Recent Buy: July 2014
Today we saw a plethora of great companies offer up discounted share prices as the S&P500 had its lowest single day drop since April of this year. With the Russia-Ukraine conflict, a mixed earnings season, and global economic growth concerns, we’ve seen jittery market noise in July; however, today’s news about Argentina’s second debt default in 12 years was the icing on the cake that provided us DGIer’s some very nice long-term investment opportunities. While some investors worry about where the market will go from here, I’m only focused on how my individual companies will grow from here. Even though my portfolio is new, I’m confident in the long term income my holdings will provide despite short term prices. I’m buying into companies that pay annual growing dividends that will one day pay all of my expenses.
Today, I initiated a small position in a great mid-cap company. It’s been around for over a century and raising annual dividends for over 21 years. It has a 10 year dividend growth rate of 9.1% and a 3 year DGR of 25.40% including a 25% raise this year. There have been consistent share repurchases and growth has been exploding in recent years as it is transforming into a global leader in a field that uses our planet’s most common resource: water. Everyone loves Coca-Cola and Pepsi because they make big profits with water, but there are other ways to make money with good ole’ H2O. I purchased 30 shares of A. O. Smith Corporation (AOS) for $46.55 each with a $6.95 commision for a total cost of $1,403.45. I paid less than the 200-Day moving average price of $49.57, but I still paid a pretty big premium on the one year trailing p/e of 22.17. However, the 2015 forward p/e is a reasonable 17.90. While the growth potential of this investment is very high, it comes with a very low dividend yield of only 1.29% which adds $18.00 to my forward annual income for a new total of $882.80. This is a new investment for me and my portfolio now holds 15 positions.
“Everybody loves a hot shower. We all appreciate the convenience of clean clothes and dishes. And what can be more enjoyable than a relaxing dip in a hot tub or whirlpool? There’s nothing like hot water, and one company has been delivering the world’s hot water for more than 70 years . . . A. O. Smith. But today’s A. O. Smith is about more than hot water. We recently entered the water purification industry to deliver clean water to consumers in China and other fast-growing parts of the world. It’s all about water, and A. O. Smith has a singular focus on becoming a global leader in water technology.” ~http://www.aosmith.com/
AOS has long been a leader in water heaters, purification systems, and other cutting edge water related products as it continues to thrive in the United States. Expansion into China has only started in the past decade and growth has been spectacular. Chinese consumers are moving away from poor water quality and toward trusted water treatment brands such as A. O. Smith. The company has already captured a 20% market share in China with a 10 year CAGR of 28% there . China has a goal for its citizens to be 60% urban by 2020 and they’ll be needing clean and hot water for all the new houses, apartments, and businesses. AOS has also seen strong recent growth in India and Turkey. I believe AOS has a tremendously positive outlook for major future growth. Here are more reasons I like AOS:
- Strong growing balance sheet for future acquisitions, share repurchases, and dividend increases
- Stable/Growing and impressive product line and replacement market (Yes! Replacement parts and products revenues are growing steadily!)
- 3-Year Average Revenue Growth of 13.1%
- 3-Year Average Income Growth of 15%
- Debt / Equity: 0.2
- Broad current distribution channel with a proven expansion strategy for future worldwide population growth
What do you think of AOS? Did you make any purchases during today’s drop? How much further do you think the market will fall?