In 2011, I saw Johnson & Johnson trading at $61 per share. It was one of the first times I saw one of those buy-and-hold forever stocks trading at an attractive price that offered a margin of safety (the financial crisis wasn’t much applicable to me, because I was a college freshman while all of that was going on, and had things other than investing on my mind). The moment was highly unusual because almost everything I can find (and I’ve felt this way for a while now) falls into one of two categories: (1) A company selling at a discount to long-term value because it is working through problems—think BP, McDonald’s, GlaxoSmithKline, IBM, and a few others, or (2) companies with excellent core economics trading at various ranges of fair value, running the gamut from Exxon to Coca-Cola to Visa.
Astute readers may point out that Johnson & Johnson was in the headlines at the time for its string of product recalls, but that’s something of a red herring because when you actually studied the ongoing profits at Johnson & Johnson, the product recalls were exceptionally small when compared to the scope of Johnson & Johnson’s overall operations. I mean, even during the worst of the headlines, Johnson & Johnson was growing its annual per share profit from $4.76 to $5.00 and raising its quarterly cash payout to owners from $0.54 to $0.57. These were not choppy waters. And yet, the price languished around the $61 threshold, letting new investors see a starting dividend yield of 3.73% in the world’s best healthcare firm. Once you accept that nothing is guaranteed and we have to think in terms of probabilities, you can’t help but conclude that an investor buying Johnson & Johnson at $61 per share is establishing a starting position on highly, highly favorable terms.
I feel exactly the same way about General Electric right now at $24 per share. It gives you a 3.63% starting dividend yield if you buy today, and seems like to grow the payout by 8-11% in the years ahead. My personal estimates for General Electric’s dividend going forward are something like this:
General Electric dividend=
$0.88 per share in 2014.
$1.00 per share in 2015.
$1.12 per share in 2016.
$1.24 per share in 2017.
$1.40 per share in 2018.
$1.56 per share in 2019.
$1.80 per share in 2020.
$2.00 per share in 2021.
You could possibly collect $11 per share in dividends from 2014-2021, or a little over $10 and some change if you buy at the end of 2014. And that is without dividend reinvestment. If the prices stay low, like they are now, and the company continues to grow, you could see your yield-on-cost rise at a faster rate.
Imagine someone who owns 1,000 shares, purchased at a price of $25 per share, for a total of $25,000. That individual could be collecting $2.12 per share over the next year, and if those dividends get reinvested at an average price of $25, we are talking about $2,120 getting you 84.8 new shares.
That adds a nice little boost to the amount of annual income generated by your initial investment amount. When 2017 approaches, someone who does not elect to reinvest would be receiving 4.96% in annual income based on the amount of money set aside in 2014 to buy the stock at $25. But if you reinvest, those extra 84.8 shares bump your annual collection to 5.38%. And that’s just two years of dividend reinvestment. Once you reach year ten or so, the spread starts to get more dramatic.
Why don’t people do this? The say things like, “Let’s wait and see what happens until after GE spins off Synchrony, and play it by year then.” The problem is that, by the time that happens, the price of the stock will have increased, and you missed in your opportunity to lock in a favorable yield-on-cost. The Bank of America investors that buy in the $7-$14 range are going to be much better off for owning it while the company had been paying a penny per share in dividends than the investor that waits a couple years for 4-5 consecutive dividend increases to start a position. Waiting for that certainty often prevents you from getting shares of a stock at a nice discount.
General Electric has a backlog of over $200 billion. It has oil and gas operations that are growing a little bit above 10% annually. It’s taking all the money created by the share swap of this Synchrony spinoff and committing to repurchasing the equivalent in stock, so that your earnings per share won’t take much of a hit.
This isn’t the same company that it was in 2007—that’s lazy thinking to equate the 2007 General Electric with the 2014 General Electric. The backlog of work is almost twice as big. The troublesome real estate loan portfolio is gone. Of the remaining finance units, there is 75% more capitalization than existed in 2007. With the Alstom deal, General Electric remains on pace to make 70% of its profits “industrial related” rather than “financial servicing related.” The fact that you can initiate a position at 3.6% today is a gift; and the rewards will become more apparent in the coming years, especially for those that reinvest their dividends while the price of the stock is in the $20s and low $30s.