1 - Introduction.
There is one common trait that we all share and it is our curiosity. Our need to know what the future will be is a constant preoccupation. The future direction of the stock market fascinates us all. Often, the focus is on the short-term expectation; What is the market going to do next month or next quarter? These questions are entertaining, but they just amount to anything more than a simple speculating game. The market has too many surprises to know what the next move will be. In the other hand trying to set up a long-term direction of the market is not as much colorful, but it is the back-bone of your long-term financial survival that you are wondering about.
You will find here a comparative study of 6 stocks that offer some good future prospect and will be an important addition to your portfolio for the next 5 years or more (With minor adjustment depending on valuation). I am a firm believer that it is essential to trade part of your holding depending on the street valuation. The street valuation reacts highly on investors' emotional impulse and is often manipulated in my opinion. (Read my article about Transocean (NYSE:RIG)/Seadrill (SDRL)). By trading part of your holding at key points you will be able to free some needed cash that will be re-invested in the same stock/group of stocks, when the valuation has corrected again, close to the fair value. I use RSI (70/30) to pin-point eventual over-bought or over-sold situations that cause a buy or sell action. Simple approach, tremendous results.
Here is the list of the 6 stocks selected:
- In the oil industry in general, 2 stocks offer a long-term interesting prospect in my view. One, is an oil and gas company, British Petroleum (NYSE:BP) and the other one, is an offshore deep-water driller called Seadrill Ltd. (NYSE:SDRL) [Can be replaced by Transocean Ltd. (RIG) which is similar.]
- In the financial conglomerate I choose General Electric (NYSE:GE)
- In the bio-pharmaceutical sector my company is Pfizer, Inc.(NYSE:PFE)
- In the bank sector I will go with Wells Fargo and Co.(NYSE:WFC)
- In Food conglomerates, I have Altria Group, Inc. (NYSE:MO)
These 6 companies are very strong financially, well-known and considered as "safe" for the next 5 years at least, assuming a normal world economy going forward; which exclude any major financial catastrophes. Of course, it is a big leap of faith, and we will have some scary financial moments again without any doubt. (Look what is happening in Russia/Ukraine and its effect on BP.). But I believe their amplitude will be less worrisome as the last financial meltdown of the 2007/2008 crisis, and will be more classified as "business as usual".
This idea is debatable "ad vitam aeternam", but if someone disagrees and thinks we are heading for another economic meltdown then he or she should stay away from the market, period.
Some of the stocks indicated above present obvious buying opportunities recently, and some look over-valued by the street. Long-term so, they should all deliver a steady stream of earnings and revenue, and they are all paying good dividends considered secure. I have estimated the yearly growth from 5% to 8+% and not counting on the dividends. Well within the 5% to 7% average growth for large companies (US stock market).
This study is to show you how they stand financially today and what the growth potential is for the next 5 years. An important question a value investor should ask himself/herself is, if the companies we studied today will still be thriving in the future without any important hiccup. Difficult exercise when you see how and why the market fluctuates. The market has inherent risks that cannot be eliminated completely even if the risk is lower by choosing some solid companies. The farther we try to look at the future the less correct our projection turn out to be.
2 - Growth Stock comparison.
I could start with a long explanation but I believe a comparative table is much more visual and easier to follow. The question is to show the most important elements for a general comparative Table. The table will give different financial indicators related to the size of the company, its real value and its future potential.
Here is my comparative table:
|Stock price as of 03/03/2014 in $||36.65||49.00||25.12||31.98||36.45||46.15|
|Shares Outstanding in billion||0.469||3.100||10.09||6.480||1.990||5.260|
|Total Debt $ billion||15.32||48.19||383||36.75||14.52||206.88|
|Dividend $ yearly||3.92||2.32||0.88||1.04||1.92||1.20|
|Dividend yield %||10.70||4.73||3.50||3.25||5.27||2.60|
|Investment in 5 years with steady dividend||1.662||1.260||1.188||1.173||1.293||1.137|
|EBITDA trailing year 2013 $ billion||2.68||29.68||28.22||23.11||8.57||n/a|
|Book Value $||16.02||41.68||13.03||12.03||2.07||29.50|
|ROE return on equity % 2013||39||18||10||28||123||15|
|P/E ration as of today||6.76||6.85||18.73||10.03||16.04||11.93|
|2018 personal target||55||67||32||44||46||60|
|Average Annual Growth Rate AAGR %||8+||6+||5||6+||5||5+|
|Personal rating today||Buy||Hold||Hold||Hold||Buy||Hold|
Most of the numbers are from yahoo and adjusted from the last news for BP and SDRL (dividends.). You can click on ROE value and get more information if you want.
As you can see with my personal rating above, I find the market overvalued in general and most of the stocks here have this characteristic. SDRL is different because it has corrected 25% from its highs in November 2013 (You can read my article about SDRL and RIG here.). This sentiment reduces the AAGR to the minimum of the range.
I think the oil sector will be the best performer for the next 5 years and I applied a higher growth for SDRL and BP compare to the others. Specially for the offshore drilling sector that will grow starting 2015.
3 - 2 Year Chart comparison. Price and Dividend.
- Price fluctuation for the past 2 years.
(click to enlarge)
SDRL data by YCharts
2. Quarterly Dividend fluctuation for the past 3 years.
(click to enlarge)
SDRL Dividend data by YCharts
Some correction so ... SDRL has raised again dividend at 0.98 and BP too at 0.58.
4 - Conclusion.
Assuming that you have these 6 stocks sharing 60% of your portfolio and you spread an equal amount of $ to buy each of them(10%), you will have a combined dividend yield at roughly 4.95%. Your money invested today will be 1.0495^5 or 27.33% higher than today (if you reinvest your dividend in share of the same company, during this 5 year period). We know that investors expect inflation of approximately 2% annually over the next 5 years then this portfolio will be a great asset against inflation with the dividends.
Try to look back 5 years from now and see the result. Of course, "History doesn't repeat itself, but it does rhyme." Wrote Mark Twain.
The question is now about your holding average price and its relative safety during this period of time? Do we think these stocks are really growth stocks, sufficiently secure to trust them for many years?
My answer is Yes. A quick look here:
SDRL, is a fairly new company with one of the newest offshore drillers fleet around and will be able to take a good market share of the offshore oil sector. Dividends are now over 10% and the company keep raising them. (15% increase the past 5 years on average.)
BP is a good company weakened by the "Macondo incident" but will probably recover the next few years. I believe the stock price factored in the negative impact of this catastrophe already. (Read my article here.)
GE PFE, are the pillars of the US economy and will be around and strong 5 years from now. I do not think I need a long explanation here.
MO has earnings growing around 7% to 8% a year with still a reasonable P/E ratio of 16. Not too much surprise here.
WFC, seems one of the best play among the big banks. It gives an above average dividend yield.
Time will tell.