Follow the dividend investment decisions of a person who has no background in financial investment and wishes to take control of their financial future.

Steris Corporation (STE) - 30 Oct 2013 00:25

Tags: healthcare ste steris stock_review_2013

ste.jpg

One of the more difficult challenges with Dividend Growth Investing (DGI) is finding the next Dividend Aristocrat (stocks growing dividends 25 or more years in a row) before they become an Aristocrat.

The reward for finding a future dividend grower early are large consecutive growth periods (greater than 10%) over a long period of time. The only down side is a low starting yield but the growth rate over a long period of time compensates (exceedingly).

In my attempt to find a future aristocrat I decided to search in the low end of mid-cap stocks (stocks with a market cap of $2B to $3B) often an area overlooked when it comes to DGI. In my search I came across Steris Corporation.

Steris Corporation (STE) specializes in the manufacture a sale of sterilization equipment, supplies and lab services. They primarily serve the healthcare industry but they also provide decontamination equipment to the defense industry.

STE has been growing its dividend payout since 2005. My normal criterion is at least 10 years of dividend history but with 8 years of growth we need to run the numbers to see if it has what it takes for the long haul.

.

Dividend Growth Rates
1-Yr 3-Yr 5-Yr 10-Yr
12.5% 20.6% 26.8% n/a

.

Looking at some of my screening criteria for a DG stock we see some solid numbers:

.

Dividend Growth Rate Debt/Equity Ratio
Criteria STE Criteria STE
>= 7.2% 12.5% < 1 0.53
Dividend Yield Payout Ratio
Criteria STE Criteria STE
> 3% 1.8% < 70% 30.66%

.

The only weakness on the initial screen is that the current dividend rate of 1.8% is significantly below the 3% criteria. Depending on your time horizon this may be an obstacle but if your timeline is 15 to 20 years and you could be looking at a 14% dividend on cost.

Looking at earnings over the last 6 years we have positive earnings growth since 2008 with the exception of 2011. In 2011 there was a $110M liability related to its product SYSTEM 1 rebate program.

2013 EPS 2012 EPS 2011 EPS 2010 EPS 2009 EPS 2008 EPS
2.72 2.31 .85 2.16 1.86 1.2

The balance sheet is fairly strong as reflected with a debt/equity ratio of .529 and a current ratio of 3.19. The only area of risk was the jump in long term debt from $210M in 2012 to $492M in 2013 but further investigation identified that the additional debt was incurred to close on 4 acquisitions.

Digging into the company’s assets is where you will find the real hidden treasure in this company. In 2012 patents were valued at $43.2M but in 2013 patent value jumped to $169.5M. The large increase was a combination of aggressive R&D spending (12% of operating costs) and key acquisitions over the last few years.

Research & Development Spending
2013 2012 2011
$41.3M $36M $34.3M

As of the 2013 annual report, the company held 328 United States patents and 823 foreign patents and had 82 United States patent applications and 282 foreign patent applications pending. STE has been quietly becoming an Intellectual Property juggernaut allowing it to compete with companies 5 times its size.

Looking at the recent stock price of approximately $46 per share it is currently trading at its 52 week high and carries a trailing P/E of 17.3 and a forward P/E of 16.68. The 5 year average P/E has been 19.86 so the current stock price looks to be appropriately undervalued to what the market has historically valued. On the growth front, anticipate significant increases from lab services and sterilization supplies in mature markets such as the U.S. and Europe while sterilization equipment should experience growth in developing healthcare markets.

In summary, the company has tremendous strengths in their intellectual capital and strong balance sheet. For weaknesses there is lack of communication from the CEO to a vision or strategy on capturing growth in Latin America and Asia. In regards to risk there is the danger of the company not translating its intellectual property into future revenue growth. I would consider this a worthy investment in lieu of the risks and if they continue their aggressive R&D investments and key acquisitions we could be seeing a dividend aristocrat in the making. Even though the stock price is trading at its 52 week high I see a great long term value in both equity & dividend growth and would be a buyer at current price levels.

Note: I do not own this stock at time of this writing. - Comments: 0

The Best Financial Gifts For Children Is Not Money - 20 Oct 2013 14:54

Tags:

I’m sure there will be some backlash on this one but the best financial gifts you can give your children does not involve handing over a pile of cash. As a parent I have three simple goals for my children:

  1. teach them how to survive in today’s world
  2. help ensure their survival
  3. love’em till the end of time

These are pretty simplistic but work for me. Two of the goals involve survival and part of surviving in modern times involves financial security. Here are the financial gifts I have or will be giving my children.

Education

Budgeting (Age 8+)
Do not be shy about sharing your paycheck and monthly bills (commitments) with your children. It exposes them how to balance the needs and wants of the household. Kids are smarter than we give them credit for and grasp the concept quickly. It helps them understand that money is not an unlimited resource and planning is required to survive.

