Watchlist – January 2019

New year – new luck! Standing in the beginning of the month, it’s about time to present the potential buy candidates for January 2019. For me, not much has changed when it comes to selecting dividend growth stocks. Overall I focus on businesses with strong fundamentals. I look for companies that offer growing earnings and cash flows, excellent profitability and clean balance sheet. The quality rating grades 20 metrics to derive the final result. The next step is about checking the valuation. I do this by using a four-step-valuation approach. Ideally the purchase will be done when the stock is trading at a significant discount to its fair value estimate. Running the numbers, here are my five ideas for the watchlist in January:

(1) Apple Inc (AAPL)

Dividend Yield: 1.97% | 5-yr. Dividend Growth Rate: 26.60% | Payout Ratio: 24% | Quality Rating: 74/100 (4 stars) | Valuation Rating: 0.83 (17% undervalued)

Apple took a serious beating during the past two months. Its share price dropped by almost 40% compared to the highs in October 2018. Above all, the biggest concern is the revised revenue guidance for Apple’s fiscal Q1 2019. The tech-giant expects revenue of $84 billion versus a former range of $89 billion to $93 billion. This implies a minor 5% yoy decline. However reading the recent headlines, it sounds like that Apple is one step away from bankruptcy. Crazy! I just want to recall: we are talking about one of the most valuable brands in the world! Furthermore Apple has an outstanding profitability and sits on a ton of cash. Well, personally I highly welcome current headwinds and consider initiating a position in January.

What I like: brand power, loyal circle of customers, cash reserves, excellent credit rating (AA+), high margins, Buffett investment
What I don’t like: revised revenue guidance, headwinds relating to the trade conflict with China

(2) 3M Co (MMM)

Dividend Yield: 2.84% | 5-yr. Dividend Growth Rate: 14.80% | Payout Ratio: 60% | Quality Rating: 78/100 (4 stars) | Valuation Rating: 1.01 (fairly valued)

MMM is a model student when it comes to returning cash to shareholders. The company has increased its dividend in 60 consecutive years! Throughout all the big crisis of the past decades, MMM was able to deliver a ever-raising paycheck. One thing is certain: you need to have a rock-solid business model in order to do so. Yes, there are concerns of an economic slowdown that might hurt MMMs earnings and cash flows. However thinking long-term, I believe that the recent price correction offers an attractive opportunity to purchase a high-quality business.

What I like: well-diversified portfolio, focus on innovations, wide-moat, excellent credit rating (AA-), margin expansion
What I don’t like: cyclical nature, no margin of safety

(3) Dominion Energy Inc (D)

Dividend Yield: 4.63% | 5-yr. Dividend Growth Rate: 9.60% | Payout Ratio: 68% | Quality Rating: 62/100 (3 stars) | Valuation Rating: 0.92 (8% undervalued)

Dominion Energy has proven to be a great defensive stock in these volatile times. On some of the worst market days, its share price remained stable or even was in the green. D’s excellent combination of yield and growth made the stock very popular among dividend growth investors. Currently I don’t own any utilities in the SF portfolio. This is something I really would like to change. D, that offers an above-average yield and good dividend growth, might be my next acquisition in January.

What I like: defensive nature, combination of yield and growth, wide-moat, low-beta stock
What I don’t like: increasing debt load

(4) Delta Airlines Inc (DAL)

Dividend Yield: 2.93% | 5-yr. Dividend Growth Rate: 61.29% | Payout Ratio: 25% | Quality Rating: 73/100 (4 stars) | Valuation Rating: 0.70 (30% undervalued)

Atlanta-based Delta Air Lines is one of the world’s largest airlines, flying to more than 325 destinations in 60 countries. What I really like about DAL is its strong dividend growth combined with a low payout ratio. This definitely leaves some room fur further dividend hikes and share repurchases. In the beginning of the year DAL’s share price dropped by 9% due to revised revenue forecasts. As a result DAL’s yield is sitting at 3% now. Considering the very attractive valuation, the airlines giant would be a good buy candidate for this month.

What I like: combination of dividend growth and payout ratio, positive revenue trend, very low P/E ratio, Buffett investment
What I don’t like: cyclical nature, revised revenue forecasts, dependency from oil prices

(5) Broadcom Inc (AVGO)

Dividend Yield: 4.45% | 5-yr. Dividend Growth Rate: 51.10% | Payout Ratio: 46% | Quality Rating: 74/100 (4 stars) | Valuation Rating: 0.65 (35% undervalued)

AVGO was already a candidate of the December 2018 watchlist (link to December 2018 – Watchlist). Since I’m still impressed with its revenue, EPS and dividend performance, I continue to like this business in 2019. There is very little to be worried about, to be honest. One could mention the relatively high exposure to Apple. However AVGO has managed to shine in the wireless segment by beating market expectations. The company is well-positioned to expand its leading role in the next generation technology sector.

What I like: well-positioned in the IoT segment, share repurchases, very high dividend growth, growing revenues and earnings, positive free cash flow trend
What I don’t like: cyclical industry, high exposure to Apple (Apple accounted for more than 20% of revenue in fiscal 2017)

Wrapping up

It’s a nice mix of different investment opportunities for this month. Although I have a tendency to initiate a position in the utility sector, the final decision is not made yet. However I do not worry about making a wrong choice. I expect all of the candidates to do well in the long-term. And this is my personal investment horizon. Even if the share price drops after the purchase, it will only have a minor impact ten to fifteen years from now.

8 Comments

  1. divvydad January 8, 2019 at 10:14 pm

    Quality list of companies that you’ve identified. I added to my MMM position last week, but am still formulating my own watch list for the remainder of the month. Look forward to seeing what purchases you end up making!

    Reply
    1. Snugfortune January 8, 2019 at 10:57 pm

      MMM is really a best-in-class business. Unfortunately it’s rarely trading at a discount.
      But buying a wunderful company at a fair price is a good way to go.
      Cheers

      Reply
  2. Frankie @ Fully Franked Finance January 10, 2019 at 8:20 pm

    Hey SnugFortune, thanks for the list of new ideas, I’ll definitely get my buddy Global Gary to have a closer look at a couple.

    Love the valuation reference too – what approach do you use to estimate the % under / over valued?

    Cheers, Gary

    Reply
    1. Snugfortune January 10, 2019 at 10:30 pm

      You’re welcome, Gary!
      My final valuation rating result is basically an arithmetic average of four different price/fair value ratios.
      You can read more about it here: Valuation Rating

      Reply
  3. DivHut January 15, 2019 at 8:31 am

    You have put together a nice list for January. AAPL seems to have really taken a serious dive in recent months and is offering a compelling entry point. I like all the names you mention except for DAL. Just not a fan of airlines.

    Reply
    1. Snugfortune January 16, 2019 at 5:21 pm

      Finally I decided to go with D. But I’ll keep my eyes on Apple and maybe pull the trigger in February.
      Thank you, DH!

      Reply
  4. BrokeInvestor January 15, 2019 at 3:43 pm

    Thanks for the list! I like how clear and structured your explanations are, as I mentioned in your previous watchlist. I can see that you already chose Dominion as your next investment. I am looking for some utility companies to be added to my portfolio as well, so Dominion is one of the candidates.

    Reply
    1. Snugfortune January 16, 2019 at 5:49 pm

      I appreciate your feedback, BI!
      When it comes to D, I felt like it’s a good opportunity to add a great company from this sector to my portfolio.
      Look forward to seeing which utlity you’re going to choose.

      Reply

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