Four Stocks to Consider for 2018 and Beyond

Hello Everyone ! Welcome 2018 !!!

Hope we all have a great investing year in 2018 and beyond.

Hope everyone had wonderful Bull run for 2017 and ready for what wall street has stored for us this year. I am pretty excited for the year 2018, regardless the greatest bull run ends or not or market correction comes this year or not. I wish everyone to have great investing year ahead and trust that the dividend income keeps stepping up for all of us to get a step closer to financial freedom.

My Target is to increase TDK’s forward dividend income to $6,000 before the year ends.

As a value investor, its extremely important not to overpay for even a quality companies while hunting for continued sustainable dividend income. For example, Boeing, Johnson & Johnson, McDonald’s, MMM, Lockheed Martin Corp, Procter & Gamble, Colgate-Palmolive etc. are all great dividend companies to buy and hold forever. However, I wouldn’t want to buy any of these great names at their current valuations. While traditionally dividends within these great blue chip companies have increased generally at a faster pace than inflation over time, I still believe overpaying for a blue chip is not the greatest idea after all. I also understand that it depends on one’s perception and the way they calculate the intrinsic value on whether one finds a company being overvalued or undervalued or somewhere in between and that creates this market so much interesting. Moreover, I also think timing the market is not cup of my tea and traditionally I have not succeeded either to try and time the market. Despite all these, I am still a strong believer of not overpaying for a great quality dividend paying company either. I am sure that during this process, I will be wrong at times and will miss greatest opportunities but I am personally OK with missing big opportunities than to buy knowing that the price I am paying is way too high than the value of the company.

I also would like to add, while searching for a value stock, one must not get carried away just by one or two ratios either. For example, if PEG ratio is given too much of importance while making investing decision, it can mislead the overall decision. Like PE ratio, PEG ratio is also considered, smaller the better. Companies trading below PEG ratio of 1.0 is generally considered in value zone. (My person limit for PEG is actually 2.5 coupled with several other parameter limits). However, for Caterpillar and Deere & Company, PEG ratios are at 0.55 and 0.94, respectively, makes it look like a value stock, even after having a huge run of about 55% and 47% in past year, respectively. If one pays too much attention to PEG ratios, then CAT seems very lucrative at these prices than what it looked like a year ago based on its last year’s trading PEG ratio. Also, total Debt for CAT and DE stands at about $25B and $24B, respectively. While I believe these debts are still within manageable levels but in increasing interest rate market, interest payments will also expand which can negatively affect company’s free cash flow. Hence, I wouldn’t be buyer of these great blue chip companies at these prices.

Below is my list, not in any particular order, for any investor to consider for 2018:

CVS Health Corp (CVS)

CVS has been down for year 2017. However, with current Tax reform will positively affect CVS. Company has recently announced that tax advantage will increase companies cash flow by about 1.2B per year due to tax reform. AET buyout can also happen in later half of 2018, assuming it’s approved. If it doesn’t get thru, CVS will still be in a great shape and if it gets thru, then there will be good amount positive cash flow coming in from  AET’s continuing operations. Like CVS, AET is also among high TAX paying companies which will be benefited from tax reform. Please see TDK’s recent buy posts (here and here) about CVS for more detailed analysis. CVS will not increase dividend until the debt levels will come down to companies targeted debt levels relative to EBITDA. With tax reform, I believe that level will come within a year or two at most.

Exxon Mobile (XOM)

Exxon Mobile is another good name that I believe will do good for 2018 and beyond. More details about XOM and my thoughts about this company can be found here. Increase in oil prices in recent months is very positive sign for this cyclical oil giant company. I believe XOM is attractively priced with 3.55% current dividend yield. XOM has not been paying very high taxes in domestic taxes, however, XOM has paid very high taxes in past specially close to top of the cycle. That means, in future when XOM will make more profits from its operations in higher oil price environment, that is when it will see the most advantage on the taxes.

 Target Corp (TGT)

Target is definitely the name on the my list for 2018 and beyond. More details about Target can be found here , in TDK’s post about a month ago for purchase of TGT shares  While target has gone up by about 14% in one month since TDK’s purchase, I still believe target is nicely priced with 3.77% current dividend yield. Target has been paying about 33% in domestic taxes, which is another reason why target will be positively impacted by reduction in corporate taxes.

