Where Are We Going From Here? (Nov 2014)

[Dividend Watcher]

I didn't come back to this article for a while since I wanted others to chime in. I really expected more to comment with the collective knowledge here but appreciate those of you that did.

First off, I'm sorry to hear about your crystal ball, Kerim. I hate to say it but you really should be buying American-made crystal balls and not that cheap Korean junk you pick up at Target. Below is a picture of me using mine as I was doing some stock screening the other day.

   

Well, after what seemed like a volatile couple months or so I actually feel better about things now. Market volatility is up and not all in the same direction. To me that's a plus. When everything keeps going up with nary a discouraging word, I really begin to get worried. In the last couple weeks we've had some dips where I'd consider adding bits & pieces here and there and not feel nervous about the position so I did. Prices are a little high but not downright outrageous. The holiday shopping period wasn't marked with spikes either up or down but overall it seemed to be fine for most retailers. Thankfully, at least from what I was able to see in my busy schedule, no one was killed at a Walmart fighting over any of the season's specials. Unemployment is down even though it seems many are part-time and/or low wage jobs -- at least they've got some money coming in.

The oil market is in disarray right now. Everything seems to have dropped quite a bit, some more so than others, yet we haven't really seen anything in hard numbers. Everyone is offering an opinion or forecast which I'm guessing you can classify as noise right now. I'm comfortable where I'm at even though I'm wondering if the wife & I may see some dividend cuts with ESV or HP. In either case, as of right now, I'm willing to hold on through the cuts and look to the other side as I think both have been pretty conservatively managed for the business they're in. They don't call them "roughnecks" without a reason.

I mentioned the ag sector in my original post (DE specifically) and promised R2R I'd take a broader look into the sector when I had a chance. He was more interested in ADM at the time. Of course, I've collected a pile of notes and historical studies but just haven't had time to even read it all let alone form a more logical opinion than my "gut feelings". What does make me wonder is that in a cyclical industry, the usual rule of thumb was that P/Es were compressed (low) when companies were at the peak of their earnings cycle and often much higher when a bottom in the market was reached. Right now, DE has a P/E of less than 10. Their annual report just came out and I skimmed management's letter and took a quick look at the income statement. Earnings dropped a little and management wasn't sanguine about the outlook. I guess we'll have to wait and see over the next couple years and see how things turn out. In the meantime, I'm holding my DE and reinvesting the dividends. If/when a drop comes, at least I'll be adding at better yields.

Lewys120 asked over on the 'What Did You Buy Today' thread:

Quote:Currently on watch list;

KO (at around $40)
AAPL
JNJ <--- Looks decent but not overwhelming
WAL

What's everyones opinion on these at current valuation?
Nothing cheap really :/

Since I didn't want to clutter up that thread, I thought I'd add it here since I was muttering anyway.

He was really wondering about JNJ and I bought some today. I felt that it wasn't going to come back to 'cheap' much before my wife retired -- it's in her portfolio -- and we'd miss out on several years of compounding which is important at our age.

That got me thinking (I know, a bad thing because then I ramble) about something that's bugged me for a few years. I kept wondering why I never noticed the power of reinvested dividends in my younger days. Many stocks I owned then, JNJ, HNZ, STT for example, all had their dividends reinvested. With commissions pretty high back then, I didn't trade much and reinvesting was still free so took advantage of it.

I mentioned somewhere here that I was doing some work putting a new network in for a client last summer and found the business section of the newspaper dated March 3rd, 1991 in the ceiling. Curiosity got the best of me and I pulled it back out to look at what yields and prices were then. Lo and behold, JNJ closed at $82 on the previous Friday (3/1/1991). The dividend was listed at $1.36 annually giving us a yield of 1.6% and P/E was hovering around 24.

Then I looked at some others:

SYMBOL - YIELD - P/E
EMR - 2.97% - 14
GE - 2.96% - 14
CL - 2.43% - 16
CLX - 3.6% - 15
KO - 1.82% - 26
PEP - 1.21% - 24
MCD - 3.02% - 6
XOM - 4.81% - 14 (I don't know the symbol back then but no Mobil)
CVX - 4.08% - 12 (same as XOM)

There's tons more but you get the idea. Just like now, it seems the favorite growth & income stocks such as JNJ, KO & PEP, all sported high P/Es and low yields. The other comparisons were all over the place and there were names you won't see any more.

So then I was wondering what the market was like when these numbers were recorded. Here's the long-term S&P 500 from Yahoo Finance:

   

I hope you can see the numbers. I've put the marker on the closest date to the old newspaper I used. We were on the verge of the great 90s bull. I'll bet dividends didn't keep up with prices through it and that could be the reason why dividends never stood out nor piqued my interest. Before the 90s, I spend my money on mutual funds because I didn't know any better so they wouldn't have meant anything to me at the time.

Since Lewys was asking about JNJ and I just bought it, I thought I'd focus a little more on that:

   

Wow! You can see the marker shows JNJ's price to be $10 and change yet the price in the paper was $82.00. That's about 7.2% CAGR with NO dividends taken into account and starting at a P/E of 24. How many splits is that?

Lewys, my thinking when I bought some JNJ yesterday was that the current P/E is around the high teens and yield is 2.7%. Compare that to above. There's another dividend boost in the next 6 months and JNJ is going to keep on doing what they're doing. They have an A+ credit rating, have some more drugs in the pipeline, have a much larger consumer division than before and you're hopefully planning to hold for another 30 years or more. Do you think it's a fair price here? I don't think you'll notice much difference if you buy at $95 or $100. Maybe if it goes back down to the $60 range it will but don't call me to let me know, I'll be at the bank taking out a mortgage.

As for KO, David Crosetti at Seeking Alpha worked for KO for many years and has a boatload of KO stock. His opinion from following the stock for a million years is that when it crosses into the 3% yield range it's fairly valued. Again, compare KO's stats today with what I listed above. Then go look at a 30 year chart and tell me if you think KO is in a fair range now. (FYI, the paper lists the price back then at $52-3/4.)

AAPL I have no opinion here and WAL I don't know a thing about. So there's my answer.

Just remember the past ain't the present and all that jazz. This is my own opinion and I don't work for any brokerage. The moon rises in the night. I own KO and JNJ and all the other usual disclosures.

So there's the followup to my whining post I started this thread with along with some extra stuff thrown in. The comments everyone else added made me think some more so thanks. Appreciate any and all further thoughts.