Recent Buys – December (Part 3)

As a value investor, one should always be on hunt to find the bargain and keep investing in these bargains at regular interval, monthly or bi-weekly. When bargains shifts from one company to other, we as a value investor, should follow the value stocks and maintain monthly purchases of these value stocks to create continuously growing stream of passive income. Continuous flow of dividend income stream that can grow over the time at faster pace than inflation rate is extremely vital.

In The Dividend Karma’s journey of creating constant flow of passive income via dividend investing, I try to keep looking around hunting for the value dividend stock and post it on this blog once I made a decision and pull the trigger to buy piece of business within any such company.

On 7th December, I bought 75 stocks of Enterprise Products & Partners (EPD) at an average price of $24.365. EPD pays quarterly dividend of $0.42 (paid in the month of January, April, July and October). Dividends will be reinvested.

Capital invested is $1,827.38. This purchases will increase the TDK’s annual dividend by $126.0. Dividend on this purchase yields about 6.89%.

On 6th December, I also bought 15 stocks of CVS at an average price of $71.65 (invested capital is $1,074.75). CVS pays quarterly dividend of $0.50 (paid in the month of January, April, July and October). TDK’s annuanl dividend will increase by $30. Dividends yield is about 2.79%, however, I expect CVS to announce dividend increase before I receive my first dividend on this purchase, which will actually put my forward dividend yield on this purchase just above 3%, let’s see though. I recently have bought CVS and have posted my investing philosophy here and here.

TDK’s Portfolio is updated with these purchases and can be found here. These two buys were added on TDK’s Traditional IRA account and will add $156.0 to TDK’s forward annual dividend.

Key Factors for EPD:

Forward PE is at about 16.5 which is lower than ttm PE of 19.5. I am bullish on O&G industry for next 3 to 5 years, this purchase will add to TDK’s overly exposed O&G portfolio.

EBIT ttm (Earning before Interest and Tax) to EV ratio is right barely at 6.87%, which is much lower than my minimum target of 10%. However, these companies are best when looked at cash flow from operations.

Current Ratio is right at 0.71, which is less than 1.0, mainly due to high debt nature of pipeline and service businesses. Debt is pretty high at close to $25B which is also typical for pipeline service business.

Payout Ratio is at about 132% when compared to EPS. However, looking at free cash flow of EPD’s business and potentially rebound of oil prices in coming years can really help. Even without oil price rebound, I still believe the dividend can be sustained either by issuing more shares (which I don’t really like but again its pretty common for pipeline service businesses) or by using cash flow from operations to pay for dividends.

Average cash flow from operation alone for past three years is about $4.1 B.  These cash flow numbers are good from a high dividend company of about $56 B in size to be able to generate 7 to 8% of cash flow from operation alone every year. Even if we compare these with enterprise value instead of  market value, these numbers are still reasonable at about 5.2%.

Outstanding share count increased from 1.72B in 2012 thru 2.16B at the end of Q3 of 2017. Again this is common for pipeline service businesses since they try to sale more shares of companies at regular interval to create more cushion to buy more assets instead of taking debt on books and in turn create more shareholder’s equity despite having created more outstanding shares. For example, EPD’s assets increased from $36B in 2012 to 53.3B currently while liabilities increased from 22.6B in 2012 to $30.75B as of Q317, thereby increasing total shareholder’s equity of 13.2B in 2012 to $22.33B as of Q317. In other words, outstanding shares increased 25.5% but shareholder’s equity increased by 70%.

What are your thoughts on this purchase ? What are the stocks you are buying or looking to add ?

This Post Has 4 Comments

  1. I do not own pipeline stocks, but oil is certainly going up in next year or two

    1. Thanks Invest1 for stopping by and commenting. Yes, I also feel the same. Oil prices are on upward movement as of now and I’m hopeful it will continue for next 3 to 5 years.

      Happy Investing.
      TDK.

  2. Nice buy. What is the dividend history for EPD? I do not own EPD. I am interested in CVS.

    1. Hi Divdendgeek,

      I had looked back until before 2008 for dividend history of EPD and it was uninterrupted and growing every quarter since July 2004, thru financial crisis. Annual dividend is growing since even longer, including thru tech bubble and financial crisis.
      I agree CVS is surely a good buy here.

      Thanks for stopping by and commenting. Happy Investing !
      TDK.

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