Savings (Age 10+)
Explain to your children what you are saving for and why. It is important they understand the concept of planning for major purchases, emergencies, and retirement. Planning for emergencies is always a great topic, what a child or even young adult perceive as an emergency is entirely different than you would expect. With my children I express it in little emergencies & big emergencies. Where little emergencies are like your car breaking down and big emergencies are when you cannot collect a paycheck and pay the bills.

Investing (Age 12+)
To most kids savings is very simple; you put it in a bank (piggy or commercial). From their perspective things like the stock market are only in the movies or for the incredibly rich. Share what investing techniques you are using to reach your saving goals. Why a bank, why the stock market, what are bonds, and so-on.

Saving Priorities (Age 18+)
A young working adult comes into something they never had before; a steady income. With a steady income for savings they need to understand which saving goals have more priority than others.

  1. Emergency savings
  2. Saving for a major purchase (house, wedding, etc…)
  3. Retirement

I realize the retirement zealots will scream bloody murder that retirement should be number 1 as time is the best ally for ensuring a funded retirement (and I agree). But so much can go wrong between when your child first starts working and retirement. Being able to manage emergencies so they do not impact their retirement is just as or more critical. Of course I will preach how dividend growth investing can help with both emergency & retirement savings.

Loans & Credit (Age 18+)
With a steady income stream comes the potential to borrow money. It is important to teach your child the different types of lending or credit debt so they can make proper decisions about debt. What is a mortgage, yield & interest, payments, early payoffs, auto loans, etc…

At the end of the day all of these life lessons are creating financial literacy for our children. If you expect a local high school to teach these things to your children do not count on it. I find it amazing that teaching financial literacy is not a mandatory class or set of classes during high school. A recent study by Champlain College summarized the issue and provides for an interesting read on the financial literacy of our youth of which I was not surprised to see my home state with a grade of F.

Living at Home

Allowing your children to live at home is probably the greatest gift to give your children as it gives them a tremendous head start. But there are horror stories about children living at home and in some cases never leaving. To make this work parents and children each need to change. Talk to your child about why they want to live in your home. If the answer is simply, ”I can’t afford to live on my own” then it is the wrong answer. Instead ask them to lay out some goals that start with the phrase “I want to live at home for X years to save for…”.

Also let them know why you want them to live at home. They need to understand that living at home is truly a gift and here is why you are offering such a gift.


With a little luck I hope to offer my children the opportunity to live at home and give the advice to save 60% of their salary for the first two years and to not touch it unless a big emergency or retirement comes along. After the first two years, they can begin saving the next 2 to 3 years for whatever they want in life. I strongly believe a Dividend Growth Portfolio can create an income stream latter in life that can help with emergencies and retirement.

Whether or not they heed the advice is another story but at least offering them the opportunity to live at home & save to start a new life is the best gift I can think of. - Comments: 0

Recent Buy - 16 Oct 2013 00:40

Tags: ppl

On the road to diversifying my portfolio by adding to my position of PPL with an additional 20 shares which will contribute $29 annually.

This pulls up my investment in utilities to 3.5% of my portfolio. 3.5% meets my target allocation as it is more of a defensive position than one of growth. - Comments: 0

How DGI Fits Into My Goals - 12 Oct 2013 11:37

Tags: emergencies income retirement

My investment goals are very simple and probably similar to most investors:

Intermediate Goals (10+ years)

  1. Maintain a significant cash position for emergencies
  2. Build a passive income stream to supplement lost income during emergencies

Long Term Goals (Retirement)

  1. Build a passive income stream to replace my income
  2. Maintain some wealth my children can inherit

Dividend Growth Investing (DGI) is one of the key strategies that I am employing to meet both intermediate & long term goals. For passive income of intermediate goals, DGI is my 100% solution. If I find myself unemployed prior to retirement I plan on supplementing unemployment payments with my dividend stream and cash position in the hopes it will tide me over until I land a new job. If I’m lucky enough and a severe emergency never arises then there is the additional bonus of rolling this into my retirement.

For long term retirement goals, DGI is not my 100% income solution and there are two primary reasons for this. The first is asset risk diversity which I have posted about in the past. Since DGI composition is entirely tied to stocks your portfolio lives and dies by the success of stock markets. By diversifying in other asset classes it reduces exposure. The second reason for multiple solutions has more to do with my spouse. My spouse is extremely intelligent but has no care or interest in investing. If I pass away during retirement and our portfolio was entirely DGI what position would that leave her in? DGI is not a “set it & forget it” investment, it requires constant financial monitoring to ensure dividends are stable and dividend growth is still achievable. Without those skill sets it leaves my spouse exposed to long term risk.

