Recent Buys: April 20th, 2015

Whenever I put new money into investments, my mind races with all of the possibilities of current and future cash flow. My portfolio produces an ever rising stream of income via annual dividend growth, and how I choose to seek and use that cash flow is increasingly important. Every dollar invested today is worth so many more in the future, and that’s especially true among all the businesses I’m invested in.

One of the main attributes I analyze in a company is their Payout Ratio. This is simply the percentage of earnings paid out in dividends to shareholders. I like to see a low payout ratio, with the bulk of earnings being used for research, development, acquisitions, mergers, and share buybacks. I aim to make sure each of my investments are looking toward the future and using their cash flow to grow earnings, revenues, and profits so they can keep sharing their wealth with me for years to come.

The ideal business is one that earns very high returns on capital and that keeps using lots of capital at those high returns.  That becomes a compounding machine.  So if you had your choice, if you could put a hundred million dollars into a business that earns twenty percent on that capital–twenty million–ideally, it would be able to earn twenty percent on a hundred twenty million the following year and on a hundred fourty-four million the following year and so on.  You could keep redeploying capital at [those] same returns over time.  But there are very, very, very few businesses like that…we can move that money around from those businesses to buy more businesses.” ~ Warren Buffett at a Berkshire Hathaway shareholder meeting when asked what the ideal business is.

Warren Buffett was a pioneer of using cash flow from one business to invest into many others which created an ever rising snowball of income. This principle works beautifully with the dividend growth investment strategy, and I’m waiting patiently for my annual dividend income to become more substantial so I can start deploying capital  with even more focus.

I’ve become increasingly fond of global investment asset management company Franklin Resources (BEN).  They’ve successfully used their cash flow to grow from a single location in New York to currently having offices in 35 countries and clients in more than 150. I first invested in the business in December and then averaged down in January. Today I averaged down yet again and made it the largest holding in my portfolio with a total value of just over 5k. I bought 39 shares for $51.35 each with a $6.95 commission and total transaction cost of $2,009.60. This purchase yields 1.2% and adds $23.40 to my 12-month forward dividends. As the dividends of BEN grow each year, like they have since before I was born, that smaller initial yield will grow too and inflate my yield on cost dramatically.

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One of my biggest attractions to this company is their incredibly low payout ratio that typically hovers in the low teen percentages. I can’t just assume a dollar amount because the payout ratio works as a percentage, and massive mega cap companies that have a much higher percentage payout ratio can still have plenty of cash leftover to reinvest in themselves along with paying those growing dividends. The best thing to do is to dig in deeper with actual numbers and research and see where all that cash flow is going.

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After dividends and share repurchases, BEN still has plenty of free cash flow for management to invest elsewhere or even give out one time “special dividends” to shareholders like they have four times since 2009.

“One of the ways that we have built Franklin Templeton’s global business is by making strategic investments in smaller, highly experienced asset management companies,” ~ Franklin Templeton CEO Greg Johnson after one of their many recent acquisitions, increasing their presence in Australia and the UK.

The company has acquired so many successful global businesses over the years by using its free cash flow responsibly. It’s no surprise BEN has trumped the S&P 500 over the last 20 years. If one had invested 10K into BEN in 1995, it would be worth almost $200K today versus the $50K of the S&P 500 including dividend reinvestment.

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What’s better is that cash flow doesn’t appear to be slowing down at all when looking at a recent fast graphs chart. In fact, according to analysts, it looks like some of the best days are still ahead for this giant of an investment firm.  What will they acquire next?

(For those unfamiliar with viewing cash flow via fastgraphs: The current stock price is the black line, and typically when that black line is in the darker green area below the orange line, the stock is undervalued compared to its cash flow.  When the black line is below the dark blue line, the price is undervalued compared its normal Price/Cash Flow ratio.  The white line toward the bottom are the dividends with their specific numbers below that.  You’ll also see data such as current dividend yield, market cap, debt, and cash flow numbers with percentage changes.)

2015_APRIL_FG_BEN

Too often, I see investors complaining when they don’t get the dividend raise they had hoped for from an investment. These investors are usually newer to the dividend growth strategy and need to remember that this is not a get rich quick scheme. Successful dividend growth investing requires decades of contributions, capital allocation, compounding, and research.  

When you own a fundamentally solid company, sometimes it’s best to trust management will use cash flow to the best of their abilities in the short term.  This usually provides shareholders with much better value in the long term.  Paying attention to cash flow can also be a good way to recognize when management is being irresponsible and may reveal reasons to sell shares in that business.