Kinder Morgan (KMI)

Kinder Morgan has had rough past year and half after the debt levels were considered too high for allowing to borrow more money there by issuing more share in open market to fund for dividend payments and/or CapEx. Company decided to cut down their dividend and ever since it is taking right steps to move forward with positive results. Company’s debt levels are reduced from 42B in 2015 down to 35B as of Q3 17. Net operating cah flow is about 5B, that can well cover company’s projected 60% dividend increase for year 2018 with continuing CapEx without needing additional funding. Company has paid about 30% in taxes (KMI has paid 3.01B in Taxes from 10.3B of pretax income) over past 5 years that means lower taxes from tax reform will positively impact KMI’s future net income and cash flow from operations. You can find recent post where I initiated a long position within the company here.

Some of these companies have already gone up in prices since last I purchase, however I still think there is more room for growth both in terms of earnings and share prices.

I am long JNJ, CVS, KMI, XOM & TGT. You can find TDK’s full portfolio here.

This Post Has 17 Comments

  1. Regarding “I still believe overpaying for a blue chip is not the greatest idea after all.”

    If you keep thinking that way, you will miss out on some of the best companies that have the potential to earn you huge gains and dividends in the future.

    People forget, great companies demand premium, and may not come down to a bargain valuation ever. I would rather have my portfolio build-up of big positions in great companies generating the safest and growing dividends and returns than have a big position in highly bargained or laggard stocks with risky dividends.

    In a bull market, cheap stocks are cheap because they are considered highly risky and market has priced them in the bargain bin. Whereas high quality stocks trade at premium and keep getting higher because they are of high quality and will do better even in a bear market.

    Think about it, if you own a sports team, which players would you want to be out playing the most in the field? The best performing players or the ones sitting on the bench?

    Take care and I wish you meet your target objective for the year.

    1. Mr. ATM,

      I see your point of view clear as well. However, I still don’t think it is a good idea for one to buy companies like BA, CAT or DE at current prices despite them being greatest dividend companies. I also agree that I may completely miss out on huge gains from these companies, but like I mentioned in my article, I am personally OK missing out on gains or waiting for the lower valuation before I initiated a position within this great names. Some people may not be OK missing out on these gains or staying away from these great names, and I understand that point and respect that point of view as well.

      These differences in thought process and investing philosophy creates these market so much more interesting and create opportunities. Some believe in efficient market theory like you mentioned, I personally believe markets are not 100% efficient. But again, I think both theory can still lead to a right path to meet our objectives. So Good Luck to you and me :).

      Thanks for stopping by and comment.

      Happy Investing.
      TDK.

    2. You seem to be projecting a lot of bias into that comment. I read it as, given 2 companies of equal future value, buy the cheaper one. Everyone has their own way of balancing that, but it boils down to trying to find the best “deal”.

      1. Mr SLM,

        I am not fully sure where you find me biased but I am happy to clarify if you pin point which point you are exactly referring to.

        Regarding “I read it as, given 2 companies of equal future value, buy the cheaper one. ” Yes, you read it exactly as I intended, I am surprised why it seems rocket science if the equal future 2 companies are found (which I know they don’t exist exactly) then of course I will buy the cheaper of the two.

        Yes, I agree everyone has their own way of balancing and I respect that totally. I am neither advocating to follow my way nor indicating or claiming that my way is better by any means. In fact, I have made numerous mistakes in my investing life and am sure will make more in future as well but I try to minimize the amount of mistakes I make. That’s why I mentioned in my post that I may be wrong and may miss out on big gains but I am personally OK with that than to buy a company or name that I value as over priced and still buy big. I am fan of dollar cost average idea as discussed in some comments here when price is much higher than I would like to pay.

        Thanks for stopping by and commenting.

        Good Luck and happy investing.
        TDK.

