After the presidential election, there has been some noise in the market about the fiscal cliff. As a result, the main indices have lost over 3% in 3 days. We all know that negative news which brings the market down is a good opportunity for long term dividend growth investors.
I believe it's a good time to take a look at dividend growth blue chips which have been beaten down lately. (Prices listed are as of the close of Nov 9, 2012.)
There are many metrics to determine if a company should be on the buy list or not. As long term dividend growth investors, we want to get into a great company that is at fair value (or better yet undervalued), so that we can enjoy its growing dividends for many subsequent years.
A company's ability to pay growing dividends is directly dependent on its ability to generate cash from its everyday operations. I also like companies with lots of cash on hand, whether it'd be for paying off debt, investing, share repurchasing, or paying investors in the form of dividends. Of course, it is just as important that this company has a healthy debt level - so that it can pay it off when it's due.
As a result, it is fundamental to at least look at the following metrics as preliminary research on a company:
- cash from operations
- free cash flow
- debt to equity ratio <= 1
McDonald's (MCD) at 84.74 [yield: 3.63%]
The golden arc is a fast food restaurant with a global footprint.
~ Cash from Operations - 5-year ~
Since the 2008 recession, the cash received from operations has been in an overall uptrend for McDonald's. Its free cash flow is at 1255M, and debt-to-equity ratio is 0.96. Both considered healthy.
MCD just hit its 52-week low today, and it's highly oversold on the daily chart. Its weekly chart shows that its next support is at 83.62; however, it maybe bouncing off from the bottom of the weekly Bollinger Band. The cautious long term investor could think about scaling in this dividend champion now.
Coca-Cola (KO) at 36.29 [yield: 2.81%]
When I'm thirsty, I think of drinking a coke or Dasani water. I've seen comments about the stock being lackluster as of late; however, it is a great company with moderate growth even in bad times.
Since the 2008 recession, the cash received from operations has been in an overall uptrend for Coca-Cola, and this trend looks like it's continuing strong even when the economic future is unclear.
KO has a respectable free cash flow of 4306M, and a debt-to-equity ratio of 1.01. Yes, that is greater than 1, the metric I set above, but it is the lowest compared to its peers of Pepsi (PEP), and Dr Pepper (DPS). PEP's is 1.31 and DPS's is 1.19. (Seeking Alpha provides a quick and easy way to compare information of related companies. Simply create a portfolio of such companies and click the various tabs.)
Technically, Coca-Cola seems to be breaking a weekly support. If it does, its next major support is at 32.84. I will recommend seeing if it breaks through the 36.75 support for real next week before adding to this wonderful company.
AT&T (T) at 33.54 [yield: 5.37%]
I know many people who can't live without their cell phones. In fact, they have it on 24/7. Thus, I believe AT&T will continue to do well.
AT&T's cash from operations are a bit more volatile, but even at its lowest point within the last 5 years, it still generated 36.27B as shown on ycharts.com. T has a whooping free cash flow of 5112M and a debt-to-equity ratio of 0.63.
AT&T is hitting some major support around the 33 price point. The cautious long term investor could buy some now and buy some more if it does break through.
The above mentioned dividend champions are well known and covered well, but I don't see a lot of technical analysis comments. So, that's why I included some technical analysis in this article. Of course, the use of fundamental analysis with technical analysis is the ultimate combination. First, find wonderful companies that are fair or undervalued fundamental analysis. Then, use technical analysis to decide on a price range for entry. A good strategy I've seen some investors employ and one that I use myself is to scale in a position for dollar cost averaging.
Is the Company at Fair Value?
Recently, Chuck Carnevale, a well-known SA contributor, wrote an article on "How Can I Know If My Stocks Are Fairly Valued?". I highly recommend you read it if you haven't already. Mr. Carnevale's excellent F.A.S.T. Graphs tool allows one to quickly identify whether a company is undervalued, fair-valued or overvalued.
Source of price and yield information is from Google Finance. Graphs are from ycharts. Other metrics are from none other than Seeking Alpha.