I wanted to also mention a small purchase of Coca-Cola (KO) via my commission free Loyal3 account. I first purchased KO last month, and on 4/14 I bought 6.1914 additional shares for $40.54 each with a total cost basis of $251. The purchase added $8.17 to my 12-month forward income for a new grand total of $1,734.73.

Did you make any recent purchases? What are your thoughts on BEN and the importance of cash flow?

My Dividend Growth

http://www.mydividendgrowth.com

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35 thoughts on “Recent Buys: April 20th, 2015
  1. JC @ Passive-Income-Pursuit

    Thanks for the update on some recent buys and for the more in depth look at BEN. I have to say that it looks pretty good here. Recently I’ve been looking at some lower yield/higher growth companies that I’d really like to add to my portfolio. That’s about the only issue I see with BEN and I’ll have to give them a more in depth look. I’m pretty bullish on the asset managers over the long term although I might have to wait until the next recession to add some of them. There’s so many great companies and no where near enough capital or time. I want higher current dividend income from my portfolio but there’s not a whole lot value in the so-called sweet spot area with 3-4% yield with 5-10% annual growth, especially since most of the consumer staples companies are fairly expensive or I have a bit too much allocation to them. Once I build up some more capital I might have to see about selling put options until I get the shares. Best of luck with your recent investments.

     
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    1. My Dividend Growth

      I really like your comment on that sweet spot range. So much of it seems overvalued right now and looking for stocks on the edges of that seems like the best idea. It’s so true about all the great businesses to choose from, I wish more of the very very great ones would go on sale already. I’m really liking the idea of these low yield / high growth investments especially with my time frame. I’m excited for my holdings to be diverse enough for comfort and then focus on building larger positions, I like thinking about how many shares I might own in 30 years. I’m excited to see your options play out, I think that’s a great idea.

      Best Regard!

       
      Reply
  2. FerdiS

    Interesting buy here, Ryan. I’ll have to take a look at BEN, but right of the bat the yield is a little low for my taste. How I wish I were as young as you so that issue wouldn’t be one… 🙂

    Take care and keep up the good work!

    Cheers
    FerdiS

     
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  3. Khen Elazar

    Great pick. Low yield, but superb growth.
    Wrote an article in favor of it in Seeking Alpha.
    Great company. Good luck

     
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    1. My Dividend Growth

      Khen, your article was a great reminder that I had an obvious choice sitting in front of me when almost everything else seems overvalued at the moment. Appreciate your support and I’ll be curious if you hop aboard at some point.

      All my best,
      Ryan

       
      Reply
  4. Dividend Gremlin

    Ryan,

    Really liking BEN and TROW. They are both top 10 right now on my watch list, which I unfortunately am not touching due current funds.

    I am going to put out a little research thing on your prior Healthcare post, specifically looking at out-patient physical therapy. More a qualitative perspective, I think that industry is going to be hot.

    – Gremlin

     
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    1. My Dividend Growth

      That’s sounding like a nice top 10 list Gremlin. I’ll be curious to see what goes on sale when your funds free up, with current high stock prices it might not hurt to wait for a few down days anyway. I can’t wait to hear about the research you’ve been doing, I’ve been so busy these last few weeks and haven’t devoted as much time on investments as usual. Thanks for stopping by!

       
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  5. Dividend Mantra

    Ryan,

    Great company. Excellent fundamentals across the board. And I also love that special dividend of theirs. Hope to add this to the mix alongside TROW at some point. 🙂

    Keep up the great work. One step at a time!

    Best regards.

     
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    1. My Dividend Growth

      I remember you having them as one to watch which was very reassuring. I’m curious to see how often that special dividend will pay out, and how much it’ll boost my average annual yield over time. You’re in very good hands with TROW, and I’d also want to join you there at some point. One day we’ll be asset managing brothers! Haha, thanks for checking in and I’m excited to read your book this weekend.

       
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  6. Dividend Legion

    Hey Ryan,

    Very good article, I really enjoyed reading it. I love the concept that, if you invest in a great business, it’ll be able to grow your yield on cost to high amounts. Imagine having a YOC of 100% and receiving your entire invested amount each year…That’s the dream! 🙂

    BEN seems like a great investment, very solid fundamentals. I’d be tempted myself if it wasn’t for the low yield. I feel that I should maximise the higher yielding stocks (within reason) and leave the likes of BEN to later in my investing journey.

    Keep up the great articles and the fantastic progress!

