In a previous article I highlighted eight dividend paying companies whose share prices were at least 15% lower during the last year. The idea was that short-term concerns can cause materially lower share prices. If the short-term concerns indeed turn out to be temporary, lower prices can spell opportunity.
This article looks at the other end of the spectrum. The companies highlighted in this commentary have materially higher share prices in the last year - to the tune of 15%+. In opposition to the lower priced securities, here the expectations are much more upbeat. Although as Warren Buffet would warn: "you pay a very high price in the stock market for a cheery consensus." So perhaps the companies that follow should come with a cautionary note.
Here's a look at the 12 companies:
McDonald's (NYSE:MCD) - 35% higher
Campbell's (NYSE:CPB) - 34% higher
Microsoft (NASDAQ:MSFT) - 34% higher
Kimberly-Clark (NYSE:KMB) - 28% higher
McCormick (NYSE:MKC) - 24% higher
Visa (NYSE:V) - 24% higher
Kellogg (NYSE:K) - 20% higher
Aqua America (NYSE:WTR) - 20% higher
AT&T (NYSE:T) - 18% higher
Lockheed Martin (NYSE:LMT) - 16% higher
Clorox (NYSE:CLX) - 16% higher
Southern Company (NYSE:SO) - 15% higher
The price comparisons were done from mid-April of 2015 through mid-April of this year.
McDonald's is an interesting starting example. From the end of 2011 through the third quarter of 2015, the stock price basically did nothing - starting and ending around $100. Actually it declined a bit in the interim, offering the long-term net buyer a bit of a benefit.
Since that time the share price has quickly jumped up to $128, a 30% increase in just over 6 months and hence its inclusion on this list. Part of that is a result of years of stagnation, but part of it is due to renewed expectations about the company's potential growth. Still, as the price goes higher it makes it more and more difficult to think about the security in a compelling sort of way.
I'm reminded of Tim McAleenan Jr.s general rule as to when you might consider selling a quality holding. His stance was that you ought to only make that consideration if the current valuation is giving up five years' worth of capital appreciation, as approximated by the five-year earnings forecast and average 10-year P/E ratio.
So for something like McDonald's you could look back and see that average earnings multiple over the past decade has been around 17 or 18. There are a lot of estimates out there, but generally the 5-year estimates are in the $7 to $8 per share range. You could then use the midpoints or create a range of values.
So using the midpoints you'd come to an exact value of $131.25. Using a wider set of numbers, you might think about something in the $119 to $144 range as being the point where you'd consider selling. Either way you look at it, shares are at or quite close to that level.
Now this doesn't mean that McDonald's share price must stagnant for years or eventually be lower. The company could indeed grow faster or trade at a loftier valuation multiple in the future. Moreover, there are other caveats at play that could make selling more or less attractive. However, I wouldn't exactly discount this information either. Should shares of McDonald's eventually trade under say 20 times earnings, today's investor could certainly see investment results that trail business results. This is something that ought to be considered as you buy, sell or hold.
Or something like McCormick provides similar attributes. The quality of the business is not in question - earnings and dividends march upward year-after-year. During the last decade earnings-per-share grew by 8% per year and investors would have enjoyed total gains of over 12% per annum. That's the sort of thing that can generate substantial wealth.
Yet this very solid result was fueled by factors that are hard to expand indefinitely. The company benefited greatly from an increased profit margin and an earnings multiple that went from around 19 to the upper-20's. Sure it's possible that the profit margin can continue to increase and that shares might trade at say 35 times earnings in the future, but these possibilities become less and less likely as time goes on. As such, the future returns could be a bit more difficult to formulate. Certainly not impossible, but the "investment bar" is higher nonetheless.
When you look at a company like Visa, it's not as difficult to justify the higher share price. Whether or not the company is actually 20% or 25% better than it was a year ago is hard to say, but it's easier to make that argument when the company is in excellent financial shape and has a proven path to exceptional growth. Even with the much higher share price, shares still hover around what many consider to be a reasonable range given the robust expectations of the business.
AT&T is a good example of the ebbs and flows of the market. From the middle of 2012 through the third quarter of 2015 the share price was actually lower, as the earnings and dividend crept up. A lot of people got used to seeing shares trade in the low-to-mid $30's, so now it looks comparatively "expensive" in the high-$30's.
Yet unlike many of the other names above, I'd contend that is more or less a return to "normal" rather than an extension of where the valuation usually sits. While the magnitude of the increase has been substantial as of late, comparatively shares still appear reasonable. You have a company that's now expected to grow a bit faster than it had, trading around 15 times earnings (depending on how you look at earnings) and paying out a dividend yield near 5%. You don't need much growth off of that base for things to turn out alright in the long-term.
In short, the above names give a look at the opposite end of the spectrum. The consensus is certainly cheery for many of these securities, allowing for much higher share prices as of late. This doesn't automatically make them lesser investments, but I'd contend that it at least offers a cautionary note. The trick when you see a much higher price is determining whether or not the current offering price is still interesting, or if the short-term cheers could turn into long-term jeers.
Disclosure: I am/we are long MCD, T.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.