Investing in equities is a painstaking, tedious process. Nothing is more frustrating than crunching number after number, extrapolating future earnings, evaluating micro/macro threats, gathering ROE, expected SGR, finally finding a company you love, then realizing it's grossly overpriced. Or even worse, getting through 75% of an article and watching the market sell off 600 points, forcing you to remodel your evaluations (as happened this week)!
That’s why I live for these pullbacks. Everything goes on sale. Sure, the good companies are discounted less--but they are still discounted. I usually go shopping using deep in the money call options on names I want to buy when the market stabilizes. This lets me get into full positions at a decent price while limiting my downside risk.
So what names did I dive into last week? Let’s start with a pharmaceutical and industrials.
The first name I added to my portfolio was:
Abbott Laboratories (NYSE:ABT)
Current Dividend Yield: 3.8%
Abbott Laboratories is a global, broad-based health care company devoted to discovering new medicines, new technologies and new ways to manage health. Their products span the continuum of care, from nutritional products and laboratory diagnostics through medical devices and pharmaceutical therapies. Abbott Laboratories' comprehensive line of products encircles life itself -- addressing important health needs from infancy to the golden years.
Abbott Laboratories derives its revenue from four main business segments:
Pharmaceutical Products: 56%
Abbott generates over half its yearly revenue from branded pharmaceuticals. Chief among these drugs are the rheumatoid arthritis drug Humira, making up nearly half of its branded pharma revenue. Lucky for Abbott, Humira’s patent is safe until Jan 2017. Other notable drugs produced by Abbott are Depakote and Niaspan.
Nutritional Products: 16%
The second-largest revenue producer for Abbott Labs is its nutritional product division, which generates over $5 billion in revenue. Well-known brands include, Zoneperfect, Ensure, Pediasure and Similac.
Abbott's diagnostic division runs tests for hospitals, labs, and universities, screening for a variety of diseases and conditions.
Finally, Abbott's vascular division is centered on stents. Stents help open clogged arteries in afflicted patients. The reviews of Abbott’s stent products have been excellent, and they have begun stealing market share from competitors. This should be a key area of growth for the company.
Let’s take a look at some of Abbott Laboratories' fundamentals:
Right off the bat, you have to love Abbott’s 7-year ROE of 21.6%, handily beating the market average. The 7-year SGR is low for my liking, but I believe this is largely due to Abbott’s dividend payout ratio of 57.5% (more on this later). It is currently trading at a P/E of 15.2, over 6 points off its historical average. Take a look at stockpup’s (great resource) DuPont Analysis of the company:
Abbott dividend history is equally as impressive. Abbott is part of the elite Dividend Champion list, raising its dividend payout for an astounding 39 years in a row. Over the 7 years, Abbott's dividend growth rate is just below 10% with an average payout ratio of 57.5%. There are a few years that skew the DPR number considerably (notably fiscal year 2006); this is in large part due to Abbott’s acquisition of Guidant's vascular intervention and endovascular solutions businesses. With a yield approaching 4%, Abbott is comfortably yielding more than 10-year U.S Treasuries. Here are the historics:
If we model Abbott's future returns using its sustainable growth rate, we come to a compelling investment:
Just like any brand pharmaceutical company, Abbott's main threat remains patent expiration. With Humira locked up until at least 2017, Abbott has some lead time. Abbott’s pipeline is in its infancy, with very few drugs yet in Phase III development. However, its other divisions and strong international growth should be able to offset some of these losses. ABT is a great company, great dividend, cash cow intact and attractively valued.
Recommendation: Strong Buy
The Boeing Company (NYSE:BA)
Industry: Aerospace and Defense
Current Dividend Yield: 2.9%
The Boeing Company is the world’s largest aerospace and defense company. It operates worldwide and is the largest exporter in the United States. Its three main divisions are Commercial Airline, Integrated Defense Systems, and Boeing Capital.
Commercial Airplanes: 50%
From the iconic 747 to the all-new 787 Dreamliner, Boeing delivers a family of technologically advanced and efficient airplanes to customers around the world. With a global aerospace refresh starting anew, Boeing can expect to see an increase in demand for its planes in the coming quarters. In fact, Boeing has recently received one of its largest orders to date from American Airlines. Boeing did split this order with is closest competitor, EADS NV (OTCPK:EADSY) but if we take management's word for it, they simply couldn’t produce enough planes to fill the order by themselves.
Integrated Defense Systems: 50%
Boeing is a recognized leader in providing and supporting large-scale systems that combine sophisticated communications networks with air-, land-, sea- and space-based platforms for military, government and commercial customers around the world.
Key IDS products are: fighter jets, rotocraft, large aircraft, missiles/bombs, satellites, communication systems, space systems and launch systems
Investors have recently been concerned with the U.S government’s contraction in defense spending. I acknowledge this is a legitimate concern, however it's not one that I am losing sleep over. The fact of the matter is that America is perpetually at war. This is not a political statement. It is what it is.
Let’s take a look at Boeing's fundamentals’:
With cyclical companies such as Boeing, it’s important to not get caught up with 7-year averages and ratios. Even with Boeing’s cyclicality, its 7-year ROE is a respectable 14.6%. Additionally, it is trading at a considerable discount to its historic P/E. As with Abbott, the SGR is low for my liking, but I’m willing to look past this for its potential upside. Let’s look at Stockpups' DuPont Analysis of the company:
From this chart you can see Boeing's recent surge in ROE. This is obviously directly linked to the 787 Dreamliner finally (hopefully) coming online.
But you know I look for dividend protection, and Boeing has paid a consistent dividend since 1995. Its dividend growth rate over the last 7 years has been a commendable 13.8%, with a payout ratio of 47.8%. Again, the high DPR is due to the cyclicality of BA’s business. With a current yield approaching 3%, Boeing is well above the 10-year U.S. Treasury. This is a good, safe, growing dividend.
If we model Boeing's future returns using its historic growth rate, we come to a attractive investment:
Airline refresh cycles usually last roughly 7 to 10 years. So a 10-year forecast might be a bit optimistic. However, a 34.6% return is nothing to sneeze at.
Boeing is highly cyclical name in the early stages of its refresh cycle. The recent market pullback has caused this beta name to be dragged down to highly attractive levels. Concern over Department of Defense spending cuts are highly overblown. This is an iconic brand with a new and highly desirable product, an attractive yield, and it's attractively valued.
Recommendation: Strong Buy
Disclosure: I am long BA, ABT.