Time To Take Advantage Of Short-Term Price Fluctuations

Includes: COP, CVX, JNJ, KMB, MCD, PG, T
by: Eli Inkrot

Ask and you shall receive.

Last week I wrote an article about the upcoming earnings announcements of several long-term dividend growth companies. The article was titled: "How to find Opportunities Within Upcoming Earnings Announcements" and can be found here. I specifically focused on the long and stable dividend histories of McDonald's (NYSE:MCD), Johnson & Johnson (NYSE:JNJ), Kimberly-Clark (NYSE:KMB), Colgate-Palmolive (NYSE:CL), AT&T (NYSE:T), Procter & Gamble (NYSE:PG) and Chevron (NYSE:CVX), all of which reported earnings within 4 days of each other.

In the article I argue that the 'what' in your portfolio is likely to be much more fundamental than the 'when.' Further, my contention was that if you like a certain company at a given price before the earnings announcement, you should jump at the opportunity if the share price happened to decline after their reported earnings. That is, if you felt that the earnings miss (or whatever the reason for the share price decline) was tied directly to short-term concerns and not an inherent long-term issue. In this way one would be able to purchase a larger piece of a wonderful company, whilst getting paid more to do it.

My lasting summary was as follows:

My plan of action for the upcoming announcements would be to 1) see what goes down, 2) determine if it is a short-term or long-term concern and 3) initiate or add to a wonderful company that I believe will continue to increase payouts whilst fundamentally rewarding shareholders.

Luckily for the dividend growth investor, last week yielded 'sales-o-plenty.' Here's a look at the available discounts since the recent earnings announcements of my "in-focus" formidable firms:

Company 1/20 Price Low Price Since Announcement
McDonald's $101.50 $98.05
Johnson & Johnson $65.30 $64.76
Kimberly-Clark $73.68 $70.80
ConocoPhillips $71.20 $69.01
AT&T $30.42 $29.27
Procter & Gamble $66.00 $64.27
Chevron $106.60 $104.00
SPY $131.24 $131.36

It should be noted that I did not include ConocoPhillips (NYSE:COP) in my original article, however COP is a suitable example given the company's commitment to dividend increases. Additionally, Colgate-Palmolive was excluded as it did not fit the constraint for this article.

It is perhaps a bit unnerving that 6 of the 7 'wonderful' companies that I decided to focus on immediately declined in price after their respective earnings announcement. An imaginable precursor to an overall trend; however that is neither here nor there. The thesis remains: If you believe that these companies are poised to grow payouts in a sustainable manner over the long-term, then there's no reason not to view short-term fluctuations as opportunities. I believe this idea has been well covered, but perhaps a lasting example will provide additional guidance. I was recently doing a little required reading and I came along this relevant scenario:

Frost in Florida can bump up the price of oranges, but it should have little impact on the price of the citrus groves producing the oranges; instead, longer-term expectations of the demand and supply of oranges govern the values of these groves.


Let's see if we can focus on the citrus groves.

Kimberly-Clark - On January 20th the price-to-play was $73.68 a share for KMB, yet after an earnings miss one could have scooped up shares for as little as $70.80. This represents a yield on cost difference of about 0.15%. Practically this means that one could have bought an extra five and a half shares for every $10,000 invested and get paid an extra 'transaction cost covering' $15 in dividends to do it. The real value comes from the 4% price appreciation that is 'baked in.' It is likely that the short-term price decline is founded. However, if you believe that more people will be blowing their nose with Kleenex in the next couple of decades, then there doesn't appear too much reason to worry. After all KMB also announced a 2012 share repurchase plan around $1 Billion and gave growth guidance for its 40th consecutive dividend increase announcement in the mid-single digits.

As a dividend growth investor who believes in the long-term prospects of Kimberly-Clark I'd be pumped. Just to be clear: "In the next year, by doing nothing at all, I'm going to own around 3% more of the company than I did previously, you're going to give me a payout raise that outpaces inflation in the 4-6% range and it will cost me less than it did a week ago?" Ok, good.

Johnson & Johnson - Johnson & Johnson doesn't fit the thesis quite as well as KMB, but at one point investors did have the opportunity to buy at a lower price after earnings. But then again with a 3.5% current yield and a near 9% 5-year average dividend growth rate, investors are consistently rewarded anyway. The next payout goes ex-dividend on February 24th, with a payable date of March 13th. However, the dividend after that is likely to be more exciting as JNJ looks to increase its payout for the 50th consecutive year.

McDonalds - MCD has long been the dividend growth investor's "gee, I wish I could have gotten in at a lower price" stock. MCD beat earnings but still went down due to a 'too hot for the fryer' downgrade. Most would probably agree that MCD isn't a bargain at the current levels, but then again the best time to own a wonderful company is today, or preferably yesterday. McDonalds has a current yield around 2.8%, a 35 year streak of increasing dividends and 5-year average dividend growth rate over 20%. The company just beat earnings and the shares are trading lower than they were a week ago. Sounds like a point of further research to me.

ConocoPhillips - More than the earnings announcement, investors are still trying to determine how they should approach the upcoming split. While uncertainty is abundant, COP does have a reasonable history of increasing shareholder payouts. Specifically, ConocoPhillips has increased dividends for 11 straight years and currently yields 3.8%. After the split it appears your yield on cost will at least increase, as the new company 'Phillips 66' looks to pay a "bonus" $.80 a share annual dividend. If one believes in the long-term prospects of COP, along with the corresponding split, the recent price slide since earnings could be an opportune time to grab more shares into a company that is committed to increasing payouts and buying back shares.

AT&T - The lost opportunity with the T-Mobile bid was an absolute blow to AT&T. However this is precisely the type of example that this article is trying to highlight. It was a blow, no question, but it's a short-term blow. If one thinks that AT&T will continue to demand its share of the growing telecommunication market in the long-term, then a price decline should be welcomed. After the near 4% price slide since earnings, T now yields over 6%. True telecoms are known for their yield, but that's a 6% current yield for a company that has been increasing payouts for 28 straight years by a rate that far outpaces inflation.

Procter & Gamble - When thinking of dividend growth companies, PG is perhaps the steadiest of Eddie's. Procter & Gamble shares have gone down about 2.5% since earnings, to today's $64.50. With a 3.2% current yield, an 11% average 5-year dividend growth rate and a history of increasing dividends for the last 55 years, there's only one question I would be asking myself. In the next couple of decades do I think PG will sell more products under the Gillette, Crest, Dawn, Downy, Gain, Bounty, Charmin and Pampers name? If the answer is yes any short-term price decline allows for the opportunity to buy into a wonderful company that is committed to returning shareholder value.

Chevron - If one isn't keen on COP's split prospects, they could always look to the bigger Chevron. CVX has increased payouts for 24 straight years, has a current yield of 3% and has been increasing dividends at an average yearly rate of about 9% over the last 5 years. The story is the same; shares are down sharply after earnings providing an opportune time to look into a wonderful company. Chevron recently announced its next payout which goes ex-dividend on February 15th and is payable on March 12th.

Obviously it is important to consider both the value and suitability of a given investment. Additionally the problem of limited capital is such that one must make both correct and applicable decisions. However given that one finds a wonderful company at a reasonable price, short-term price fluctuations are simply welcomed opportunities. An opportunity is only a cost if you don't take advantage.

Disclosure: I am long PG, JNJ, T.