Think Long Term And Buy These 3 Stocks

Includes: CAT, MO, WEC
by: Larry Smith

A few days ago I was running an errand and listening to a financial show on the radio where the host fields questions from callers. A caller stated that his financial advisor had recommended he sell some of his stocks and buy bonds to protect himself from the "Financial Cliff." Once the cliff is resolved, he was told, he could buy the stocks back. I do not remember how the host responded because I had my own response spinning in my head. Why in the world would you make short-term trades to avoid an issue that will be resolved in a relatively short time? Why do investors think they can get out and back in to the market at the most opportune time? In my opinion, the only way to invest is to invest for the long term with financially sound companies that sell a sustainable product, and that pay a growing dividend. Buy these stocks when they are on sale and hold them for as long as the business is performing well and you too will do well.

The fiscal cliff is a short-term issue; it will be resolved, one way or another. Neither side wants to see drastic cuts, they know they will be held accountable if the economy falls in to recession because of the cliff. It may be resolved in December, it may be delayed until next year, but it will be resolved. So why sell today, to buy back a short time later? Are you 100% positive that stock prices will be lower two months from now? Personally, I have no idea where stock prices will be in two months so I see no reason to sell today, in hopes I can buy back cheaper later. The entire premise of Dividend Growth Investing is based on the miracle of compounding over time; market timing is not part of the plan, buying quality stocks when they are cheap is.

Yesterday, had an article titled Panic Selling? Why Investors Are Dumping Dividend Stocks. The title of the article brought a smile to my face, if people are in a panic and selling, I will be more than happy to buy the leading dividend companies they are selling. Personally, I do not think "panic selling" has occurred, but I do know that some well-run companies are selling for less than they were a few weeks ago and that spells opportunity.

Although I would love for my stocks to go up in a straight line to the heavens, I know in the real world that does not happen. So when a sell-off comes and they always come, I actually get happy, because I know I will add to what I already own at a cheap price, or buy something new at a great entry point. The first thing I do during a sell-off is look to add to what I own, especially if I can lower my cost basis. I have been building a position in Kinder Morgan (NYSE:KMI) for some time now and the recent sell-off gave me the opportunity to complete the position and lower my costs basis. Last week I made two buys of KMI, one at $33.48 and another at $32.77. Those two buys complete my position and have lowered my cost basis to $33.75, a price I am happy with. I intend to hold KMI and collect the ever-growing dividends until the company's business falters or the dividend policy changes.

The next thing I do is look at the companies I have on my potential buy list and determine if they have reached a bargain price. Currently, there are three stocks I have been following that are approaching bargain prices. The chart below highlights these stocks. All three of these stocks are below their 52-week high, have low P/E's, and all pay nice dividends.

Company Current Price 52 Week High Yield P/E
Wisconsin Energy (NYSE:WEC) 36.12 41.48 3.30% 14.95
Caterpillar (NYSE:CAT) 81.30 116.95 2.5% 8.3
Altria (NYSE:MO) 30.49 36.29 5.7% 15.90

I have been following each of these companies for some time, as I see the price fall my finger on the buy button starts to get itchy. I think each of these companies offers compelling reasons to consider purchase.

Wisconsin Energy - WEC is a leading Midwest utility providing electric and natural gas service to parts of Wisconsin and the Upper Peninsula of Michigan. WEC provides electric service to 1.1 million customers and natural gas service to 1 million customers. Wisconsin Electric has grown earnings per share every year since 2003 and has returned 308% to shareholders over the last 10 years.

WEC recently completed a large upgrade to its generating capacity and now has enough generating capacity to meet customers' needs for years to come, as well as comply with all green energy mandates. Having completed the upgrade, Wisconsin Energy now intends to raise the dividend to a level that will make WEC more competitive with other utilities. WEC now yields 3.6% and has a pay-out ratio of 48%. Wisconsin Energy intends to raise the dividend in excess of 10% for the next couple years, increasing the pay-out ratio to 60%. (WEC information here)

What really separates WEC from other utilities is it is one of the very few that has positive free cash flow. The positive free cash flow puts in on firmer footing than other utilities and allows management more flexibility to increase the dividend, buy-back shares or make investments in other opportunities. Although it does not pay the highest dividend, WEC has some of the best long-term fundamentals I have seen.

Caterpillar - CAT is the world's leading heavy equipment manufacturer. CAT makes everything from bulldozers to locomotives to electric generators, but it also has a financial arm of the company that helps boost returns. Caterpillar's long-term shareholder return puts it in the top 25% of the S&P 500.

