Recent Purchase of BAX and BP

It’s been hard to find good value in stocks with markets near all time highs. While valuation does matter, I feel it is more a matter of the quality of a company than its current price. I’m not buying these companies for their performance over the next year or two, I’m buying them for a 10+ year time frame. In fact, the companies below have actually gone down in value since I added them to my watchlist.

A recent article on Seeking Alpha did an excellent job of elaborating on this by quoting and linking to a video of Buffett speaking.

Coca-Cola went public in 1919. The stock sold for $40 a share. One year later it’s selling for $19. It had gone down 50% in one year. And you might think that’s some kind of disaster. And you might think that sugar prices increased and the bottlers were rebellious and a whole bunch of other things, you can always find a few reasons why that wasn’t the ideal moment to buy it. Years later you would have seen the great depression and you’d see World War 2, and you’d see sugar rationing, and you’d see thermal nuclear weapons, the whole thing. There’s always a reason, but in the end if you’d bought 1 share for 40 bucks and reinvested the dividends it’d be worth about $5 million now … And that factor so over rides anything else. I mean if you’re right about the business, you’ll make a lot of money. The timing part of it is a very tricky thing. So I don’t worry about any given event if I’ve got a wonderful business … You can figure out what will happen, you can’t figure out when it will happen. You don’t want to focus too much on when; you want to focus on what. If you’re right about what, you don’t have to worry about when very much.

I’ve highlighted the important part above: “You don’t want to focus too much on when; you want to focus on what. If you’re right about what, you don’t have to worry about when very much.”

Using this philosophy with free cash from my paycheck and a recent sale, I purchased two companies that, I believe, are fairly (or cheaply) valued and will serve me well many years from now.

I purchased 30 shares of Baxter International Inc (BAX) at $65.809/share. BAX has a dividend yield of 2.98% and has a 5-year annualized dividend growth rate of 16.9%. BAX has also been aggressively reducing the number of outstanding shares. This purchase will add $58.80 in annual dividends.

I also purchased 50 shares of British Petroleum (BP) at $42.0096/share. BP has a dividend yield of 5.14% and has recently started raising dividends again since the oil spill. The first raise was 14.3% and the second was around 12.5%. The payout ratio is around 25% so there is plenty of room for future raises. This purchase will add $108 in annual dividends. All the oil companies have low PE values. CVX, which I own, is 9.85; XOM is 10.84. BP, is not just cheap, but very cheap. It has a PE ratio of only 5.2 (with a forward-looking PE more in line with the other oil companies of 9.03). The market is pricing in the cost of the oil spill cleanup and resultant legal fees. There are still a few pending litigations, but if need be BP has the cash flow and low debt in order to survive and flourish like Exxon-Mobil did after its spill.

I’m particularly thrilled with BP’s and Chevron’s involvement in Liquid Natural Gas (LNG). I feel that this product, which the US has in abundance, will be a huge contributor to energy in the not-so-distant future. There are a few small LNG-related companies such as Golar LNG, Ltd (GLNG) and Cheniere Energy Partners LP (CQP) that I’m considering, but companies I already own, like BP, CVX, and KMI have or are developing exposure to our LNG exportation.

With the contributions of BAX and BP, my estimated annual dividend is now $1,566 (or $130.50/month!). I will receive BP’s last distribution of the year but didn’t make the ex-dividend date for BAX.

Full disclosure: Long BAX, BP, CVX, KMI, KO