May 2015 Update

Moving Forward – Slowly

By this time in the year, I had hoped that our portfolio’s dividend growth would have progressed further than it has.  I continue making progress in the area of forward dividend income, though it feels as if I’m walking up a sand dune.  I must admit that I struggle to find additional investments that I am comfortable with.  For May, I made a single add and received 4 small to moderate dividend increases.  Not all bad, but I will continue with my efforts to improve.  I’ve been keeping my eye on utilities and REIT stocks as of late.  As a group, these stocks are being pressured by fears of a rate hike.

My single purchase for May was a utility (see below).  As for REITs, I am most interested in VTR, OHI and HCP.  HCP has about 3.6% income weight, VTR about 1.6% and OHI is absent.  HCP makes me slightly uneasy because of their tenant concentration and the fact that one of their largest tenants (HCR ManorCare) is being dogged by the Feds.  HCP also had to assist HCR with a new leasing agreement due to HCR’s financial difficulties.

For the reasons above, I’ll likely refrain from adding to HCP for now.  The current yield is at 6% which is the point that I start to get a little nervous.  In this interest rate environment, the market doesn’t allow for a 6% yield for no reason.  HCR may prove itself to be a headwind for HCP in the immediate future.  Just recently, HCP announced that “Paul F. Gallagher has resigned as Executive Vice President and Chief Investment Officer, effective June 30, 2015. To promote a smooth transition, Mr. Gallagher will provide consulting services until March 15, 2016”.  Yet another reason to be cautious I think.  We shall see.

Should I decide to add to my REIT stash, Ventas (VTR) is the most likely candidate at this time.  I think the price is reasonable here.  It is distinctly possible that the price will go lower though, so any purchases I make will be incremental.

My purchase for May

On May 12, I added shares of Southern Company (SO) @ $43.25, providing a yield of 5% at the time of purchase.  SO now has 4.2% NAV weight and 5.4% income weight.  If the price drops a few bucks from here, I may want to add a little more, though not a lot.  I view it as a full position.

S&P Quality Ranking = A-  /  Low Risk  / Rating Hold / Target Price $45 / Fair Value $43.90
Morningstar = Credit A- / Rating of 4 stars / Low FV uncertainty / Fair Value $47.00

Utility stocks in general have been under some pressure as of late.  My presumption is that this is related to interest rate hike fears.  As to SO specifically, there are also some potential issues with cost overruns on some of their projects in Mississippi.  From Morningstar’s analyst report….

“Southern took a further small earnings charge for ongoing cost overruns at the Kemper project, which wasn’t a meaningful amount. However, during the quarter the Mississippi Supreme Court challenged the agreement Southern had struck with the Mississippi PSC, ordering a refund of rates collected to date since the PSC hasn’t completed a prudency review of the project spending.”

This may have a material impact on SO’s earnings and fair value estimates in the future.  I’m going to keep my faith in SO and continue to hold this most dependable dividend payer.

Further info on SO

Looking at the earnings and price FAST Graph for SO, the black price line intersects with the orange earnings justified “fair value” line.  I also note that the 5% yield is not far from the historic high in recent years.  P/E is slightly below average and the white dotted dividend line moves nicely upward.  Clearly, SO is not a growth stock.  I hold it for the income that I can then spend or use toward the purchase of other DG stocks.

SO FG 20150617

Looking at the FAST Graphs Forecasting Calculator graphs, SO also seems reasonably priced.  The first graph depicts return guesstimates using current analyst estimates and a P/E of 15.  The second graph uses a “normal” P/E for SO.  In either case, the price seems justified.  Again, it’s certainly not a growth stock but it adequately serves its role of providing income without undue risk.

SO FG Est2 20150617

Year over year dividend comparison for May 2015

  • Dividend income for May was 28.5% above last year’s monthly total.
  • On a YTD basis through May, dividend income was 39.4% above last year.

Stock Sales For May

  • None

Dividend Increases for May ( I love pay raises)

  • Alliance Resource Partners (ARLP) bumped up their dividend by 1.9%, ex-div May 6.  This is the second increase for 2015, with the February increase being 2.2%.
  • Exxon Mobil (XOM) increased their dividend by 5.8%, ex-div May 11.  Not bad considering the current woes of the oil industry.
  • Southern Company (SO) increased by 3.3%, ex-div May 14.
  • Johnson and Johnson (JNJ) increased by 7.1%, ex-div May 21.  JNJ is one of our oldest and largest holdings and was added to in April.  I know you aren’t supposed to fall in love with a stock, so let’s just say I’m infatuated with this one.

2015 YTD forward dividend income (through May)

  • Stock purchases have added 9.92% to our dividend income
  • Dividend increases have added 3.28% to our dividend income
  • Stock sales have decreased forward income by 5.71%
  • Overall, our YTD forward dividend income increase is 7.49%.  There is work to be done here.

Best wishes and happy investing!  I hope this posting finds you happy and healthy.

Steve

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4 responses

  1. My recent buys have been in the REIT space as I am looking to build a position in the big three health REITS, HCP, HCN and VTR. I have other smaller plays on my radar as well such as OHI, NHI and LTC and some other non-health REITs but for now I’ll continue to focus on the three I already own. Like SO. Have 3 utils in my portfolio for many years now. SO, ED and D. I plan to keep them for many more years though I can see a point when I’ll sell those stakes. Thanks for sharing.

  2. DH,

    Thanks for stopping by. I’ve got HCP and VTR but haven’t ventured into HCN yet. It’s a popular pick among DGI types. It hasn’t popped up on my radar yet though. Still waiting for a better price. I do like the utilities sector, but that’s because I’m a retired guy and am fond of steady income. I’ll try to be sure my utility allocation doesn’t get out of control, but as long as they treat me right on dividends, I doubt I’ll ever sell. I’ve been watching ED. Hoping for an entry price at $55 or below. We shall see. If the Fed actually does raise rates at some point, we might get a little pop to the down side and a chance at better prices. Take care.

    Steve

  3. roadmap2retire | Reply

    Thanks for sharing, DG.
    I think being prudent with HCP is the right thing to do. I didnt know about the CIO leaving – always makes me nervous when management leaves for no apparent reason or terminated for that matter (like the Ex-CEO at HCP). I think you are taking the right decision by being careful here…its a risky investment and it may well pay off, but if you are risk averse, you are better off going with something safer like VTR. I just initiated a position yesterday – post should be coming up on my blog soon.

    Also, thanks for sharing your thoughts on SO. I think its a great company and like you mentioned – it not for growth…but a solid steady income. I am looking at the utilities sector carefully and SO stands out. The payout ratio is high and the expected earnings growth is low, but that steady low volatility performance of the years is exactly what I want out of a utility stock. I might add SO soon – just have to make up my mind on which utility company to pick.

    Best
    R2R

    1. R2R,

      Thanks for commenting. I won’t likely sell the HCP that I have, unless the situation worsens significantly. It has about a half-position weighting so I don’t feel like I’m overly exposed. It’s a very strong company but as you noted, a little caution is in order. I’m still undecided on VTR but may start gradually upping the position. The situation with interest rates is anyone’s guess, but it seems to rattle the market enough that I am hopeful when it comes to lower REIT prices.

      I wish you well on any utility purchases you make. I enjoy having them in my portfolio. They have something of steadying effect. For example, according to M*, the beta for SO is a mere .16. That seems pretty comfortable to me. It’s a high yield / low growth stock. I just need to use caution and not overdo it. I am in search of higher dividend growth as well just to strike a little balance and try to keep up with inflation. Take care.

      Steve

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