6 Stocks I Want To Buy More In 2017

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Includes: AAPL, CSCO, PEP, SBUX, V, VFC
by: The Dividend Bro

Summary

Going into 2017, I want to add to some of our smallest positions.

Apple, Cisco, PepsiCo, Starbucks, V.F. Corp and Visa are all below a half position.

I will be looking to add to each of these names throughout the year.

My wife and I spent much of the last year growing the number of positions in our dividend growth portfolio. As I wrote in my 2016 year-end review, which you can read here, we added 8 new positions. We made a concerted effort in 2016 to add both dividend stalwarts like V.F. Corp (NYSE:VFC) and PepsiCo (NYSE:PEP) as well as companies that are relatively new to paying a dividend, like Cisco (NASDAQ:CSCO) and Visa (NYSE:V). Because of this, we have many positions that are below a half position. I would like to spend a good portion of this year adding to our smallest holdings. Of course, I wouldn't hesitate to add a new name if something we don't own is sitting at too good of a value to turn down. My goal, however, is to add to what we already own.

As a reminder, here are my investment guidelines:

Core holdings are those that:

  • Have at least 10 consecutive years of dividend growth.
  • Are considered by S&P Capital/Morningstar to be no more than 5% overvalued.
  • Are considered by F.A.S.T. Graphs to have a current price to earnings ratio that is no more than 5% overvalued when compared to the five-year average price to earnings ratio.
  • Have a dividend yield above 2.0%.
  • Dominate their sector of the economy.

Supporting holdings are those that:

  • Have 5 years of dividend growth or 10 years of paying uninterrupted dividends.
  • Are considered by S&P Capital/Morningstar to be no more than 5% overvalued.
  • Are considered by F.A.S.T. Graphs to have a current price to earnings ratio no more than 5% overvalued when compared to the five-year average price to earnings ratio.
  • Have a dividend yield above 1.0%.

Speculative holdings are those that:

  • Have recently initiated a dividend.
  • Or have an average dividend growth rate of at least 10% or higher for the life of the dividend.
  • Are considered by S&P Capital/Morningstar/F.A.S.T. Graphs to be at least 5% undervalued.

Apple (NASDAQ:AAPL)

Current Yield

# Years div growth

3-Year Div Growth Rate

1.93%

5

9.80%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

$130

$169.30

$133

F.A.S.T Graphs Current PE

F.A.S.T Graphs 5-Year Avg PE

Price Target

13.9

13.6

Under $153

Remember last year when it seemed like everyone thought Apple, both the company and the stock, were dead in the water? The stock returned almost 10% in 2016, not including dividends. According to S&P Capital, iPhones make up about 62% of the company's revenues. As iPhones go, so does Apple. The company also produces Mac computers, iPads and iTunes Music, but it is really phones that drive the company.

One item to keep in mind is that Apple holds close to $200 billion overseas. Most companies that hold money offshore don't bring it back to the United States because they don't want to pay a high tax on it. It is thought by many that a Republican-controlled White House and Congress may look to lower the corporate tax rate or offer a reparation holiday. If so, Apple has the capability to bring back a lot of money and put it to good use either with acquisitions or higher dividends.

Speaking of dividends, Apple has finally made it onto David Fish's U.S. Dividend Champions list. With 5 consecutive years of dividend growth, Apple is now a Dividend Challenger. Over the past 3 years, the average dividend growth rate has been under just 10%. Shares currently yield just under 2%.

F.A.S.T. Graphs gives us a current price to earnings ratio of 13.9 and an average 5-year PE ratio of 13.6. By this measure, Apple is about 2% overvalued. S&P Capital gives a 12-month price target of $130 and a fair value of $169.30. Based on Friday's closing price of $117.91, Apple is 10.25% and 43.58% undervalued respectively. I should note that the previous fair value S&P Capital gave for Apple was $124, much lower than the current one. Morningstar gives a fair value of $133 or 12.80% higher from the recent close. Average these numbers out and I find shares of Apple to be 16% undervalued. With 5 years of dividend growth, I now consider Apple to be a supporting holding and am willing to pay a 5% premium to fair value. Therefore, anything under $153 would qualify the company for purchase.

The largest company in the world by market cap is just under 2% of our total portfolio, which is less than a half position. Obviously, buying Apple back in the mid-$90s would have been preferable, but I still think Apple has upside even from these levels.