Taking my spouse & risk into consideration here is my projected income stream to simplify things:

20% Social Security
20% Annuity (with survivor benefits)
30% Bonds (combination of U.S. Govt, Corporate, Foreign & Munis)
30% Dividend Growth Investing

As far as preserving some wealth for my children the plan is to leave 15% of my 401K invested in an ETF index fund that mimics the S&P 500.

Without a crystal ball this is my strategy with what is known today and if the investing landscape changes in the next 20 years I’ll have to re-think my approach but for now I believe this to be a conservative and considerate approach. If you have not thought about replacing your income in emergency or retirement situations then now may be a good time to reflect on the topic and start your plan. - Comments: 0

Recent Buys - 08 Oct 2013 15:37

Tags: bp cvx

With the recent minor pullback in the markets (thank you debt ceiling crisis) I took advantage of the situation to diversify my portfolio.

As of September I held zero shares in the energy sector but that has changed. I picked up a decent amount of shares of Chevron (CVX) and started a small position in BP (BP). The two purchases have increased my annual dividend by $115.

Chevron sounds like it was a no brainer but when deciding between Chevron or Exxon/Mobil it is not an easy choice. Both are excellent companies and you cannot go wrong purchasing either. At the end of the day I went with CVX and its higher yield and I was nervous about how much Exxon/Mobil has invested into natural gas.

BP was an entirely different story. With a dividend yield north of 5% it makes one stop in their tracks. But high yields do not come without risk the largest of which is BP still dealing with the Gulf oil spill settlements. Another risk was that BP has only recently started to increase their dividend again so any hiccup down the road may cause the dividend payment to become static. To adjust for the risk I only started with a small investment (24 shares). - Comments: 0

My Watch List Explained - 05 Oct 2013 14:47

Tags:

A watch list is crucial for any investor and each investor tracks key values or ratios to what is perceived as important. It allows investors to keep an eye on changes to potential investments that may represent a buying opportunity.

One of my fears entering into dividend growth investing is I will fall back into my bad habit of trying to time the market and only buy stocks at a price that represents a discount or value. While this type of thinking does lead to some hidden gems it can hinder my portfolio as I may not invest for long stretches of time limiting my ability to capture dividend growth and to diversify at a decent pace.

To get over the fear (or bad habit), I have structured my watch list to align with my portfolio strategy. My portfolio strategy is to initially invest with a 3% dividend yield and minimum growth rate of 9%. This criterion is then used to calculate a max price point or buy price for an individual stock and then adjust it for any perceived risks. Once a buy price is established it is then measured by the % of how much over or under it is versus the current stock price. The result tells me how much of a discount the stock price is in relation to my portfolio strategy.

This approach has resulted in more regularly investment periods, a larger population of stocks, and eliminated trying to time the market which historically for me has never panned out (probably because I cannot predict the future).

So how does your watch list work? - Comments: 0

Kids Are So Much Smarter Today - 01 Oct 2013 11:10

Tags: custodial kid

My 11 year old son approached me last week asking about stocks and if he can invest. At first I was taken back by the comment but after seeing how serious he was about the subject my mood changed from surprised to pride.

I sat with him and explained the risks of investing and he just soaked it all in. After explaining market basics we then went over the differences between stock price gains/loss and income (i.e. dividends) and how this was different from his savings account.

It did not take long for him to grasp the value aspect of dividend investing so we next talked about how much money he was willing to invest. He decided to cash out his life savings ($317) and I promised him that I would match him dollar for dollar. This brought his total up to $634. Our next task was to find brokerage for a custodial account, we ended up at Sharebuilder.com as there was no minimum balance required and they would credit him $50 after his first trade.

Next was to show him a list of dividend paying stocks and after a few days he came back with three selections. McDonalds, Proctor & Gamble and an electric company PPL. When asked of my opinion I gave him approval and of course asked him why those three. His response was, "I love McDonalds, almost everything around our house has P&G on the label, and everyone uses electricity." He also said when he gets more money he wants to buy a water company because everyone drinks water. Not a bad response from an 11 year old and it showed me just how aware of his surroundings he is. At that age I couldn't get past baseball, comic books, & fishing. When the heck did kids get so darn smart?

The bank transfer should clear in a week so I'll sit with him and guide him through his first buy. Once he buys his first stock he plans on sharing with his math teacher so they can go over the stock & dividend yield. This should be a great life lesson for applying math concepts like calculating & using percentages and ratios.

As he gets older I'll start teaching him how to tear apart a financial statement but I'm probably getting ahead of myself :) - Comments: 0


Unless otherwise stated, the content of this page is licensed under Creative Commons Attribution-ShareAlike 3.0 License