  2. TDK and ATM have a good debate. It is one I struggle with all the time. I hate to overpay for a stock, but I also hate to miss out on good opportunities. I have passed on Boeing and Home Depot for valuation reasons over the years and regret it. My only solution is to add to my positions in increments over time. You can then benefit which ever way the price goes. Tom

    1. True, this can go either ways and to be honest, both ways are good. I actually sometime do exactly what you mentioned, dollar cost average or buy very little just to keep an eye on. Boeing and Home Depot are on my regret list too, BIG TIME, including CAT.

      Thanks for stopping by and for your comments.
      TDK.

  3. Nice debate. My idea is similar but through ETFs. By buying ETFs I might by overpaying for certain stocks … However, I will also end up buying value stocks. The hope then is that on an average I end up positive. The definition of overpriced is vague AFAIK. Historically, S&P 500 is high. If I had stayed out in 2017 I would lost 15% gains. Could it have gone other way … yes of course. Again, on an average I hope to make money.

    1. I agree to what you’re saying. However, just to clarify I am not advocating to completely cash out and wait for correction. All I was trying to address is when cash becomes available for investing, I just try avoid high valuation stocks and instead try and buy little cheaper stocks available in the market place. I also believe that one should make regular purchases over time regardless, because like you mentioned during 2017 they would be missing out on overall 15+% gains. I am also big fan of ETFs, although I don’t have a whole lot of ETFs in my portfolio (I still have some though), I agree that some % of ETFs is justified in any portfolios. I am just leaned little more towards dividend paying stocks myself, for the very reason of getting closer to Financial Independence (FI) via passive income.

      Thanks and Good Luck,
      TDK.

  4. KMI and xom looks good as oil prices mostly go up in coming years. CVS may bring transformation in health care with atenna

    1. True Invest1. These stocks can do good these year and probably beyond. I wanted to add GE to the list as well but end up not adding it. I believe, CVS together with Aetna can plan to convert their CVS stores into Urgent Care or consulting doctors at the location at walk-ins. Will see.

      Thanks for stopping by and commenting, hope you enjoyed the post.
      TDK.

  5. First time here TDK. And I love the debate. For me, I’m a big fan of dollar cost averaging. That way, I get the average price of the stocks rather than having to worry about if the stock is over valued or not. It’s hard to tell sometimes. But, I also agree that your approach has merits and there’s not only one right way to invest in the market. An investor has to invest based on their knowledge level, risk tolerance, attitude, beliefs, etc. And, since we’re all different, we certainly, at times, approach the market differently, for better or for worse.

    1. Good to have you visit the blog for the first time. Dollar cost average is definitely one way to create small but steady position in highly valued companies. Yes, its hard to tell sometimes, but when you think is highly priced and if you can find a bargain in some other region or some other companies within same sector also having nice dividend records, then I see not much interest in going for highly valued companies over such bargains. Again, this is just my approach of investing not necessarily the only way to invest or not gaurantee of success either. Hope you like some posts on this blog, my recent picks and thought process.

      Good Luck.
      TDK.

  6. There is some intense debating going on here. Valuation metrics can be difficult. Focusing solely on valuation metrics can be tricky because it can cause you to overlook some other metrics that are critical for finding a great dividend stock. I try to save valuation for last after I have an idea whether or not I like the company’s management team, story, and dividend history. Sure, some stocks may never trade at a discount to others in their industry and if that’s your only metric, yes you will miss out. But I also look to see if the company is trading at a discount to the broader market as well. Its all about finding your rhythm and what exactly you want as an investor. I own three of the four stocks on your list. Don’t forget that KMI is set to increase their dividend here in 2018 if management follows through on their announced plans.

    Bert

    1. Hi Bert,

      True, debate in positive way is always good and welcomed. Yes, other metrics are also important like you mentioned. I actually covered within the article the same thing only one ratio or two can be misleading. So yes, overall picture is more important including financial strength, integrity of management, dividend history, debt levels etc. Good to have you fellow share holder on three of the four from the list.

      Yes, KMI dividend increase is little tricky since their recent past history about their announced plans versus what was delivered wasn’t all that great.

      Thanks for stopping by and commenting. Good luck.
      TDK.

    1. Thank you Suresh for stopping by and commenting.

      Good Luck.
      TDK.

  7. I don’t buy very many individual stocks but thanks for sharing your input!

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