Leader in 5G
XOM	$38.74	12.46	0.24	25.2	6.78%	Oil Glut
CSCO	$34.31	14.81	0.45	20.4	3.60%
*Price, Int.Cov. Yld from Market XLS P/E from Schwab

Note the one stock that has not corrected as much as the market is TRV.

You should always look for more data on the stocks you are considering.  I noted in the table above some of the externalities that might color my decision to buy.

BE BRAVE, BE DISCIPLINED

M* MoneyMadam
Disclosure:  Long JPM, IBM, CAT, VZ, XOM, CSCO.   I have covered calls working on a portion of my holdings in each name.

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Seven Dividend Stocks for 2016

Mike Holland, veteran money manager and frequent contributor to financial  news shows, was on The Nightly Business Report this last Thursday.   Back in the 1980's, Mr. Holland would discuss investing on Louis Rukeyser's "Wall Street Week in Review." I think he was even one of Lou's elves.

More recently on the Nightly Business Report, Holland listed seven dividend stocks for income investors to consider.  Since one of the early lessons in life is to seek expert advice, I decided to take advantage of this expert's advice and make these seven stocks the focus of my analysis this week.

In this post, I overlay my M* 2016 Dividend screening criteria on these seven stocks to determine if I should include one or more in my portfolio.

My 2016 screening criteria are in the table below.



The seven stocks, in alphabetical order are Chubb (CB), General Electric (GE), Johnson and Johnson (JNJ), JP Morgan (JPM), Three M, (MMM), Microsoft (MSFT), Exxon Mobil, XOM.

Chubb (CB)

Chubb, the smallest cap. stock in the group has solid fundamentals.   See the table below.



CB earned over eight dollars per share and paid out only 30% of that in dividends.  With a D/E ratio of only .14 this is a solid stock.  Unlike the life and health insurers, as a property and casualty insurer, Chubb is less vulnerable to interest rate influences than the life insurers.

My major concern about CB is their low yield.  At 2.34%, CB is below my minimum criteria of 2.75%.  Therefore, you will not see CB in the 2016 portfolio.   However,  covered calls on Friday were encouraging so we will see on Monday if we can make up for the meager yield with covered calls.

Another fundamental that makes me want to own Chubb is the dividend growth of 20.92% per year over the past 5 years.   Dividend growth is greater than revenue growth (rev. growth = 7.43%) but I would settle for a pay raise of 7.43% should the dividend growth reflect revenue growth.

General Electric (GE)

I can understand including GE as a core holding if you look at 100 years of history, but even I do not have a hundred years to wait.   I need to be sure my stocks can pay the dividend and increase it.  To pay and increase dividends, the company has to earn more than it pays out.

If recent revenue growth was compelling, suggesting that earnings also will grow, then I might consider GE, but this is not the case so GE is out of the picture.  See the table below.



Johnson and Johnson (JNJ)

JNJ is the big engine that could!   As you can see in the table below, JNJ has revenue growth, it has dividend growth, it has almost no debt, and almost no excitement.  Covered calls are non existent.  Johnson and Johnson is truly a core holding that I own and I expect every conservative investor owns.



 
You get global diversification without significant currency risk when you own JNJ.  It just seems so boring which is exactly what a conservative income investor needs for some of her portfolio.

You can go broke on boring.  Who can live on 2.95%, so let us look onto to the rest of the list.

J.P. Morgan (JPM)

JPM, a bank stock is of interest.  Technically, the dividend has increased an average of 148% over the past five years.   This would seem incredible until you add in the history.  JPM, like all big banks was a victim of the 2008/2009 disruption of credit markets.  Having cut their dividend to almost nothing, they clawed their way back to deliver a healthy dividend yield of just over 3%.

JPM has paid the price of the global financial crisis on 2008/2009 and that is evident in their balance sheet.  With a D/E (debt to equity) ratio of 1.46, JPM is not a candidate for inclusion in my 2016 portfolio or in my personal portfolio.

The table below tells it all.



3M (MMM)

I used to own 3M.  I cannot remember why I sold it: probably because I wanted more than 3% yield and sold covered calls that were called away.  Today, I am looking at MMM again.

Revenue growth is slower than dividend growth.  This tells me, I may not see the same dividend growth in the future as has occurred over the past five years.  Yet, if dividend growth slows to equal revenue growth, then I would still be happy.  If revenue growth slows as well, there could be trouble.

I look to covered calls to make up the difference and on Friday (2/12/2016) I found a few good calls.  The good balance sheet (D/E .75), relatively good yield (2.88%) and prospects for additional income from covered calls make MMM an excellent inclusion in my 2016 portfolio.



 Microsoft (MSFT)

I like MSFT even more than I like MMM.  Of the seven stocks reviewed here, MSFT is the only stock with revenue growth close to dividend growth.  Moreover, MSFT has a solid balance sheet and covered call opportunity.  MSFT will be added to the 2016 portfolio this week.

See the table below and you will note MSFT has but one negative, the ratio of earnings paid out in dividends.  Dividends paid out are nearly 100 percent of EPS; this is not a lot margin for error.  However, the covered call potential and solid balance sheet, make MSFT worth the risk.



Exxon Mobil (XOM)

Exxon Mobil has never been my favorite major integrated oil company.  I have always preferred Chevron (CVX.)   Yet if Holland suggests it, why not take a look.  

Exxon's yield is the best of the group at 3.6% and they have very good financials with a D/E ratio of .12.   But, look at the revenue.   The oil patch shake up has hurt XOM's revenues mightily.  Since XOM has negative revenue growth, I will not include it in my 2016 portfolio,  I will eliminate XOM immediately.



Further Action

During this short week, which happens to include options expiration on Friday, I will look to add to JNJ as if it is a money market fund;  I will look to add MMM provided the calls make it worth it; and I will add to MSFT.  CB cannot be included in 2016 portfolio as the yield is too low, but if calls are good, I just might add.  Although, I have a number of insurance companies in my stable right now.

I will post my trades should you be interested in seeing how this works out.

Thank you Mr. Holland for these seven ideas.  Usually it takes me 20 tries to find even one stock I like and you gave me 3 out of 7.   Good work.

M* TheMoneyMadam

Disclosure:  Long JNJ, MSFT,  May add CB and MMM

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