Is Now The Time To Buy?

Includes: BP, C, CNI, JNJ, KO, MSFT, PBI, T, XOM
by: Larry Smith

As a dividend growth investor, I always see market pull backs as an opportunity to buy more shares of companies I already own at good prices, or as a chance to purchase shares in a company I have been following at a good entry point. The market has been in decline for some time now and many stocks are 10%, or more, cheaper than they were a month ago. However, since this is investing and nothing about investing is easy, the issue of "is this the time to buy" is more complicated than that.

Right now may seem like a good time to buy, but there may be a better time to buy next week, or next month. I remember watching CNBC during the banking crisis in 2008 and hearing an analyst say Citigroup (NYSE:C) at 24 was a great buy, after all, it was 45 not that long ago. Turns out, Citi was not a good buy until it got down to $1.00.

As dividend growth investors, the universe of stocks we own, follow, or desire tend to be less volatile than other sectors. Dividend growth stocks, generally, are mature companies with good balance sheets, growing at a slow, steady pace. Dividend growth stocks, although less volatile, will still move up and down in price enough that good buying opportunities will present themselves. Declines in price may occur for various reasons, with some reasons making for better buying opportunities than others.

Price Declines of the Company's Own Making. - At times, companies screw-up, an oil company may have a well blow and cause a perceived environmental disaster, much like BP (NYSE:BP) had seen in 2010. A company's product may be recalled, an issue Johnson & Johnson (NYSE:JNJ) has been facing, or accounting issues may be exposed, an issue that brought down WorldCom.

Operational issues, like well blow-outs and product recalls, are usually excellent times to buy, if the issue is short-term. An operational event that causes a price drop, but will eventually be rectified, allows a smart buyer the opportunity to purchase shares that are temporarily cheaper due to panic selling.

An accounting issue is, to me, a reason to sell with three hands. If a company I own announces accounting irregularities, I will not stick around to find out how bad it gets, and I definitely would not buy any shares. It has been my experience that accounting issues almost always get worse, and in some cases much worse. I owned WorldCom and held on too long as I listened to the executives proclaim everything was alright. That will not happen to me again.

Bear Market Decline - Bear market declines are excellent times to buy, if, and this is a big if, you know when the bear market is over, or close to being over. Bear markets are loosely defined as any market decline of 10% or more. However, any investor who has been around for any length of time has probably seen market declines of 50% or more. So jumping in when the 10% mark is hit is not always the best time to buy. As a dividend growth investors, my investment time-line is long term so I am not looking to pick the exact bottom of a bear market, I just want a good price on a dividend growth stock. What makes this a little bit more difficult is that many dividend growth stocks are considered defensive and may not decline as much as the overall market.

So what should a dividend growth investor do? I have two strategies I use: One is dollar cost averaging and the other is buying cyclicals. If the market is in decline and the stock you want to buy is down, or you want to add to a current holding, take half of your available cash and buy some shares. If the stock continues to decline you can pick up some shares even cheaper and lower your cost basis. If your stock starts to rise in price, you can buy some shares and be happy you picked up some near the bottom and have an overall low cost basis. With most on-line trades now costing between seven and nine dollars, your trade cost is not overwhelming.

Most bear market declines are caused by economic weakness. The economic weakness may be caused by any number of factors, geopolitical event, banking crisis, political upheaval, etc., but the end result is economic weakness. During times of economic weakness, cyclical stocks tend to fall the furthest as they are most tied to the economy. If you are willing to hold and wait for the turn-around, you can pick up some great bargains and collect a nice dividend while you wait.