Cisco

Current Yield

# Years div growth

5-Year Div Growth Rate

3.44%

6

40.60%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

$32

$33.80

$27

F.A.S.T Graphs Current PE

F.A.S.T Graphs 5-Year Avg PE

Price Target

12.8

11.9

Under $32

Cisco, which makes the routers and switchers that allow computers and networks around the world to connect to each other, was first purchased for our portfolio last January. What attracted me then, besides shares being undervalued and the strength of their business, was the dividend growth rate and yield. The company has raised dividends for the last 6 years and the 5-year average dividend growth rate is north of 40%. Shares also yield almost 3.5%. Not too many companies can offer a robust growth rate and a generous dividend yield.

F.A.S.T. Graphs gives Cisco's current PE ratio as 12.8, which is 7% higher than the 5-year average of 11.9. S&P Capital gives a 12-month price target of $32, which is 5.86% below Friday's closing price of $30.23. S&P Capital's current fair value is $33.80 or 11.81% higher from here. Morningstar is more bearish and offers a fair value of $27. This is almost 11% above the recent closing price. Averaged out and I find Cisco is just about fairly valued. With 6 years of dividend growth, I am fine paying a 5% premium to fair value. While I wouldn't mind a pullback in the price, I'd be willing to buy more shares of Cisco at under $32 or so.

PepsiCo Inc.

Current Yield

# Years div growth

5-Year Div Growth Rate

2.88%

44

7.90%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

$124

$86.10

$106

F.A.S.T Graphs Current PE

F.A.S.T Graphs 5-Year Avg PE

Price Target

21.8

19.5

Under $109

When most people think of PepsiCo, they think of the soda portion of the company, but the snack segments actually account for half of the revenue according to Morningstar. Brands include Frito corn chips, Lay's potato chip, Doritos, Cheetos and SunChips. The company also makes cereal such as Life and, my personal favorite, Cap'n Crunch. They also make Aunt Jemima Syrup. PepsiCo also produces the sports drink Gatorade and Tropicana orange juice. The point is that PepsiCo, unlike its competitor Coca-Cola (NYSE:KO), is much more than a soda company. I consider PepsiCo to be diversified snack conglomerate.

In addition, PepsiCo is also a Dividend Champion. There are very few companies that can match PepsiCo's 44 years of dividend growth. In addition to having a current yield of 2.88%, the company has given shareholders an almost 8% dividend increase per year over the past 5. Not bad for a soda and snack giant.

We have only purchased PepsiCo once, back on 2/12/2016. Including dividends, we have a gain of more than 8% in less than a year. Not bad, but I want more shares of this company. Of the stocks held in our IRAs, PepsiCo is our third smallest position. I've been waiting for a good time to add to the holding. Is now the right time?

F.A.S.T. Graphs says the current price to earnings ratio is 21.8 and the average PE over the past 5 years is 19.5. This measure tells me shares are currently 10.55% overvalued. S&P Capital gives a 1-year price target of $124, which would be good for 18.56% gain based on the 1/6/2017 closing price of $104.59. Their fair value, however, is $86.10. This says shares are currently almost 18% overvalued. Morningstar says fair value is $106, or 1.35% higher from here. Average these numbers out and I find PepsiCo to be about 2% overvalued. With 4+ decades of dividend growth, I have zero problem paying a 5% premium for shares of PepsiCo. Any price under $109 would qualify the company for purchase.

Starbucks (NASDAQ:SBUX)

Current Yield

# Years div growth

5-Year Div Growth Rate

1.75%

7

24.90%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

$57

$50.20

$66

F.A.S.T Graphs Current PE

F.A.S.T Graphs 5-Year Avg PE

Price Target

29

30

Under $63

2015 was a great year for shareholders of Starbucks, as the stock appreciated 46%. In 2016, the stock dropped 7.5%. Howard Schultz, the visionary that has helped to make Starbucks a household name, is stepping down as CEO, but will remain with the company. Personally, I feel the stock was simply taking a breather in 2016 after an impressive run the year before. Something else to keep in mind, Starbucks is planning to eventually have 5,000 stores in China, which would be double their current store count. This could set the company up for some impressive revenue growth in the future.

While the company currently yields 1.75%, the 5-year dividend growth rate is 24.90%. Companies with these high dividend growth rates often see them fall off after a while. Not Starbucks. Last year, the company gave shareholders a 25% dividend raise.