    DL

     
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    1. My Dividend Growth

      Thanks DL, I’m happy you enjoyed this one. YOC is fascinating over long periods of time. The early retirement stage is really just the beginning and you could make so much money over the following decades if you picked the right businesses. I don’t blame you for getting started with juicier yields at this point, and I’ll be curious to see if you ever decide to throw in a low yield / high growth stock in the mix down the line. Appreciate the nice comment!

       
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  7. Laura

    I like the thought that $10 000 could be worth $191000 in 20 years. BEN does seem like a fabulous investment. I do wonder if it is easy for UK investors to trade this one. I must check if it is available through my tax free stocks and shares ISA.

     
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    1. My Dividend Growth

      I wonder if it’s available for you too, Laura. I know they have an ever increasing presence there, so maybe they’d have options. Let us know if you explore that. I’m a big fan of trying to picture how much growth a company will have in the future and obviously the wider the better. I think BEN is one of those great ones and trading for a healthy discount at the moment. We’ll have to see what happens. Thanks for the comment!

       
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  8. Zero to Zeros

    Great buy Ryan, BEN and TROW are easily the best 2 asset managers out there these days. And I really like what you said:

    “Successful dividend growth investing requires decades of contributions, capital allocation, compounding, and research.”

    Such a true statement! I sometimes find myself making the mistake of chasing overly high yields when DGR is just as important, if not more. I think DGR is a more abstract, less tangible concept than yield, which is why it is easier to lose oneself chasing for the latter.

    At the end of the day, time is the name of this game we play!

    Cheers

     
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    1. My Dividend Growth

      Appreciate that, Alex. There are a few other asset managers I admire too like BLK, EV, TROW, EVR & even a few others. They are cash spitting machines and most have long and healthy track records. There is some threat from newer firms with lower fees, so it’ll be an interesting sector to watch. I happen to think BEN is a clear choice based on current valuation, but there are other great deals out there. BEN’s small yield is a little misleading too, if you factor special dividends over time, it’s much much higher.

      You have so much time on your side, I think a few lower current yield / higher dividend growth picks would be perfect for you. The yield on cost by the time you need the income should be impressive with loads of capital appreciation to boot. I know I wish I had bought more Visa or grabbed Disney a while ago. Oh well, there will be plenty of others 🙂

      Best Wishes,
      Ryan

       
      Reply
  9. D2R

    Hi Ryan,

    TROW is a great investment, and I am definitely looking into that as well. I feel that we are in similar situations, since we both have time on our side. I think I’m finally settling into my own as an investor as well, not always trying to go for the highest yields, but learning how to make smart investments. Overall, can’t wait to see your progression! Good luck!

    D2R

     
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    1. My Dividend Growth

      Hi D2R. I’m a big fan of TROW 🙂 It’s very cool to have other like minded people around the same age to bounce ideas off of, glad you checked in! I hear you about settling in, I’m there and comfortably but still trying to learn more everyday. I the looks of your blog and am excited to check it out.

       
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  10. longtermmindset.com

    I’ve never studied BEN before, but it looks interesting. I’m a HUGE fan of adding to your winners, and when you find a stock that pays a dividend and has a good history of reducing its share count, its worth digging further. I see that you made it your top position, thats interesting. I’ll study this name a bit and see if I like it as well!

     
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    1. My Dividend Growth

      That’s a good observation about adding to winners. I think sometimes I’ll have to fight my urge to keep diversifying, but for the most part I’m really looking forward to building some larger positions with the best of my best holdings. There are so many options out there, but only so many I can keep up with so I agree that letting the winners ride makes the most sense. I’d be curious to hear your thoughts after you’ve read up a little on BEN. Best wishes 🙂

       
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  11. FrugalityToFinancialFreedom

    I am not very familiar with BEN but I like what I saw here, even though the entry yield is low, the payout ratio and the dividend growth is outstanding. Buybacks are amazing too, with an nice valuation. I say solid buy there Ryan, can’t blame you for having this as your largest position. Thanks for sharing.

     
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    1. My Dividend Growth

      Glad to get you interested, FTFF. I’ll be curious to see how long this one remains my top value, it’s a little uncomfortable approaching 10% of the portfolio, so hopefully new purchases mellow that out a bit. I love that the low payout is not everything it seems with all the special dividends over the years, people tend to forget that because it’s not common in most business types. I appreciate you stopping through, and best regards!

       
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  12. DivGuy

    I don’t mind going for lower yield if growth is there. I didn’t see any mention about its growth rate though. It looks like a solid one, but I’m too pretty heavy in financials!