Canadian National Railway (NYSE:CNI) was a company I had followed for a while, partly for sentimental reasons as they have a small yard and some tracks that are just blocks from the house I grew up in Wisconsin. In late 2008 and early 2009, during the banking crisis, the stock fell from the mid-$50s down to the mid-$30s. Watching the car loadings report I saw a slight improvement in the report. So on 05/19/2009 I bought shares of CNI for $38.30. I held the shares until January 2011 where I sold them for $67.67. I sold at the time out of fear the European crisis would slow the entire world economy down and thus drop the price. I was wrong on that, as CNI has continued upward, but I am still happy with how the investment worked out. That is just one example of how buying a cyclical dividend growth stock during a bear market can prove very profitable.

Business Model is Broken - Mature companies often times have mature businesses, some of these businesses evolve over time and continue to be good performers. Coca-Cola (NYSE:KO) has been around for over 125 years, yet it continues to grow by expanding to more and more countries and by adding more beverages to its portfolio. There is no reason to think that Coca-Cola will not continue to grow. Other companies like Pitney Bowes (NYSE:PBI) which has been around for over 100 years (starting as the Pitney Postal Machine Company) has seen its main business of postal metering slowly wither away. Unable to find a new business to grow, PBI has seen its share price decline from around 46 in 2007 to 14 today. An argument could be made that this is a good time to buy if you like a high yield and are willing to take the risk that the dividend won't be cut. However, with revenue declining and unable to get their digital business rolling, the future for PBI could be very weak.

Kodak is another company that saw its main business destroyed by technology. Unable to develop a business with revenue equal to the old business, Kodak filed for bankruptcy in January. When a business model is broken, you can hang on to collect the ever growing dividend (assuming it is not cut) or you can sell on move on to a better investment opportunity. If I own a company and I see sales falling, revenue declining and a product that is out dated, I would be selling, not buying.

Stock Downgrade - Every investor has had some Wall Street analyst downgrade a stock they own at some point in time. In most cases, the day of the downgrade, the downgraded stock will drop in price. If you are confident of the company's long term viability, downgrades are excellent times to buy. It has been my experience that downgrades result in a dollar or two drop in price. The price drop in many cases is literally a one or two day event and then the stock resumes trading as if the downgrade never happened. On September 22.2011 Goldman Sachs (NYSE:GS) downgraded Johnson and Johnson to hold from buy. The stock that day closed down $1.21 at $61.92. Just five days later on September 27th, JNJ closed at $63.82, which was higher than the price was just before the stock was downgraded.

The above example does not happen every time, but the majority of dividend growth stocks are large, mature companies with large, extensive businesses, it takes a major event to disrupt their business momentum. Always remember, a downgrade is just one person's opinion, if you have confidence in the stock you own this can be a fortuitous time to buy.

So Is It Time to Buy, Or Not? - I think it is only fair that at this point I tell you if I think it is a good time to buy. This is just my opinion, and I would certainly hope no one runs out to buy some stock just because "Larry says so."

Over the last month stock prices have declined in large measure due to the continued European crisis which has impacted some multinationals and the rising dollar, which has hurt many commodity stocks. The economic news from the United States has been relatively positive with housing showing some small signs of recovering, gasoline prices falling, retail sales mostly positive and unemployment slowly falling. This mixed bag of news is, as all economic news is, short term. As I am dividend growth investor and my time horizon is, in some cases, forever, I try take a more long-term view of the world.

It is my view that 10 years from now the Greece crisis will be a distant memory, but in that time McDonald's will have opened thousands of new restaurants, KO will be selling billions of more beverages, JNJ will be providing more medical products to an aging world population, Exxon Mobil (NYSE:XOM) will be providing energy to an expanding world, Microsoft (NASDAQ:MSFT) will be selling more software to a world hungry for information and AT&T (NYSE:T) will be providing the backbone for the world to communicate. All of those companies will continue to raise their dividend and share their growing profits.

So yes, it is a good time to buy dividend growth stocks. The market has pulled back; stocks are cheaper. Could they get cheaper? Yes, but for the dividend growth investor who allows time and the miracle of compounding work for them, now is a good time to buy.

Disclosure: I am long KO, MCD, XOM.