Of all the positions I've listed in this article, most are well below a half position. Starbucks is right at a half position. Given the company's dominance in its sector, the potential for gains in China and the dividend growth, I would welcome the opportunity for more shares.

F.A.S.T. Graphs says the current PE ratio is 29 and the 5-year average is 30. This says shares are 3.45% undervalued. S&P Capital has a 12-month price target of $57. This is very close to the 1/5/2017 closing price of $57.13. Their fair value is $50.20, or 12% lower than Friday's close. Morningstar is much more bullish with fair value at $66. This is more than 15% above the recent trading price. Average these numbers out and I find Starbucks to be about 1.6% undervalued. With 7 years of dividend growth, I am willing to pay 5% over fair value for Starbucks. Under $63, and I'd be willing to add our position.

V.F. Corp

Current Yield

# Years div growth

5-Year Div Growth Rate

3.16%

44

18.60%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

$58

$54.70

$73

F.A.S.T Graphs Current PE

F.A.S.T Graphs 5-Year Avg PE

Price Target

17

18.9

Under $69

V.F. Corp is the maker of such brands as North Face, Wrangler, Lee, Jan Sport, Vans and Timberland. While you are probably familiar with some of their brands, did you know that the company has paid and raised dividends for 44 consecutive years? Or that the average dividend raise over the past 5 years was more than 18%? Not bad for an apparel company. The stock didn't perform very well in 2016, losing more than 14% in a single year. In fact, shares are down 27% from the start of 2015. We first purchased shares back on 9/23/2016 and while we are sitting on a 6.5% loss since then, the company's brand power and dividend track record are still very appealing. V.F. Corp is the smallest of the positions we hold in our IRAs. Would love to add to the company at some point this year.

F.A.S.T. Graphs lists the current price to earnings multiple at 17 and the average 5-year ratio at 18.9. This says upside of shares could be 11.18%. S&P Capital gives a 12-month price target of $58 and a fair value of $54.70. These numbers say shares are currently 9% and 2.86% undervalued respectively based on Friday's closing price of $53.18. Morningstar is very bullish, stating fair value is $73. Reaching this price would result in a 37.37% gain. Average these numbers out and I find shares of the company to be 15% undervalued. V.F. Corp is one of the most undervalued stocks that I follow. With 44 years of dividend growth, I would be fine with paying a 5% premium to fair value. Under $69, and you can count me a buyer.

Visa

Current Yield

# Years div growth

5-Year Div Growth Rate

0.80%

9

28.40%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

$87

$79.90

$101

F.A.S.T Graphs Current PE

F.A.S.T Graphs 5-Year Avg PE

Price Target

27.8

24.2

Under $91

Visa is the largest and most dominate credit card company in the world. Morningstar says they accounted for half of all credit card transactions in the world. More and more, people are ditching cash and using cards to pay for goods and services. Securing the Costco credit card contract away from American Express (NYSE:AXP) and the USAA contract from MasterCard (NYSE:MA) tells you that the company isn't comfortable with what they already have.

Visa is the second smallest position we have in our IRAs and would definitely like to increase the size of this holding. Visa has raised dividends each of the past 9 years and has an average growth rate over the past 5 years of more than 28%. Last year, the company gave shareholders an 18% dividend bump. Can't complain about that raise even if the yield is just 0.80%.

According to F.A.S.T. Graphs, the current PE is 27.8. This is almost 13% higher than the 5-year average PE of 24.2. S&P Capital's price target is $87, which would be almost 6% higher than Friday's close of $82.21. Their fair value is $79.90, which is about 3% below the recent trading price. Morningstar's fair value is $101 or 22.86% higher from here. Average these numbers out and I find shares to be about 3% undervalued. With 9 years of dividend growth, I'd be willing to add shares at a price below $91.

Conclusion

Now that we've increased the number of positions we have our portfolio, I would like to add to many of our smaller positions this year. Apple, Cisco, PepsiCo, Starbucks, V.F. Corp and Visa are all at or below a half position. My goal is to be able to add to each of these names throughout 2017. What do you think of these companies? What stocks are you watching for 2017?

Disclosure: I am/we are long AAPL, CSCO, KO, PEP, MA, SBUX, V, VFC.

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: We are not investment professional. Please do your own research prior to making an investment decision.