Finding An Entry Price Point: Sometimes Value Is More Important Than The Price

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 |  Includes: ADI, AFL, APD, INTC, KO, MSFT, WMT
by: David Crosetti

Have you ever made a major purchase and then thought to yourself, "I wonder if I got a good deal?" We all do it. It's human nature. It is especially true when you go to purchase a new car. If you're like me, you begin that process by deciding what kind of car is best going to serve your needs.

Hopefully you've taken the time to consider what type of vehicle you need and what price you want to pay for the car. So you do your homework. You go to various web sites and research the vehicle and the options that it comes with. You determine that a specific car meets your needs and you head off to the dealership.

As you enter the parking lot, you can see all the salesmen lined up outside. They are all looking in your direction, because one of them is next in line to get the next "up" and you just happen to be it. You discuss the car you are looking for and he probes a little to see what color you want and what options you want. He disappears for a while and then comes back with a set of keys to a car that meets your needs. It's time for a test drive.

You put the car through the paces and bring it back to the dealership. "Well, what do you think?" the salesman asks. "Great," you respond and the next thing you know, you're inside and negotiating. You tell the salesman how much you want to pay for the car, and he takes the offer to the Sales Manager. A few minutes later, he comes back and says, "Looks like we've got a deal."

Your first thought is, "Man, I should have made a lower offer."

Things To Consider

Did you get the "best" deal? Well, unless you purchased the right vehicle for your particular needs, the price you paid doesn't really matter. If you needed a truck, but you bought a 2 door coupe, because "the price was right," then how do you plan to haul the things you need to haul in the smaller car?

It would seem that the most important part of a purchase is to find the right vehicle for your needs and then the value that the vehicle gives you should determine the price that you will pay.

What You Need To Know

I love a value. I love to buy things on sale. But, with the stock market, there are so many things that can mask true value. Not too long ago, Coca Cola (NYSE:KO) being priced at $62.50 represented a value, to me, because of the earnings, relative to the price.

In addition, there was the added value that gave me the opportunity to purchase shares of KO with a 3% dividend yield with that acquisition. Earnings moving forward indicated that KO had some upside potential from the $62.50 price I paid and it turns out, that was in fact the case.

One of the best summary statements concerning stock prices, relative to intrinsic value, was made by Chuck Carnevale, in an article he wrote titled: "43 Dividend Champions On Sale: A Rare Opportunity."

This is what Chuck said:

Shares of stock represent ownership in the business. In the long run, business success and shareholder returns will inevitably correlate. However, it is also an undeniable fact that the stock market can and will temporarily either over-price or under-price a business. And, it is also an undeniable fact that a company (business) derives its true value from its earnings power, in other words, the amount of cash flow it is capable of generating on its shareholders' behalf.

Therefore, contrary to what many people are willing to accept, is the indisputable reality that the business results of the company behind the common stock you own is far more important to wealth creation, than what the stock market may be mispricing it at over a short period of time.

Mispricing happens when emotions erode rational thinking thereby manifesting either greed or fear. It is important that investors maintain a reasoned and rational approach and avoid the emotional response at all costs.

As Chuck Carnevale points out, your entry point for a stock needs to be priced at a value, relative to its intrinsic worth. In order to find those gems, I like to use a screening tool that is available at my online brokerage, Charles Schwab, to filter out the wheat from the chaff. Once I have a list of stocks that interest me, I use a tool known as F.A.S.T Graphs, a service provided by Chuck Carnevale, to give me a visual look at the companies and it shows me very clearly if a stock is overpriced or underpriced by the market.

Companies You Might Want To Consider

Aflac (NYSE:AFL): Is a Dividend Champion that has been increasing dividends for 29 years. The company currently yields a 2.9% dividend with a payout ratio of 26%.

Air Products and Chemicals (NYSE:APD): Is a Dividend Champion that has been increasing dividends for 30 years. The company currently yields 3.0% with a payout ratio of 46%.

Analog Devices (NYSE:ADI): Is a Dividend Contender that has been increasing dividends for 10 years. The company currently yields 3.10% with a payout ratio of 47%.

Intel Corporation (NASDAQ:INTC): Is a Dividend Challenger that has been increasing dividends for 8 years. The company currently yields 2.90% with a payout ratio of 35%.

Microsoft (NASDAQ:MSFT): Is a Dividend Challenger that has been increasing dividends for 8 years. The company currently yields 2.50% with a payout ratio of 29%.

Walmart (NYSE:WMT): Is a Dividend Champion that has been increasing dividends for 38 years. The company currently yields 2.70% with a payout ratio of 35%.

Some of the things I like about these particular companies is that while some are currently yielding dividends below 3%, placing an entry price that would reflect a 3% yield may be a good strategy. These companies have low payout ratios for their dividends, have relatively low PEG Ratios (under 2); have relatively low debt; have very good dividend growth rates and strong Return on Equity numbers.

Conclusion

Finding companies that are priced at a value is sometimes quite a challenge. Sometimes you may have to bend on yield points in order to purchase at an attractive price that will allow you to enjoy the impact of the dividend growth rate.

Getting in the habit of running screens on a regular basis to find these value priced companies can be time consuming, but in the best interests of stock investing plans, that effort will pay off with long-term gains for folks interested in capital gain and increasing income streams for those of us who are using that strategy.

But, the bottom line is that identifying value is the key to successful stock investing.

Disclosure: I am long ADI, KO, AFL, MSFT, INTC, APD, WMT.