    Cheers!

    Mike

     
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    1. My Dividend Growth

      I’m so heavy in financials too, at over 22% of the portfolio. Way to much for comfort, but there’s so much value there these days. I like how there are so many relevant growth rates to analyze in an investment. In the article I showed compound annual growth rate of dividends, cash flow growth rate, price growth compared to share repurchases, historical growth and returns of invested capital vs a benchmark, and global office location growth. I’ll try to throw in more general growth rates like EPS and Revenue in the future, but even the little I highlighted is enough to excite me. Thanks for the feedback!

       
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      1. DivGuy

        Ryan,
        I was more concerned about the fact the company is seriously lagging behind the market during a bull market. Is there a reason? I mean, I see the value and the dividend growth but I wonder why the stock performs so poorly over the past 5 years (only +30% or so compared to the S&P 500 at +73%). It could be interesting to see why the market doesn’t recognize BEN value, especially that dividend stocks have been trendy over the past 5 years.
        Cheers,
        Mike

         
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        1. My Dividend Growth

          I understand your concerns, and thanks for sharing! Personally, I think that price performance alone doesn’t really mean anything in the short term because the market is full of so many different businesses and fundamentals and has such a crazy mind of its own. I feel much more comfy comparing things like earnings over short periods. On fast graphs, the second half of 2009 through the first half of 2010 BEN’s PE was in the mid to high 20’s and now five years later it’s come down to around 14 which could explain the unimpressive results. Meanwhile, the S&P 500 has stayed much the same with a PE of around 18 over that time. Earnings per share of the index increased 56.5% from that time to now, while the EPS of BEN beat that by gaining 80% over that period. No matter how I stack it, the fundamentals of BEN seem much better than the S&P 500. Typically the price will always follow earnings in the long run and I only smell a discount at current levels 🙂 It’s interesting to see value here when the market doesn’t, I hope I’m right hehe. Great comment and thanks again Mike!

           
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  13. Retire Before Dad

    MDG,
    Your writing on BEN has been enlightening. I join the chorus of those interested. I also have a position in TROW and just received the special dividend today. Sweetness!

    I’ll add about BEN, they have a stellar balance sheet and 9 billion in cash on hand, or $15 per share. Lotsa room to grow the payouts.
    -RBD

     
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    1. My Dividend Growth

      Oh nice! I suggested TROW to my father and he received his special dividend too and it was awesome! I just missed the boat on BEN’s special dividend in December, oh well I’m sure they’re be more. It’s interesting that special dividends are so common among the asset managers. Thanks for pointing out the stellar balance sheet, that cash on hand seems set to increase substantially over the next few years too. I’m hoping for handsome payouts for good stretch to come. Appreciate the comment, RBD!

       
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  14. MU

    Nice buy, MDG. This stock has solid fundamental. Although dividend yield is a little low, recently it seems that low dividend yield and high growth companies have better overall performance than high yield ones.

    I’ll do some serous homework on this stock. Thanks for the sharing.

    — MU

     
    Reply
    1. My Dividend Growth

      Thanks, MU. I’d be interested in your thoughts when you look into it. The yield on cost can wrack up pretty fast on these low yield / high growth investments with lots of capital appreciation to boot. I’ll likely still be earning income in some way 10 years from now, so I’m planning to devote a good piece of my portfolio for lower yields / higher growth. Thanks for stopping by, I can’t believe I’ve missed your blog so far… looks like a lot of great content and I’m excited to dig in.

       
      Reply
  15. Alexander Starr

    Excellent buy at a double digit discount to FV.

    “BEN’s small yield is a little misleading too, if you factor special dividends over time, it’s much much higher.”

    I wonder if you can provide the historical true yield factoring in special dividends?

     
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    1. My Dividend Growth

      Thanks for the comment, Alexander. I don’t have that info readily available, but you can do some quick calculations using their website: http://investors.franklinresources.com/investor-relations/stock-information/dividends-splits/default.aspx

      Special dividends have trumped the regular dividends since they started in 2009. In 2009 regular dividends were only about 21 cents for the whole year and the special dividend was 5 times that at 1 dollar. Just looking at totals on that link is enough to understand the payout method management prefers and become a fan. It’s almost like a Disney paying the one big dividend per year, but then giving out quarterly smaller dividends. Even last year the special dividend nearly doubled the normal dividend so the stock would have yielded over 2% and this was a very down year for special dividend amount at only .50 cents. I hope that helps!

      Best,
      Ryan

       
      Reply
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