I believe most investors have a pretty good idea what CAT does, so I want to get to what I think makes this a compelling investment. For fiscal year 2012, CAT expects to earn $9.00 to $9.25 a share, which is down slightly from what it had previously forecast for the year. CAT blamed the slow world economy for the downward revision. However, during an analyst meeting in September, Cat management was fairly adamant that it believes the company can earn approximately $15.00 a share in 2015. In fact, the $15.00 estimate was conservative. Here is the exact quote from Doug Oberhelman, Caterpillar CEO.

So, the drum roll of that is $80 billion to $100 billion by 2015, 5% to 13%, a broad spread here and that's purposeful. Earnings per share, profit per share of $12 to $18. Ann asked me right off the bat; you're lowering your guidance? I am not lowering our goal and intention.

If it turns out that worldwide GDP growth is more like we thought it would be, and it comes around in '13, '14, '15, we're going to go right back to$15 to $20 because internally I'm more convinced than ever that we'll get that done. But losing 2011 and losing 2012 with a reasonable level of growth has just delayed when that's going to happen. I don't think that's a big surprise to anybody.

So I, for one, am still thinking $15 to $20, but we need better growth than we've just -- than I've just outlined. If not -- if the growth and the scenario plays out like we just described the $12 to $18, $80 billion to $100 billion spread. And I am sure, Cliff, we'll be at the upper end of that by the time comes as we were in 2009. But I think it's prudent given what's happened in '11 and '12 to readjust here a little bit for 2015.

If you look at the forecast for 2015 and take the worst earnings number mentioned, which is $12.00 a share and put a P/E of 10 on the earnings you get a price of $120.00, which is approximately a 46% gain from today's price. If you take the middle earnings number of $15.00 with a P/E of 10 you get $150.00, which is a 83% gain and if they were to hit the $20.00 a share, that's $200.00 a share and more than a double from today's price.

Nothing is guaranteed, but Caterpillar is selling for what I believe is an unbelievably low price. A long-term investor has to look beyond today's noise and see the future; I think the future for CAT looks bright.

Altria - I have followed Altria for a very long time. I owned Altria before it split off Kraft (KRFT) and Philip Morris International (PMI). I have stated previously that I deeply regret selling Altria, as I would have made a lot of money had I held. What is left of Altria is still an attractive business. MO has dominant market share (42% for Marlboro) in the cigarette business, is the leader (50% share) in smokeless tobacco, has a strong cigar business, a growing wine business and owns 28.6% of SABMiller. All these businesses produce a lot of cash and Altria shares that cash with shareholders with a dividend payout ratio of 80%.

I have always admired Altria's management as it has successfully navigated all the lawsuits and all the government regulation while still growing the business and paying out cash to shareholders. For fiscal year 2012, Altria expects to earn approximately $2.20 a share, which is an 8% improvement over 2011 earnings, right in-line with Altria's goal to grow earnings yearly by 7% to 9%

At today's closing price of $30.79, MO has a yield of 5.7%, which is very attractive. Not only does Altria pay out a rich dividend, it also buys back shares, having recently announced an increase of $500,000 to a previously announced $1 million buy-back.

What I like about MO is it as shareholder friendly as a company can be. It pays out most of its cash in dividends, buys back shares and cuts corporate costs to the bone. What concerns me is the continued attack on smoking and the declining cigarette sales. Overall cigarette sales fell 3% in 2011 and 0.5% in 2012. As taxes increase and government regulation continues I cannot stop worrying that the loss of sales eventually catches up with MO. I realize it has successfully raised prices to compensate for the decline in the number of smokers, but I am not sure that can continue. Having said that, at some point the valuation and healthy dividend makes MO a buy. (All Altria information can found here)

Action - If I were a rich man I would buy all three of the stocks I mentioned and feel very comfortable with what the future held for me. Unfortunately, I am not rich and will only be able to start building a position in one of these stocks. As the market has been pulling back and may continue to fall, I would not take a full position immediately. Although market pull-backs provide great buying opportunities, no one rings the bell when they have reached the bottom. Thus I believe an investor should scale in during market pull-backs. If the market rallies after your initial buy, you feel good that you picked some shares up near the bottom. If the market continues to fall, you can feel good you are lowering your cost basis.

As a dividend-growth investor, short-term hiccups in the market don't upset me, nor do I try to trade around news as some advisors would suggest. I use the news and the pull-backs to strengthen my portfolio. Don't panic over a market downturn, instead, get greedy and buy stock in quality companies while they are on sale. Don't worry about what may happen in the next few weeks or months, instead ask yourself, where will this stock likely will be in five years. In the next few weeks I will most likely begin accumulating one of the stocks I have mentioned. I say likely, because if the selling continues, I may choose to add to something I already own if I can lower my cost basis. I will share what I do and why, when I make the purchase.

Disclosure: I am long KMI. 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.

Additional disclosure: I may take a position in WEC, CAT, or MO in the near future.